You have the following information for an up and coming utility company (FirstPower) striving to revolutionize the electric grid:

FirstPower (FP) owns 72% of EasyPower. EasyPower trades on NYSE with 52 million shares outstanding at $8.35 per share. FP has a cash balance of 400 million but you believe that you should attach a premium of 7% given its track record. FP has 135 million in accounts payable and 270 million in debt that is marked to market. FP has been targeted with a lawsuit. If FP were to lose the suit, payout will be 220 million but with the help of lawyers you estimate the probability of this happening is 35%. FP has 87 million shares outstanding in addition to 7 million management options. The management options have an average exercise price of $7 and average expiration of 4 years. The value per option is $6. You have completed the estimate of the operating value of assets of FP at $1.3 billion. Estimate the value of common equity per share of FP.

Now you evaluate Zale Inc. The company is expected to earn $77 million in after-tax operating income next year on $1.1 billion capital invested. The company is in stable growth phase and is expected to sustain its current ROC while growing at 1.8% a year forever. You estimate the COC at 9%

b) Estimate the value of the operating assets of Zale

You have noticed that Zale has a cash balance of $120 million invested in commercial paper (CP) and T-Bills (T-B) earning 0.6% a year. You estimate that there is a 60% probability that the management of Zale will reinvest this cash in assets that are similar to their exiting operating assets' risk return profile. There is a 40% likelihood that the cash will be continued to be invested in CPs and T-Bs.

c) What value would you attach to the cash balance of Zale

Answer rating: 100% (QA)

To estimate the value of common equity per share of FirstPower FP we need to consider the various components and adjust the operating value of assets accordingly Given information FP owns 72 of EasyPo... View the full answer