(fcff2/1,12^2) (fcff3+terminalvalue)/1,12^3) PV $44,20 $43,41 1027,90677 (sommaPV) Value today = $1.115,51 + Cash 100 - Debt 150 - Eq Options 50 (valuetoday+cash- debt-eqoptions) Value of equity $1.015,51 (valueofequity/20) Value per share= $50,78 2. Katsunaka Bank is a bank holding company in Japan. The bank reported a book value of equity of 200 billion yen on which it is expected to generate a net income of 16 billion yen next year. The bank is in stable growth, growing 2% a year and has a cost of equity of 6%. b. Estimate the intrinsic price to book equity ratio for this firm (2 points) c. Now assume that you are told that the stock actually trades at 3 times the book value of equity, largely on the expectation that the firm’s future projects will earn higher returns than its current investments. If the growth remains unchanged at 2% a year, estimate the market’s expectation of return on equity on future investments. (2 points) d. Assume that you are comparing the price to book ratios of Japanese banks and you notice that Katsunaka Bank trades at a much higher price to book ratio than the other banks. Which of the following would you consider the best explanation for why this might happen? (1 point) k. Katsunaka has a lower return on equity than the typical bank in the sector. kk. Katsunaka has a lower proportion of bad real estate loans in its portfolio than the typical bank kkk. Katsunaka’s earnings have been far more volatile over the last 5 years than other banks iv. Katsunaka has a smaller market capitalization than the typical bank in the sector. x. None of the above. vi. All of the above f. Katsunaka Bank announces a stock buyback where it will buy back 10% of its outstanding equity, using cash that it has on hand. What effect will this have on the price to book ratio? (1 point) k. It will have no effect on the price to book ratio kk. It will decrease the price to book ratio jjj. It will increase the price to book ratio iv. Impossible to tell without more information
Solution Problem 2 a. Intrinsic Price to Book Ratio Return on equity = 8% Easest way to do this Cost of equity = 6% PBV = (ROE - g)/ (Cost of equity -g) Growth rate = 2% 75,00%=1- Payout ratio = (growthrate/returnonequity) 1,5=(returnonequity- growthrate)/(costequity- Price to Book = growthrate) b. If price to book ratio is 3 PBV = 3 = (ROE -0.02)/(0.06-0.02) Implied ROE = 14% c. ii. Katsunaka has a lower proportion of bad real estate loans in its portfolio than the typical bank (Makes it less risky). All of the other choices would lead to a lower Price to book d. iii. It will increase the price to book ratio (Both the market value of equity and the book value of equity will decrease by the same absolute amount. The ratio will go up in this case, because the company has a price to book that exceeds one) 3. You are trying to assess whether it makes sense for Luminol Inc., a consumer product manufacturer to divest itself of some of its businesses. The firm has book capital of $ 2 billion, on which it generated after-tax operating income of $160 million in the most recent year. The firm is considering divesting itself of its appliance business, which accounted for
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