quiz2sol - Spring1996 Problem1 Price/BVforAlumCare= 4 P/= 2...

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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 WACC = 13.55% (.6) + 6% (.4) = 0.11 Value/Sales Ratio = .18 (1.05) / (.1053-.05) = 3.42 Value/Sales Ratio of Generic Brand = 3.42 * 0.5 = 1.71 Value of Brand Name = 342 - 171 = 171 million 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
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