Abc Acquitsion

mergedValuation ProblemSet2 Dr. ZachariasSautner Ifnoin dustation virtuallythepremiumhasbeengiveninthequestionsbelow,you canusethedataformthefollowingtable Arithmetic norm GeometricAverage Stocks? Stocks? Stocks? Stocks? diachronicPeriod 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 languish? terminvestorthe nonrepresentationalaveragewithtreasury link ups(4. 4%)isused. Fora petty? terminvestorthearithmeticaveragewithtreasurybills(7. 92%)isused. In some(prenominal)casesthelongestpossibleperiodistaken. Solutions 1. InDecember1995,Boise cascades occupationhadabetaof0. 95. Thetreasurybill markatthetimewas5. 8%,andthetreasurybond locatewas6. 4%. The unwaveringlyhad debtoutstandingof$1. 7billionandamarket observeof fair playof$1. 5billion thecorpopace peripheral appraiseratewas36%. a. Estimatetheexpected go alongonthe telephone lineforashortterminvestorin th ecompany. b.Estimatetheexpectedreturnonthestockforalong? terminvestorin thecompany. c. Estimatethecostofequityforthecompany. a. WeusetheCAPM TheExpectedReturnonthestock=0. 058+0. 95(0. 0792)=0. 1332=13. 32% Sincetheinvestorisashort? terminvestor,weusetheT? billrate,andthearithmetic mean. Sincethe concentreisshort? term,wedontneedtotakecompoundinginto account. 1 b. Foralong? terminvestor,wewouldusetheT? bondrate,andthegeometricmean Theexpectedreturn=0. 064+0. 95(0. 0484)=0. 1or11%,where4. 84%isusedas theestimateofthemarket lay on the linepremium,sincethatisthegeometricaverageofthe marketpremiumusingthelong? termT? bondrateasthe put on the linefreerate. c. Thecostofequityforthecompanyismore fittinglythelong? termrequired rateofreturn,sincemostprojectsforthecompanywouldbelong? term. 2. BoiseCascadehaddebtoutstandingof$1. 7billionandhadamarketvalueof equityof$1. 5billionthecorporatemarginaltaxratewas36%. a. Assuming that the current beta of 0. 5 for the stock is a reasonable one,estimat etheunleveredbetaforthecompany. b. How often of the risk in the company can be attributed to business riskandmuchtofinancialleverage? c. a. Theleveredbetaofthecompanyisgivenby enactment ? (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%,whiletheremainderisduetofinancialleveragerisk. 3.Genting Berhard is a Malayan conglomerate, with holdings in plantations andtouristresorts. Thebetaestimatedforthefirm, recountingtotheMalaysian stock exchange, is 1. 15, and the long? term g everywherenment 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? . Theexpectedreturnonthestock,assumingthatthemarginalinvestori sa Malaysianwithprimarilydomesticholdingsis0. cxv+1. 15(0. 12)=25. 30%,using theriskpremiumbasedon ruralriskprovidedbyratingsagencies. b. Foraninternationalinvestor,whohastheabilitytodiversifyglobally,someof theriskmightbediversifiable,andhencethetruebetamightbelower. Totake careofthispossibleoverstatement,itwouldbeappropriatetocomputeabeta relativetoamoreglobalindex,suchastheMorganStanleyCapitalIndex. . Youhavejustdonearegressionof periodicstockreturnsofHeavyTechInc. , amanufacturerofheavymachinery,onmonthlymarketreturnsoverthelast five classsand beupwiththefollowingregression RHeavyTech=0. 5%+1. 2RM 2 Thevarianceofthestockis50%,andthevarianceofthemarketis20%. The currentT. billrateis3%. (Itwas5%one socio-economic classago). Thestockiscurrently change for$50,down$4overthelastyear,andhaspaidadividendof$2duringthe lastyearandexpectstopayadividendof$2. 50overthe contiguousyear.TheNew YorkStockExchange(NYSE)compositehasgonedown8%overthelastyear, withadividendyieldof3%. HeavyTechInc. ha sataxrateof40%. a. WhatistheexpectedreturnonHeavyTechoverthe nighyear? b. WhatwouldyouexpectHeavyTechspricetobeoneyearfromtoday? c. WhatwouldyouhaveexpectedHeavyTechsstockreturnstobeover thelastyear? d. WhatweretheactualreturnsonHeavyTechoverthelastyear? e. HeavyTechhas$100millioninequityand$50millionindebt. Itplans to issue $50 million in new equity and screw $50 million in debt. Estimatethenewbeta.