Quiz 2 Solution.xls - Spring 1996 Problem 1 Price/BV for...

Spring 1996
Problem 1
Price/BV for AlumCare = 4
P/BV ratio for HealthSoft = 2
If AlumCare's Price is thrice that of HealthSoft,
Let MV of Equity for AlumCare = $ 100.00
Then MV of Equity for HealthSoft = $ 33.33
BV of Equity for AlumCare = $ 25.00
BV of Equity for HealthSoft = $ 16.67
P/BV of Equity after merger = (100+33.33)/(25+16.67) = 3.20
Problem 2
Expected Growth = Net Margin * Sales/BV of Equity * Retention Ratio
.06 = Net Margin * 3* .40
Net Margin = 0.05
Price/Sales Ratio = .05 * (1.06)* .6/(.12 - .06) = 0.53
Problem 3
Unlevered Beta (using last 5 years) = 0.9/(1+(1-.4)(.2)) = 0.80
Unlevered Beta of Non-cash assets = 0.80/(1-.15) = 0.94
Levered Beta for Non-cash assets = 0.94 (1+0.6(.5)) = 1.222
Cost of Equity for Non-cash Assets = 6% + 1.22(5.5%) = 12.71%
Cost of Capital for Non-cash Assets = 12.71%(.667)+.07*.6*(.333)= 9.88%
Estimated FCFF next year from non-cash assets = (450-50)(1-.4)(1.05)-90 = $ 162
Estimated Value of Non-cash Assets = 162/(.0988-.05) = $ 3,320
Cash Balance 500
Estimated Value of the Firm = $ 3,820
- Value of Debt Outstanding = 800
Value of Equity $ 3,020
Fall 1996
Problem 1
After-tax Operating Margin = 0.18

Part II
a. True; if firms have different risk levels, they will have different PE/g ratios.
(Some of you also pointed out that the growth periods have to be the same. That is true too.
b. Firm B will have the higher Value/EBITDA multiple.
Everything else about the two firms is identical.
c. Price/BV ratio will drop by more than half.
d. P/BV = 2.5
Value of Equity will drop by 30% after special dividend.
Value of Book Value will drop by same dollar amount.
Net Effect = (2.5 * .7) / (1 - .75) = 7
Spring 1997
Problem 1
Expected PE/g ratio for GenieSoft = 2.75 - 0.50 (2) = 1.75
Expected PE/g ratio for AutoPred = 2.75 - 0.50 (1) = 2.25
Actual PE/g ratio for GenieSoft = 50/40 = 1.25
Actual PE/g ratio for AutoPred = 20/10 = 2.00
Both GenieSoft and AutoPred are undervalued relative to the market.
Problem 2
EBITDA $ 550
Depreciation $ 150
EBIT $ 400
EBIT (1-t) $ 240
Next Year
EBITDA $ 578
EBIT $ 420

EBIT (1-t) $ 252
- Reinvestment $ 84
FCFF $ 168
Firm Value $ 4,200
Value/FCFF 25.00
Value/EBIT 10.00
Value/EBITDA 7.27
Problem 3
I would use a higher Value/EBITDA multiple because the comparable firms have a lower return on capital.
Spring 1998
Problem 1
Current PBV = (ROE - g) / (COE - g)
1.5 = (ROE - 5%)/(12%-5%): Solving for ROE = 15.5%
If you add 3% to ROE, ( I also gave full credit if you used 15.5% (1.03))
PBV = (.185-.05)/(.12-.05) = 1.93 1.9286
This assumes that the growth stays the same, but payout ratio goes up
If you had assumed that the payout ratio would remain the same, but growth would change:
Current Payout Ratio = 5/15.5 = 32.26%
New Growth Rate = 0.32 * 18.5% = 5.92%
New PBV = (.185-.0592)/(.12-.0592) = 2.07
Problem 2
Predicted V/S Ratio for Estee Lauder = 0.45 + 8.5 (.16) = 1.81
Predicted V/S Ratio for Generic Company = 0.45 + 8.5 (.05) = 0.875
Difference in V/S Ratios = 0.935
Value of Estee Lauder Brand Name = 0.935 (500) = $ 467.50
Problem 3
Value of Straight Debt portion of Convertible = 12.5 (PVA, 10%, 10 years) = $ 173.19
Value of Conversion Option = 275 - 173.2 $ 101.81
Value of the Firm = $ 1,000.00
Value of Straight Debt = $ 273.19

Value of Equity = $ 726.81
Value of Conversion Option = $ 101.81
Value of Warrants = $ 100.00
Value of Equity in Stock $ 525.00
Value per Share = $ 26.25
Fall 1998
Problem 1
Value of Equity in Common Stock = 50 * $ 20 = $ 1,000.00
Value of Equity in Management Options = 10 * $ 15 = $ 150.00
Value of Conversion Option = 140 - 100 = $ 40.00
Value of Equity = $ 1,190.00
Value of Equity = $ 1,190.00
Value of Debt = $ 150.00
Value of Firm = $ 1,340.00