Quiz 2 Solution.xls - Spring 1996 Problem 1 Price\/BV for AlumCare = P\/BV ratio for HealthSoft = If AlumCare's Price is thrice that of HealthSoft Let MV

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

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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
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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
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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
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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
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