finals - Fal 1997 P ro b lem 1 1 2 3 4 T erm inal Y ear E P...

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Unformatted text preview: Fal 1997 P ro b lem 1 1 2 3 4 T erm inal Y ear E P S $1.50 $1.80 $2.16 $2.59 $2.75 F C F E $(2.0 ) $(1.20) $0.34 $0.09 $1.50 N et C ap E x $3.50 $3.0 $1.82 $2.50 $1.25 a. T erm inal V alue of E quity = 1.50/ (.125 - .06) = $23.01 C os t of E quity = 7% + 1 (5.5% ) = 12.50% b. V alue per S hare today 1 2 3 4 F C F E $(2.0 ) $(1.20) $0.34 $0.09 T erm inal V alue $23.01 P V at 15.25% $(1.74) $(0.90) $0.2 $13.09 ! D is c ount at the c ur ent c os t of equity V alue of the S toc k = $10.67 C os t of E quity 15.25% P ro b lem 2 R einv es tm ent R ate = 5/12.5 = 40% R einv es tm ent A m ount = 36 ! T his y ear F irm V alue = (150 * .6 - 36)*1.05 / (.10 - .05) = $1,134.0 P ro b lem 3 C os t of C apital = 1 .40% (.9) + 7.5% (0.6) * .1 = 10.71% C os t of E quity = 7% + 0.8 * 5.5% = 1 .40% I s hould hav e giv en y ou a return on c apital to let y ou c om pute a reinv es tm ent rate. If y ou as um e a z ero reinv es tm ent rate, y ou get V alue/S ales R atio = .03*1.05 / (.1071 - .05) = 0.5 16 37478 If y ou had as um ed that the R O C = C os t of c apital, the reinv es tm ent rate = 5% /.1071 = 46.69% U s ing this reinv es tm ent rate w ould hav e low ered the v alue to s ales ratio :.03*.46 9*1.05/(.1071-.05) = 0.25754610 8 If m anagem ent is im prov ed, U nlev ered B eta = 0.8 / (1+ (1-.4)(1/9) = 0.75 N ew B eta = 0.75 (1+ (1-.4) (3/7) = 0.9428571429 N ew C os t of E quity = 0.07 + 0.94 (.05 ) = 0.1218571429 N ew C os t of C apital = 12.18% (.7) + 8% (1-.4) (.3) = 9.97% V alue/S ales R atio = .07 *0.6 *1.05/(.09 7-.05) = 0.8 73239437 T he V alue/S ales ratio w il inc reas e by roughly 0.34. P ro b lem 4 N (d1) = 0.6517 N (d2) = 0.5675 P robability that the firm w il go bank rupt = 0.3483 - 0.4286 (It is equal to 1- N (d) V alue of E quity = 9 = 75 (.6517) - K ex p (-.07)(5)(.5675) K = (75 *.6517 - 9)/ (ex p (-0.07)(5)*5714) S olv ing, K = $9 .72 Im plied interes t rate= 8.60% P ro b lem 5 a. V aluing G & P C apital Inv es ted = 20 0 E V A c reated this y ear = (.13-.1 )(20 0) = 40 P V of E V A = 40 *1.05/(.1 -.05) = 70 V alue of F irm = 20 0 + 70 = 270 b. V aluing B andA d C apital Inv es ted = 50 E V A this y ear = (.16 -.12)(50 ) = 20 P V of E V A = 20 *1.05/(.12-.05) = 30 V alue of F irm = 50 + 30 = 80 c . C apital Inv es ted = 250 C om bined O perating Inc om e = (.13*20 0+ .16*50 ) = 340 R es tated O perating Inc om e = 340 (1.10) = 374 R es tated E V A = (374 - .10*250 ) = 124 P V of E V A , as um ing 5% grow th = 2604 N ew F irm V alue = 250 + 2604 =...
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finals - Fal 1997 P ro b lem 1 1 2 3 4 T erm inal Y ear E P...

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