the end of this year and a. If Roybus has 30 million shares outstanding and a weighted average cost of capital of 12.3%, what change in Roybus's stock price would you expect upon this announcement? (Assume that the value of Roybus's debt is not affected by the event.) b. Would you expect to be able to sell Roybus stock on hearing this announcement and make a profit? Explain.

the end of this year and a. If Roybus has 30 million shares outstanding and a weighted average cost of capital of 12.3%, what change in Roybus's stock price would you expect upon this announcement? (Assume that the value of Roybus's debt is not affected by the event.) b. Would you expect to be able to sell Roybus stock on hearing this announcement and make a profit? Explain.

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter7: Valuation Of Stocks And Corporations

Section: Chapter Questions

Problem 1lM

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Roybus, Inc., a manufacturer of flash memory, just reported that its main production facility in Taiwan was destroyed in a fire. Although the plant was fully insured, the loss of production will decrease Roybus's free cash flow by $181 million at the end of this year and by $63 million at the end of next year. a. If Roybus has 32 million shares outstanding and a weighted average cost of capital of 13.8%, what change in Roybus's stock price would you expect upon this announcement? (Assume that the value of Roybus's debt is not affected by the event.) b. Would you expect to be able to sell Roybus stock on hearing this announcement and make a profit? Explain.
LAFCO Industries believes that its two primary product lines, automotive and commercial aircraft valves, are becoming obsolete rapidly. Its free cash flow is diminishing quickly as it loses market share to new firms entering its industry. LAFCO has $200 million in debt outstanding. Senior management expects the automotive and commercial aircraft valve product lines to generate $25 and 15 million, respectively, in earnings EBITDA next year. The operating liabilities associated with these two product lines are minimal. Senior management also believes that it will not be able to upgrade these product lines because of declining cash flow and excessive current leverage. A competitor to its automotive valve business last year sold for 10 times EBITDA. Moreover, a company similar to its commercial aircraft valve product line sold last month for 12 times EBITDA. Estimate LAFCO's breakup value before taxes.
Newdex has net income of $3,000,000 (Including the effect of expected out-of-pocket costs) and 1,000,000 shares outstanding. It needs to raise $5,000,000 in funds for a new asset. It's investment banker plans to sell an issue of common stock to the public for $40, less spread of 10%. How much must Newdex's after-tax income increase by to prevent dilution of earnings per share?
Mm.2. Roybus, Inc., a manufacturer of flash memory, just reported that its main production facility in Taiwan was destroyed in a fire. Although the plant was fully insured, the loss of production will decrease Roybus's free cash flow by $181 million at the end of this year and by $57 million at the end of next year. a. If Roybus has 33 million shares outstanding and a weighted average cost of capital of 12.9%, what change in Roybus's stock price would you expect upon this announcement? (Assume that the value of Roybus's debt is not affected by the event.) b. Would you expect to be able to sell Roybus stock on hearing this announcement and make a profit? Explain.
Rian Corporation is currently working without using debt. The estimated operating profit per year is $16.065,180.00 while the equity capitalization rate (ke) is 18% pa. In the coming year, Rian is considering replacing some of his shares with a debt of $50 million, with an interest rate of 15% per annum. Question: a. Calculate the value of own capital capitalization (CS), the total capitalization value of the company (V), and the overall capitalization rate (ko) using the Net Income Approach. b. Calculate the amount of equity capitalized value, total capitalization value of the company, and overall capitalization rate using the traditional approach, if additional debt causes the equity capitalization rate (ke) to increase to 20%. c. Draw a graph of the two approaches.
ERC is the largest logging company in the United States. Their logging reserves are being depleted and is in turn causing sales to fall. In addition,new environmental protection policies are making it very difficult for the procurement of new logging sites. As a result,their dividends are declining at a constant rate of 5% per year.Dividends paid at the end of last yer are 5$ per share, and the required rate of return on the stock is 15%. a) what is the value of ERC stock? b)Assess the estimation techniques of long term corporate investments, in your answer focus on the relationship between time and accuracy in stock valuation techniques?
