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quiz2 - Quiz 2 Name Quiz 2 Spring 1996 1 AlumCare Inc which...

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Quiz 2 Name: 1 Quiz 2: Spring 1996 1. AlumCare Inc, which maintains and runs health maintenance organizations, has a price/book value ratio of 4. It merges with HealthSoft Inc, a corporation that owns and runs hospitals, and has a price/book value ratio of 2. Assuming that AlumCare’s equity value is thrice that of HealthSoft’s equity value, and that the companies adopt pooling to account for the acquistion, estimate the price/book value ratio after the merger. (Pooling essentially means that the book values of the two firms are added up to arrive at the book value of the combined firm) (3 points) 2. Design Corp is a specialy furniture retailer with revenues of $ 1.5 billion, and a book value of equity of 500 million. If the firm is in stable growth, growing 6% a year and has a payout ratio of 60%, estimate the price/sales ratio for this firm. The beta is 1.00, and the T.Bond rate is 6.5%. (3 points) 3. You have been asked to value Alcoa, and have come up with the following inputs. The stock has a beta of 0.90, estimated over the last 5 years. During this period, the firm had an average debt/equity ratio of 20% and an average cash balance of 15%. The firm’s current market value of equity is 1.6 billion and its current market value of debt is $800 million. The current cash balance is $ 500 million. The firm earned earnings before interest and taxes of $ 450 million, which includes the interest income on the current cash balance of $ 50 million. The firm’s tax rate is 40%. The firm is in stable growth, and its earnings from operations are expected to grow 5% a year. The net capital expenditures next year are expected to be $ 90 million. The riskfree rate is 6% and the firm has a cost of debt of 7%. Estimate the value of the non-cash assets of the firm, its total value, and the value of its equity. ( 4 points)
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Quiz 2 Name: 2 Quiz 2: Equity Instruments and Markets – Fall 1996 1. You are trying to estimate the brand name value for Steinway, one of the world’s best know piano manufacturers. You have the latest income statement – Revenues $ 100.00 million - COGS $ 60.00 million - Depreciation $ 10.00 million EBIT $ 30.00 million - Interest Expense $ 10.00 million EBT $ 20.00 million Taxes $ 8.00 million Net Income $ 12.00 million The firm has $ 100 million in debt outstanding, in both book value and market value terms, and expects to maintain a debt ratio of 40%. The beta of the stock is 1.10 currently, and the current long term bond rate is 7.5%. The firm is in stable growth and expects to grow 5% a year in perpetuity. The capital expenditures in the latest year were $10 million, and there is no working capital requirement. a. Estimate the firm value/sales ratio for this firm. ( 2 points) b. Assume now that the operating profit margin (EBIT/Sales) for generic piano manufacturers is half of the operating profit margin for Steinway. Assuming generic piano manufacturers have the stable growth rate and cost of capital as Steinway, what is the value of the Steinway brand name? ( 2 points) PART II ( 1 point each) PRICE/EARNINGS RATIOS a. To compare PE/g [where g is the expected growth] across firms to find under and over valued firms, you have to assume that these firms are of equivalent risk. (1 point) TRUE FALSE
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