Investment Valuation Essay

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veHome assignment 4. Adjusting Operating Earnings. Due 4/11/2012 Spinnet Telecommunications reported earnings before interest and taxes of $ 50 million on a book value of capital of $ 500 million in the most recent financial year (=current year). The book value of equity was $ 400 million and the book value of debt was $ 100 million. The debt is in the form of 10-year bank loans (balloon payment all the principal is due at the end of the 10th year) and the interest expense in the current year was $8 million. In the course of your analysis, you uncover the following: a. The firm has operating lease commitments for the next few years and they are summarized below: Year | Lease Commitment | Current year | $ 22 million | 1 | $ 24 million | 2 | $ 22 million | 3 | $ 22 million | 4 | $ 21 million | 5 | $ 20 million | Beyond yr 5 | $ 111 million | b. The firm is not rated, but you believe that it would be rated using criteria based upon smaller and riskier firms. The table summarizing interest coverage ratios and ratings for such companies is provided below. Interest Coverage Ratio | Rating | Default spread | > 12.5 | AAA | 0.5% | 9.50 - 12.50 | AA | 0.75% | 7.50 - 9.50 | A+ | 1.00% | 6.00 - 7.50 | A | 1.25% | 4.50 - 6.00 | A- | 1.50% | 3.50 - 4.50 | BBB | 2.00% | 3.00 - 3.50 | BB | 3.50% | 2.50 - 3.00 | B+ | 5.00% | 2.00 - 2.50 | B | 6.50% | 1.50 - 2.00 | B- | 7.50% | 1.25 - 1.50 | CCC | 8.5% | 0.80 - 1.25 | CC | 10.5% | 0.50 - 0.80 | C | 12.0% | < 0.50 | D | 15.0% | c. The firm reported $ 45 million in R& D expenses in the current year. Based upon your belief that there is a 3-year amortizable life for research, you collected R&D expenses for the last 3 years: Year R&D expense -1 $ 35 million -2 $ 25 million -3 $ 15 million d. The unlevered beta for other

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