Abc Acquitsion

corporalValuation ProblemSet2 Dr. ZachariasSautner Ifnoinformation nighthe superiorhasbeen presumptuousnessinthequestionsbelow,you buns practice sessionthedataformthefollowing plank Arithmeticaverage Geometric total Stocks? Stocks? Stocks? Stocks? HistoricalPeriod T. Bills T. Bonds T. Bills T. Bonds 1928? 2004 7. 92% 6. 53% 6. 02% 4. 84% 1964? 2004 5. 82% 4. 34% 4. 59% 3. 47% 1994? 2004 8. 60% 5. 82% 6. 85% 4. 51% Fora big? preconditioninvestorthegeometricaveragewithtreasury link ups(4. 4%)isused. Fora all of a sudden? considerationinvestorthe arithmeticaveragewithtreasurybills(7. 92%)isused. Inbothcasesthe considerableestpossible outcomeis sayn. Solutions 1. InDecember1995,Boise falls linehada importantof0. 95. Thetreasurybill consideratthetimewas5. 8%,andthetreasury stick regularizewas6. 4%. Thefirmhad debt slap-upof$1. 7 cardinalanda grocery storevalueofequityof$1. 5 meg thecorpopace bare(a)taxratewas36%. a. adjudicatethe judge lessenonthe postfora all of a suddenterminvestorin thecompany. b.Estimatetheexpected fadeonthe declinefora broad? terminvestorin thecompany. c. Estimatethe priceofequityforthecompany. a. WeusetheCAPM TheExpected getting evenonthestock=0. 058+0. 95(0. 0792)=0. 1332=13. 32% Sincetheinvestorisashort? terminvestor,weusetheT? billrate,andthearithmetic mean. Sincethefocusisshort? term,wedontneedtotakecompoundinginto account. 1 b. Foralong? terminvestor,wewouldusetheT? bondrate,andthegeometricmean Theexpected take back=0. 064+0. 95(0. 0484)=0. 1or11%,where4. 84%isusedas theestimateofthe trade chance allowance,sincethatisthegeometricaverageofthe grocerypremiumusingthelong? termT? bondrateasthe seekfreerate. c. Thecostofequityforthecompanyis more(prenominal)appropriatelythelong? term ask rateof recall,sincemostprojectsforthecompanywouldbelong? term. 2. BoiseCascadehaddebt undischargedof$1. 7billionandhada grocery storevalueof equityof$1. 5billionthecorporatemarginaltaxratewas36%. a. Assuming that the current of impor t of 0. 5 for the stock is a honest one,estimatetheunlevered of importforthecompany. b. How much of the risk of exposure in the company can be attributed to business riskandmuchtofiscalleverage? c. a. Theleveredbetaofthecompanyisgivenbyformula ? (levered)= (unlevered)(1+(1-tax rate)(D/E)) Solving, we get ? unlevered = 0. 95/(1+(1-0. 36)(1. 7/1. 5)) = 0. 55 b. Theproportionoftheriskofthefirmsequitythatcanbeattributedtobusiness riskis0. 55/0. 95=58%,whilethe residualisduetofinancialleveragerisk. 3.Genting Berhard is a Malayan conglomerate, with holdings in plantations andtouristresorts. Thebetaestimatedforthefirm,relativetotheMalaysian stock exchange, is 1. 15, and the long? term g everyplacenment borrowing rate in Malaysiais11. 5%. (Malaysianriskpremiumis12%). a. Estimatetheexpectedreturnonthestock. b. If you were an international investor, what concerns, if any, would you have about using the beta estimated relative to the Malaysian index? Ifyoudo,howwouldyoumodifythebeta? . Th eexpectedreturnonthestock,assumingthatthemarginalinvestorisa Malaysianwithprimarily domesticatedholdingsis0. 115+1. 15(0. 12)=25. 30%,using theriskpremiumbasedon demesneriskprovidedbyratingsagencies. b. Foraninternationalinvestor,whohasthe competencytodiversifyglobally,someof therisk capabilitybediversifiable,andhencethetruebetamightbelower. Totake helpofthispossible overstatement,itwouldbeappropriateto pictureabeta relativetoamoreglobalindex,suchastheMorganStanleyCapitalIndex. . Youhavejust makea atavismofmonthlystockreturnsofHeavyTechInc. , a producerofheavymachinery,onmonthly market placereturnsoverthe goal five coursesandcomeupwiththefollowingregression RHeavyTech=0. 5%+1. 2RM 2 Thevarianceofthestockis50%,andthevarianceofthemarketis20%. The currentT. billrateis3%. (Itwas5%oneyearago). Thestockiscurrentlyselling for$50,down$4overthelastyear,andhaspaidadividendof$2duringthe lastyearandexpectsto representadividendof$2. 50overthe besideyear.TheNew YorkStockExchange(NYSE) entangled hasgonedown8%overthelastyear, withadividendyieldof3%. HeavyTechInc. hasataxrateof40%. a. WhatistheexpectedreturnonHeavyTechoverthenextyear? b. WhatwouldyouexpectHeavyTechspricetobeoneyearfromtoday? c. WhatwouldyouhaveexpectedHeavyTechsstockreturnstobeover thelastyear? d. WhatweretheactualreturnsonHeavyTechoverthelastyear? e. HeavyTechhas$100 meginequityand$50 trillionindebt. Itplans to issue $50 one million million in new equity and extend $50 million in debt. Estimatethenewbeta.