Can you help me with these questions? Instructions for the Next Two Questions For Questions 14 and
Fantastic news! We've Found the answer you've been seeking!
Question:
Can you help me with these questions?
Transcribed Image Text:
Instructions for the Next Two Questions For Questions 14 and 15, please either upload a pdf file containing your answers or use the text entry box in Question 16 to enter your answer in text form. Scanned files of handwritten answers are acceptable. Be sure to show your work! We will not grade Excel files! If you do the problems in Excel, create a PDF of your workbook with text boxes that explain the formulas that you use. 14 20 points The CEO of the ESG Corp has hired you to advise her and her company about whether or not to acquire Greenerton, a privately held company with no outstanding debt. If ESG Corp moves forward with the acquisition, it will finance the deal with equity and no debt. You have produced the following projections (in $ million) for Greenerton's revenues, costs (which include both cost of goods sold and SG&A), and depreciation over the next two years (assume that today is 2020). Revenues Costs Depreciation Today (in 2020), Greenerton's net working capital (NWC) is $26 million. For 2021 and 2022, you estimate that Greenerton's net working capital will be 10% of revenues. You can also assume capital expenditure (CAPEX) is 0. a. (8 pts) What are Greenerton's free cash flows for 2021 and 2022? Because neither ESG or Greenerton are publicly traded, you have gathered data about BlueSky, a publicly traded firm whose operations are similar in risk to Greenerton's. BlueSky has 200,000 shares outstanding, and they are currently trading at $42 a share. It also has $2.8 million in debt. BlueSky has an equity beta (8) of 1.8, and the firm borrows at a rate of 5.6%. The corporate tax rate is 40%, the market risk premium (E[Rm]-rf) is 8%, and the risk-free rate is 4%. 2021 240 205 15 b. (6 pts) What is the unlevered cost of capital (ru) for BlueSky? c. (2 pts) You can use unlevered cost of capital (ru) for BlueSky as the weighted average cost of capital (WACC) for the Greenerton acquisition. Write one to two sentences explaining why. .pdf files only! d. (4 pts) You estimate that Greenerton's free cash flows will grow at 5% forever after 2022. Calculate the terminal value of Greenerton at the end of 2022, and the maximum value that ESG should be willing to pay to acquire Greenerton. Drag n' Drop here or Browse 15 20 points Suppose there are only two stocks in the entire market, Stock A and Stock B. Stock A has an expected return of 8% and a standard deviation, OA, of 15%. Stock B has an expected return of 14% and a standard deviation, og of 20%. Their market capitalizations are both exactly the same at $1,000,000. The correlation between Stock A and Stock B, p, is 0.3. The risk free rate, rf, is 4.5%. 2022 280 230 20 a) (5 points) What are the Sharpe ratios of Stock A and Stock B? b) (3 points) If you could only invest in either Stock A or Stock B (combined with the risk-free asset) which one would you choose and why? c) (6 points) What is the expected return on the market portfolio? d) (6 points) Show that the CAPM does not hold in this example given the numbers above. Recall that for the CAPM to hold implies that the market is equal to the tangent portfolio. T v Drag n' Drop here or Browse 16 0 points If you do not want to upload your answers in .pdf format, please use this text entry box to enter your responses to Questions 15 and 16. You do not need to enter a response here if you have already uploaded your responses above. Edit View Insert Format Tools Table 12pt Paragraph B I U Av Dv * v Ev To 8 Instructions for the Next Two Questions For Questions 14 and 15, please either upload a pdf file containing your answers or use the text entry box in Question 16 to enter your answer in text form. Scanned files of handwritten answers are acceptable. Be sure to show your work! We will not grade Excel files! If you do the problems in Excel, create a PDF of your workbook with text boxes that explain the formulas that you use. 14 20 points The CEO of the ESG Corp has hired you to advise her and her company about whether or not to acquire Greenerton, a privately held company with no outstanding debt. If ESG Corp moves forward with the acquisition, it will finance the deal with equity and no debt. You have produced the following projections (in $ million) for Greenerton's revenues, costs (which include both cost of goods sold and SG&A), and depreciation over the next two years (assume that today is 2020). Revenues Costs Depreciation Today (in 2020), Greenerton's net working capital (NWC) is $26 million. For 2021 and 2022, you estimate that Greenerton's net working capital will be 10% of revenues. You can also assume capital expenditure (CAPEX) is 0. a. (8 pts) What are Greenerton's free cash flows for 2021 and 2022? Because neither ESG or Greenerton are publicly traded, you have gathered data about BlueSky, a publicly traded firm whose operations are similar in risk to Greenerton's. BlueSky has 200,000 shares outstanding, and they are currently trading at $42 a share. It also has $2.8 million in debt. BlueSky has an equity beta (8) of 1.8, and the firm borrows at a rate of 5.6%. The corporate tax rate is 40%, the market risk premium (E[Rm]-rf) is 8%, and the risk-free rate is 4%. 2021 240 205 15 b. (6 pts) What is the unlevered cost of capital (ru) for BlueSky? c. (2 pts) You can use unlevered cost of capital (ru) for BlueSky as the weighted average cost of capital (WACC) for the Greenerton acquisition. Write one to two sentences explaining why. .pdf files only! d. (4 pts) You estimate that Greenerton's free cash flows will grow at 5% forever after 2022. Calculate the terminal value of Greenerton at the end of 2022, and the maximum value that ESG should be willing to pay to acquire Greenerton. Drag n' Drop here or Browse 15 20 points Suppose there are only two stocks in the entire market, Stock A and Stock B. Stock A has an expected return of 8% and a standard deviation, OA, of 15%. Stock B has an expected return of 14% and a standard deviation, og of 20%. Their market capitalizations are both exactly the same at $1,000,000. The correlation between Stock A and Stock B, p, is 0.3. The risk free rate, rf, is 4.5%. 2022 280 230 20 a) (5 points) What are the Sharpe ratios of Stock A and Stock B? b) (3 points) If you could only invest in either Stock A or Stock B (combined with the risk-free asset) which one would you choose and why? c) (6 points) What is the expected return on the market portfolio? d) (6 points) Show that the CAPM does not hold in this example given the numbers above. Recall that for the CAPM to hold implies that the market is equal to the tangent portfolio. T v Drag n' Drop here or Browse 16 0 points If you do not want to upload your answers in .pdf format, please use this text entry box to enter your responses to Questions 15 and 16. You do not need to enter a response here if you have already uploaded your responses above. Edit View Insert Format Tools Table 12pt Paragraph B I U Av Dv * v Ev To 8
Expert Answer:
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
Posted Date:
Students also viewed these finance questions
-
The CEO of the ESG Corp has hired you to advise her and her company about whether or not to acquire Greenerton, a privately held company with no outstanding debt. If ESG Corp moves forward with the...