The Generic Genetic (GG) Corporation pays no cash dividends currently and is not expected to for the next four years. Its latest EPS was $6.20, all of which was reinvested in the company. The firm's expected ROE for the next four years is 19% per year, during which time it is expected to continue to reinvest all of its earnings. Starting in year 5, the firm's ROE on new investments is expected to fall to 18% per year. GG's market capitalization rate is 18% per year. Required: a. What is your estimate of GG's intrinsic value per share? Note: Round your answer to 2 decimal places. b. Assuming its current market price is equal to its intrinsic value, what do you expect to happen to its price over the next year? Complete this question by entering your answers in the tabs below. Required A Required B What is your estimate of GG's intrinsic value per share? Note: Round your answer to 2 decimal places. GG's intrinsic value
The Generic Genetic (GG) Corporation pays no cash dividends currently and is not expected to for the next four years. Its latest EPS was $6.20, all of which was reinvested in the company. The firm's expected ROE for the next four years is 19% per year, during which time it is expected to continue to reinvest all of its earnings. Starting in year 5, the firm's ROE on new investments is expected to fall to 18% per year. GG's market capitalization rate is 18% per year. a. What is your estimate of GG's intrinsic value per share? (Round your answer to 2 decimal places.) GG's intrinsic value b. Assuming its current market price is equal to its intrinsic value, what do you expect to happen to its price over the next year? Price should at a rate of % over the next year.
Midland Corporation has a net income of $13 million and 6 million shares outstanding. Its common stock is currently selling for $49 per share. Midland plans to sell common stock to set up a major new production facility with a net cost of $23,265,000. The production facility will not produce a profit for one year, and then it is expected to earn a 12 percent return on the investment. Stanley Morgan and Co., an investment banking firm, plans to sell the issue to the public for $45 per share with a spread of 6 percent. a. How many shares of stock must be sold to net $23,265,000? (Note: No out-of-pocket costs must be considered in this problem.) (Do not round intermediate calculations and round your answer to the nearest whole number.) Number of shares b. What are the earnings per share (EPS) and the price-earnings ratio before the issue (based on a stock price of $49)? What will be the price per share immediately after the sale of stock if the P/E stays constant? (Do not round…
The Generic Genetic (GG) Corporation pays no cash dividends currently and is not expected to for the next four years. Its latest EPS was $5.80, all of which was reinvested in the company. The firm's expected ROE for the next four years is 24% per year, during which time it is expected to continue to reinvest all of its earnings. Starting in year 5, the firm's ROE on new investments is expected to fall to 23% per year. GG's market capitalization rate is 23% per year.a. What is your estimate of GG's intrinsic value per share? GG's intrinsic value = b. Assuming its current market price is equal to its intrinsic value, what do you expect to happen to its price over the next year? Price should increase or decrease at a rate of _________% over the next year.
The Generic Genetic (GG) Corporation pays no cash dividends currently and is not expected to for the next four years. Its latest EPS was $5.90, all of which was reinvested in the company. The firm’s expected ROE for the next four years is 16% per year, during which time it is expected to continue to reinvest all of its earnings. Starting in year 5, the firm’s ROE on new investments is expected to fall to 15% per year. GG’s market capitalization rate is 15% per year. a. What is your estimate of GG’s intrinsic value per share? (Round your answer to 2 decimal places.) b. Assuming its current market price is equal to its intrinsic value, what do you expect to happen to its price over the next year? Price should _____ at a rate of ______% over the next year.
The Generic Genetic (GG) Corporation pays no cash dividends currently and is not expected to for the next four years. Its latest EPS was $5.50, all of which was reinvested in the company. The firm's expected ROE for the next four years is 21% per year, during which time it is expected to continue to reinvest all of its earnings. Starting in year 5, the firm's ROE on new investments is expected to fall to 20% per year. GG's market capitalization rate is 20% per year. a. What is your estimate of GG's intrinsic value per share? (Round your answer to 2 decimal places.) Answer is complete but not entirely correct. GG's intrinsic value $ Price should 73.32 x b. Assuming its current market price is equal to its intrinsic value, what do you expect to happen to its price over the next year? increase X Answer is complete but not entirely correct. at a rate of 23 X % over the next year.