Based on the analysis in question 1, I estimate the cost of equity as following: 9.81% =5.74% + 0.69 * (5.9%) Question 3: How, if at all, would you change Cohen’s debt cost of capital calculation? Why? Cohen used the company’s average debt balance of 2000 and 2001 in estimating the cost of debt. However, as historical data, debt balances may not reflect the current or future cost of debt of Nike appropriately. Apparently, her calculation is wrong.
Peter Swap I. Issue: Will recognizing compensation expense as part of Mizri Corporation’s stock compensation plan faithfully represent the exchange? II. GAAP List: * 718-10-30-22: An equity instrument for which it is not possible to reasonably estimate fair value at the grant date shall be accounted for based on intrinsic value * 718-20-35-3: A modification of an equity award shall be treated as an exchange of the original award for a new award incurring additional compensation cost for any incremental value III. Alternatives: A.
that did not go well with efficient markets hypothesis. DFA believed value stocks outperformed because they were riskier companies. Value stocks could be infested with distressed companies. - 1993 paper - Three factor model: {Small - big, High - low, beta}. Variation in these 3 factors explained the bulk of variation in stock returns (regression analysis).
For MONY • Poor performance in 01-02, ROE of 1% compared to industry of 10%, valid argument? HIG JHF MET PRU UNM MONY Net income -91 806 2,196 1,085 -386 37 Equity 11,639 8,216 21,149 21,292 7,271 2,094 ROE -0.8% 9.8% 10.4% 5.1% -5.3% 1.8% • The whole life incurance sector had been in trouble • MGMT forecasted EPS of 4, analysts said 30-35 cents • Low performance since demutualization → They criticized the deal, claiming it was undervalued (Delaware courts etc) (share price above bid price they claimed) For management? • General change In control Contracts (CICs) → would compensate top mgmt. and some board members in a takeover (6% of the value of the deal) • Hard to turn around negative profits without major changes Concerns about the deal? • MGMT CICs made mgmt.
* Risk premium: using the geometric mean from 1926 to 1999 might be problematic, since the risk premium of recent decades is obviously lower than earlier (stated in the lecture). So we think a range of 3% to 5% is more reasonable. * Cost of Debt: Joanna’s calculation is based on the items on the income statement. However, when calculating cost of debt, we should consider the opportunity cost rather than the accounting cost. We should perceive the opportunity cost as the return investors will expect to earn somewhere else when accepting similar risk.
8. If you invest money in the bond fund as outlined in #4 above, approximately how long would it take you to double your money? What if you invested in the Growth Mutual Fund? 9. Oops!
This method could be misleading, as it accounts for growth twice. The value-driver formula is similar to the FCF method used above, however it acknowledges that growth requires investment and earning a return on that investment (RONIC – return on newly invested capital). If RONIC > WACC, the new investment is adding value to the firm, and vice versa. 3. Equity market value Vs. Equity book value (1960) Equity market value = $36.42/share * 1,851,255 = $67,422,707 Equity book value = $65,219,000 The
What problems arise with the short-sale strategy? i. They want to hedge market risk but are willing to bear firm specific risk because they feel they have enough knowledge to handle firm risk but are less certain about managing the entire market’s risk. They took this position because they felt confident in their ability to pick positive alpha stocks. 1.
When would TIPS outperform/underperform regular Treasuries (on a real basis)? 2. From a conceptual perspective, should TIPS be considered an additional asset class in Harvard’s policy portfolio? 3. Re-form the optimal portfolios in Exhibit 5 assuming that TIPS are unavailable for investment.
The higher valuation of the bidders, compared to the true value of the target, would not have been made by rational bidders. Thus, managerial motives are important determinants for the outcome of the M&A as manager may act to maximize their own utility and engage in ‘empire building’ (Trautwein, 1990) instead of their shareholders’ value. Managers may invest the free cash flow in projects such as acquisitions with negative net present value if that would lead to increased personal utility rather than maximize shareholder value. These free cash flows, which are generally found in the reserves, should rather be paid out as to shareholders in the form of dividends if the firm is to be effective and to maximize the stock price (Jensen,