As the seller, at a bid price of $14,000, the initial cash inflow of $11,406 is surpasses the cost of the equipment of $3,980 (Table 1.1). Also, at the end of a 10 year period, the total seller’s cash flow will be $31,437 and sellers discounted cash flow will be $21,193, which is not much higher than the buyer’s total cash flow. Based on results shown on Figure 1.2, the seller could charge a maximum of $32,360 for the machine, for the buyer to breakeven at the end of the 10 years; however, this price is entirely too high, and as mentioned previously, smaller corporations typically focus on the initial cash outflow, instead of the long run
Case Write-up on Hudson General Evaluate the value of assets The major adjustments in the above evaluation is to decide the intrinsic value of two subsidiaries (Hudson LLC and Kohala JV) invested by HGC. First of all, HGC owns 74% stake in Hudson LLC (HLLC), the book value of which put on the balance sheet was $22 million. This means the value of the total HLLC would be at around $30 million. But on the other hand, we know that Lufthansa paid $23 million for 26 percent stake in HLLC two years ago and was going to offer an additional $30 million to further increase its share to 49 percent. If we take the latest offer price as the market price for HLLC, it will be valued at $130 million, the amount much higher than the value on HGC’s balance sheet.
Chapter 01 The Equity Method of Accounting for Investments Multiple Choice Questions 1. Gaw Company owns 15% of the common stock of Trace Corporation and used the fair-value method to account for this investment. Trace reported net income of $110,000 for 2008 and paid dividends of $60,000 on October 1, 2008. How much income should Gaw recognize on this investment in 2008? A.
LinkedIn generated over $970 million in revenue and over $21 million in net income that same year. In order to conclude whether Linkedin is a favorable investment, four valuation models were used for this analysis. Price-to-earnings (P/E) valuation, price-to-sales (P/S) valuation, discounted cash flow valuation, and average-revenue-per-user (ARPU). Three of these four valuation models provide evidence that the company is undervalued, and therefore is a good investment. We recognize that there are plenty of other factors that can affect their valuation currently and in the future, however, the analysis shows that today LinkedIn is a good company to invest in.
The firm has a ( of 0.75 but this project is twice as risky as the firm’s normal operations. The expected return on the market is 10% and the risk free rate is 6%. Should the firm undertake this project? The first stage of deciding whether the firm should undertake the project is to calculate the required rate of return for the project using CAPM. As the project is twice as risky as the firm’s normal operations, it beta will be equal to 2 x 0.75 = 1.5: [pic] We will now use this required rate of return to calculate the NPV of the project: [pic] As the project has a positive NPV, it should be accepted.
Capital Budgeting Case QBR/501 Capital Budgeting Case Given two separate companies to compare I had to first crunch the numbers using the information on both companies that were proposed. The spending limit was $250,000 and I could not go over that amount. Corporation “A” had revenues equaling $100,000 in year one but increasing by 10% each year. It also had expenses of $20,000 and increasing by 15% each year. The depreciating expense is $5000 each year with a tax rate of 25% and discount rate of 10%.
Customer Analysis The total industrial consumption of cyano-acrylates which the new Bond-A-Matic 2000 would dispense was 265,000 pounds in FY 1978, expected to grow to about 335,000 pounds in FY 1979. Across 16 SIC categories, approximately 174,909 firms currently used cyano-acrylates (at a 15.5% market penetration.) 11% of CA users, i.e. approximately 19,240 firms used over 10 pounds of CAs per year, comprising at-least 75% of total current market. Assuming that growth in the CA segment stagnates, and that only heavy CA applicators would be interested in dispensing equipment the total market is still estimated at 19,240 users.
GE’s strategy is to achieve 75% of its earnings from its industrial business by 2016. The production of any service or commodity is considered an industrial process, with infrastructure being well developed assets. Also, another shift by GE is underway to rede ploy the company’s investments away from “ non-core” assets such as media, plastics and insurance to higher growth, higher margin business in oil and gas, power, aviation and health care. Since the announcement of the sale, GE shares were trending higher up 14% to $ 26.24 per share. Shares closed at $26.61 since rumors first surfaced about sales.
Calculate the expected return and standard deviation of his portfolio if he invests: (a) 40% in share X and 60% in share Y. [40%] (b) 70% in share X and 30% in share Y. [40%] (c) Calculate the correlation coefficient between X and Y. [20%] Question 3 a) Suppose your neighbour wants to invest in bonds. One of the choices is a corporate bond with a coupon rate 2%, 2-year maturity with par value of £1000 paying annual coupon payment.
c. Internal common equity where the current market price of the common stock is $43.50. The expected dividend this coming year should be $3.25, increasing thereafter at a 7% annual growth rate. The corporation’s tax rate is 34%. d. A preferred stock paying a 10% dividend on a $125 par value. If a new issue is offered, flotation costs will be 12% of the current price of $150.