-
Her Passion for Fashion Bobbi Jean Donnelly was hardened by her humble beginnings in rural Mississippi. The fourth of six children in a blue-collar working-class family, she spent the early years of...
-
e) Based on your investigation of the data set create two well-formatted tables that illustrate some important features of the data. Your tables should have informative labels and a readable number...
-
Atlas Mines has adopted a policy of increasing the annual dividend on its common stock at a constant rate of 2.75 percent annually. The firm just paid an annual dividend of $1.67. What will the...
-
If block A has a mass of 1.5 kg, determine the largest mass of block B without causing motion of the system. The coefficient of static friction between the blocks and inclined planes is ? s = 0.2. 60
-
A parallel-plate capacitor with a plate area of \(50 \mathrm{~mm}^{2}\) and air between the plates can hold \(5.5 \mathrm{pC}\) of charge per volt of potential difference across its plates. When a...
-
Flow of a film on the outside of a circular tube (see Fig. 2B.6), in a gas absorption experiment a viscous fluid flows upward through a small circular tube and then downward in laminar flow on the...
-
A ( n ) _ _ _ _ _ _ _ _ _ _ contains information about a given person, product, or event. Attribute Column Field Record
-
Create a set of use cases for the following high-level requirements in a housing system run by the Campus Housing Service. The Campus Housing Service helps students find apartments. Owners of...
-
Consider the following returns and states of the economy for TZ.Com.: Economy ProbabilityReturn Weak 15% -6% Normal 50% 3% Strong 35% 6% What is the standard deviation of TZ's returns? SET YOUR...
-
A force of 15 N is exerted to move a trolley for the distance of 5 m on a level road. How much work is done if the force is applied at an angle of 30 degrees with the horizontal?
-
What is the worst case complexity (Big O) of the following features? n is the size of the input. Give a brief ex- planation. ii. void fint arr[], int n) { for (int i=1;i
-
If a grocery cart with a mass of 16.5 kg accelerates at +2.31 m/s 2 against a frictional force of -15.0 N, what is the applied force?
-
If you are lying down and stand up quickly, you can get dizzy or feel faint. This is because the blood vessels don't have time to expand to compensate for the blood pressure drop. If your brain is...
-
An electron moves through a uniform magnetic field given by B = Bxi+(2.12 B). At a particular instant, the electron has velocity (1.891+4.70) m/s and the magnetic force acting on it is (3.82 x 10-1)...
-
The project manager spends 90% of the time in communication if the project manager fails to communicate the correct information to stakeholders, project team members, suppliers, and the company...
-
At the beginning of the year, Lam Ltd. had total assets of $800,000 and total liabilities of $500,000. Use this information to answer each of the following independent questions. (a) If Lam's total...
-
Ken paid the following amounts for interest during 2012: Qualified interest on home mortgage...........................................$4,700 Auto loan...
-
The following additional information is available for the Dr. Ivan and Irene Incisor family. The Incisors own a rental beach house in Hawaii. The beach house was rented for the full year during 2012...
-
Mark owns his home and has a $250,000 mortgage related to his purchase of the residence. When his daughter went to college in the fall of 2012, he borrowed $20,000 through a home equity loan on his...
-
A man in a barrel walking competition is moving along smoothly, with his barrel moving forward at 1.0 m/s. a. Think about how the man moves his legs. Is he walking forward or backward? b. From the...
-
A spin bike is an indoor bike that is designed to duplicate the feeling of regular road cycling. A typical spin bike has a very heavy flywheel. A friction pad or other brake provides damping that...
-
A trap-jaw ant has mandibles that can snap shut with some force, as you might expect from its name. The formidable snap is good for more than capturing prey. When an ant snaps its jaws against the...
Study smarter with the SolutionInn App