quiz1sol - S olution to Q uiz Pa ge 1 Fal 1997 P ro b lem 1...

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Unformatted text preview: S olution to Q uiz Pa ge 1 Fal 1997 P ro b lem 1 D iv idends on Index = 3% of 1050 = 31.50 V alue = 1050 = 31.50 (1.06)/(r-.06) S olv ing for r, r = 9.18% Im plied R is k P rem ium = 9.18% - 6.5% = 2.68% If y ou as um ed that the div idend y ield w as bas ed on nex t y ear's div idends , V alue = 1050 = 31.50/(r-.06) S ov ling for r, r = 9.0 % Im plied R is k P rem ium = 9% - 6.5% = 2.5% T his ans w er c an als o be obtained by ad ing the div idend y ield to ex pec ted grow th and s ubtrac ting out the ris k fre rate [T his is how w e got c os t of equity for S outhw es tern B el in the notes .] P ro b lem 2 N et Inc om e $10 .0 (10 0 * .10 = N orm al N et Inc om e) - (N et C ap E x * .75) $10.50 (C apital E x penditures : $ 80 m il; D eprec iation = $ 60(1.1) = $ 6 ; D /(D + E ) = 50 /(50 + 150 ) - C hg in W C * .75 $15.75 (W C this y ear = .10 *150 = 150; W C nex t y ear = .095 * 180 = 171; C hg in W C = 21) = F C F E $73.75 P roblem 3 E x pec ted G row th R ate in O perating Inc om e = 10% (.5) = 5% E x pec ted F C F nex t y ear E B IT (1-t) $105.0 R einv es tm ent $52.50 F C F $52.50 Spring 1998: Quiz 1 P ro b lem 1 N ote that the v alue of a firm is the C as h flow dic ounted bac k at a dis c ount rate. F or inv es tors w ho are not div ers ified (R E IT s , V enture c ap funds ), the dis c ount rate w il alw ay s be low er than it is for inv es tors w ho are div ers ified (S pec ializ ed v enture c apitalis ts , priv ate real es tate inv es tors ). F or the lat er to hav e m ore v alue, then, they hav e to hav e the c apac ity to generate higher c as h flow s than the div ers ified inv es tor. F or s pec ializ ed prov iding m anagem ent ex pertis e to firm s in that s ec tor. S im ilarly , for real es tate inv es tors , it m ay c om e from k now ing the loc al real es tate m ark et w el . A . F irm s w here inform ation about the firm is eas ily av ailable to al , and w hic h hav e go d m anagem ent in plac e S pec ializ ed inv es tors gain an adv antage through their ac es to priv ate and loc aliz ed inform ation and by prov iding m anagem ent s up ort to the c om panies that they prov ide c apital to. W hile firm s w hic h require m ore c apital m ay s e m lik e a logic al c hoic e, note that this w il hav e to c om e at the ex pens e of div ers ific ation. B . R eal es tate v alue is being driv en les by loc aliz ed inform ation and m ore by m ark et forc es ....
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