Question;9-19. IDX Technologies is a;privately held developer of advanced security systems based in Chicago.;As part of your business;development strategy, in late 2008 you initiate discussions with IDX?s;founder about the possibility of;acquiring the business at the end of 2008. Estimate the value of;IDX per share using a discounted;FCF approach and the following data;? Debt: $30 million;? Excess cash: $110 million;? Shares outstanding: 50 million;? Expected FCF in 2009: $45;million;? Expected FCF in 2010: $50;million;? Future FCF growth rate beyond;2010: 5%;? Weighted-average cost of;capital: 9.4%;From 2010 on, we expect FCF to grow at a 5% rate. Thus;using the growing perpetuity formula, we;9-20. Sora Industries has 60;million outstanding shares, $120 million in debt, $40 million in cash, and;the following projected free cash;flow for the next four years;a. Suppose Sora?s revenue and free;cash flow are expected to grow at a 5% rate beyond year 4.;If Sora?s weighted average cost of;capital is 10%, what is the value of Sora?s stock based on;this information?;b. Sora?s cost of goods sold was;assumed to be 67% of sales. If its cost of goods sold is actually;70% of sales, how would the;estimate of the stock?s value change?;c. Let?s return to the assumptions;of part (a) and suppose Sora can maintain its cost of goods;sold at 67% of sales. However, now;suppose Sora reduces its selling, general, and;administrative expenses from 20%;of sales to 16% of sales. What stock price would you;estimate now? (Assume no other;expenses, except taxes, are affected.);*d. Sora?s net working capital;needs were estimated to be 18% of sales (which is their current;level in year 0). If Sora can;reduce this requirement to 12% of sales starting in year 1, but all;other assumptions remain as in;part (a), what stock price do you estimate for Sora? (Hint;This change will have the largest;impact on Sora?s free cash flow in year 1.);9-21. Consider the valuation of;Kenneth Cole Productions in Example 9.7.;a. Suppose you believe KCP?s;initial revenue growth rate will be between 4% and 11% (with;growth slowing in equal steps to;4% by year 2011). What range of share prices for KCP is;consistent with these forecasts?;b. Suppose you believe KCP?s EBIT;margin will be between 7% and 10% of sales. What range;of share prices for KCP is;consistent with these forecasts (keeping KCP?s initial revenue;growth at 9%)?;c. Suppose you believe KCP?s;weighted average cost of capital is between 10% and 12%. What;range of share prices for KCP is;consistent with these forecasts (keeping KCP?s initial;revenue growth and EBIT margin at;9%)?;Berk/DeMarzo ? Corporate;Finance, Second Edition131;?2011 Pearson Education, Inc. Publishing as Prentice Hall;d. What range of share prices is;consistent if you vary the estimates as in parts (a), (b), and (c);simultaneously?;9-22. You notice that PepsiCo has;a stock price of $52.66 and EPS of $3.20. Its competitor, the Coca-;Cola Company, has EPS of $2.49.;Estimate the value of a share of Coca-Cola stock using only;this data.;PepsiCo P/E = 52.66/3.20 = 16.46x. Apply to Coca-Cola: $2.49;?16.46 = $40.98.;9-23. Suppose that in January;2006, Kenneth Cole Productions had EPS of $1.65 and a book value of;equity of $12.05 per share.;a. Using the average P/E multiple;in Table 9.1, estimate KCP?s share price.;b. What range of share prices do;you estimate based on the highest and lowest P/E multiples in;Table 9.1?;c. Using the average price to book;value multiple in Table 9.1, estimate KCP?s share price.;d. What range of share prices do;you estimate based on the highest and lowest price to book;value multiples in Table 9.1?;9-24. Suppose that in January;2006, Kenneth Cole Productions had sales of $518 million, EBITDA of;$55.6 million, excess cash of $100;million, $3 million of debt, and 21 million shares outstanding.;a. Using the average enterprise;value to sales multiple in Table 9.1, estimate KCP?s share price.;b. What range of share prices do;you estimate based on the highest and lowest enterprise value;to sales multiples in Table 9.1?;c. Using the average enterprise;value to EBITDA multiple in Table 9.1, estimate KCP?s share;price.;d. What range of share prices do;you estimate based on the highest and lowest enterprise value;to EBITDA multiples in Table 9.1?;9-25. In addition to footwear;Kenneth Cole Productions designs and sells handbags, apparel, and;other accessories. You decide;therefore, to consider comparables for KCP outside the footwear;industry.;a. Suppose that Fossil, Inc., has;an enterprise value to EBITDA multiple of 9.73 and a P/E;multiple of 18.4. What share price;would you estimate for KCP using each of these multiples;based on the data for KCP in;Problems 23 and 24?;b. Suppose that Tommy Hilfiger;Corporation has an enterprise value to EBITDA multiple of;7.19 and a P/E multiple of 17.2.;What share price would you estimate for KCP using each of;these multiples, based on the data;for KCP in Problems 23 and 24?;9-26. Consider the following data;for the airline industry in early 2009 (EV = enterprise value, BV =;book value, NM = not meaningful;because divisor is negative). Discuss the challenges of using;multiples to value an airline.;All the multiples show a great deal of variation across;firms. This makes the use of multiples;problematic because there is clearly more to valuation than;the multiples reveal. Without a clear;understanding of what drives the differences in multiples;across airlines, it is unclear what the;?correct? multiple to use is when trying to value a new;airline.;9-27. You read in the paper that;Summit Systems from Problem 6 has revised its growth prospects;and now expects its dividends to;grow at 3% per year forever.;a. What is the new value of a;share of Summit Systems stock based on this information?;b. If you tried to sell your;Summit Systems stock after reading this news, what price would you;be likely to get and why?;9-28. In early 2009, Coca-Cola;Company had a share price of $46. Its dividend was $1.52, and you;expect Coca-Cola to raise this;dividend by approximately 7% per year in perpetuity.;a. If Coca-Cola?s equity cost of;capital is 8%, what share price would you expect based on your;estimate of the dividend growth;rate?;b. Given Coca-Cola?s share price;what would you conclude about your assessment of Coca-;Cola?s future dividend growth?.;9-29. Roybus, Inc., a manufacturer;of flash memory, just reported that its main production facility in;Taiwan was destroyed in a fire.;While the plant was fully insured, the loss of production will;decrease Roybus? free cash flow by;$180 million at the end of this year and by $60 million at the;end of next year.;a. If Roybus has 35 million shares;outstanding and a weighted average cost of capital of 13%;what change in Roybus? stock price;would you expect upon this announcement? (Assume the;value of Roybus? 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.;9-30. Apnex, Inc., is a;biotechnology firm that is about to announce the results of its clinical trials;of a;potential new cancer drug. If the;trials were successful, Apnex stock will be worth $70 per share.;If the trials were unsuccessful;Apnex stock will be worth $18 per share. Suppose that the;morning before the announcement is;scheduled, Apnex shares are trading for $55 per share.;a. Based on the current share;price, what sort of expectations do investors seem to have about;the success of the trials?;b. Suppose hedge fund manager Paul;Kliner has hired several prominent research scientists to;examine the public data on the;drug and make their own assessment of the drug?s promise.;Would Kliner?s fund be likely to;profit by trading the stock in the hours prior to the;announcement?;c. What would limit the fund?s;ability to profit on its information?.
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