FIN 415 Winter 2024 Quiz 3 20240429_2134

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University of Michigan *

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May 9, 2024

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FIN 415 CORPORATE INVESTMENT DECISIONS QUIZ 3 WINTER 2024 Instructions Time and submission information You have 120 minutes. There are 6 questions. There are 2 non-quantitative questions (each worth 10% of the points for this quiz for a total of 20%) and there are 4 quantitative questions (each worth 20% of the points for this quiz for a total of 80%). The questions have multiple parts and within a question each part carries equal weight. For example, two parts = 50% weight for each part, three parts = 1/3 weight for each part. You will need to use Excel to complete the quiz. Retain all decimal places in your calculations. If you round inputs then some of your calculations will be incorrect. For a question with a numerical answer, to score a point there must be a calculation in your spread sheet that leads to your answer. For example, if your valuation of a stock is $125.25 there must be a calculation in your spread sheet that leads to the valuation of $125.25. You cannot work out the answer on a piece of paper and type $125.25 into the spread sheet. The exam is open book. You can use any resources at all to complete the quiz, but you cannot collaborate with a person. There can be instances in which an exam question has an error, or is subject to an alternative, but reasonable interpretation. If this happens I will refer to your spread sheet in deciding whether to award a point. When you submit your quiz, make sure you give me the following information. For questions 1 and 2 just type your letter answers. For questions 3-6 you should provide a numerical solution with a cell reference to your computations in your spread sheet in the first work sheet. This is NOT A HYPERLINK. It’s just a reference to a cell on another worksheet like we have in many spread sheets used in class and which you can see on past exam solutions. Question summary There are 2 non-computation questions and 4 computation questions. The non-computation questions will take you less time than the computation questions. So make sure you answer the non-computation questions. Question Type Topic 1 Non-quantitative Asset pricing models 2 Non-quantitative Valuation discounts 3 Quantitative Valuation: Booking 4 Quantitative Valuation: Itron 5 Quantitative Acquisition: Ulta acquisition of Sally 6 Quantitative Cost of equity
FIN 415 Corporate Investment Decisions Quiz 3 Winter 2024 2 Questions Question 1: Asset pricing models 1. Part A: What was the catalyst to the development of the Fama-French 3-factor model, published in 1993? (a) The observation that non-beta stock characteristics seem to predict stock returns. (b) The observation that taxes exist, a violation of perfect capital markets. (c) The observation that active portfolio managers consistently earn above-benchmark returns. Part B: What was the catalyst to the development of the Black Capital Asset Pricing Model, published in 1972? (a) The Black CAPM adopted the more realistic assumption that investors borrow at a rate above the risk-free rate. (b) The Black CAPM adopted the more realistic assumption that investors would prefer to hold an asset with zero beta at a higher return than government bonds. (c) The Black CAPM adopted the more realistic assumption that investors are unable to easily diversify. Question 2: Valuation discounts 2. The liquidity discount is underpinned by two areas of research – restricted stock transactions and acquisitions of private companies. Both areas of research have flaws but as practitioners we do our best to incorporate liquidity adjustments. Part A: What is the flaw in the restricted stock transactions analysis? (a) The time restriction on sale is relatively short compared to actual illiquid holdings being valued. (b) Founders don’t care about sale restrictions because they are in for the long haul. (c) Executives are compensated for sale restrictions with higher salaries. Part B: What is the flaw in the private companies’ analysis? (a) There is actually a robust market for the trading of private company shares. (b) The high leverage of private companies compared to publicly-traded companies negatively affects their valuation multiples. (c) Companies are not randomly assigned to be private or publicly-traded and the choice to stay private or go public means that comparing valuation multiples captures non-liquidity characteristics.
FIN 415 Corporate Investment Decisions Quiz 3 Winter 2024 3 Question 3: Booking 3. Your task is to estimate equity value per share for Booking Holdings Inc. (Booking), a travel company. Use multiples to estimate equity value per share using three different measures of earnings: Earnings before interest, tax, depreciation and amortization (EBITDA), earnings before interest and tax (EBIT) and earnings per share (EPS). For each earnings measure you have three years of forecast earnings. To reach a conclusion on valuation derived from each earnings measure, take an average of your valuations derived from earnings from forecast years one, two and three. Booking has debt of $14,252 million and 34 million shares on issue. Earnings forecasts for Booking and comparable firms are presented in the table below. Firm Price ($) Shares (m) Debt ($m) EBITDA ($m) EBIT ($m) EPS 1 2 3 1 2 3 1 2 3 Comparable firms Norwegian Cruise Line $18.54 426 14,059 2,231 2,487 2,833 1,285 1,485 1,764 $1.08 $1.53 $1.95 Expedia $131.59 137 6,253 3,022 3,371 3,590 1,727 2,053 2,294 $9.31 $11.90 $14.06 Airbnb $156.61 647 1,991 4,036 4,640 5,318 2,713 3,213 3,949 $4.35 $4.99 $5.83 Carnival $14.28 1264 30,572 5,674 6,275 6,602 3,114 3,561 3,805 $0.91 $1.40 $1.71 Royal Caribbean $131.99 256 21,452 5,576 6,082 6,541 3,855 4,248 4,647 $10.19 $11.98 $13.74 Tripadvisor $25.56 138 896 399 459 528 219 255 361 $0.87 $1.32 $1.61 Sabre Corp $2.66 380 4,834 535 712 754 435 614 647 -$0.52 $0.03 $0.14 Booking 34 14,252 7,930 8,890 9,895 7,492 8,408 9,421 $168.74 $198.26 $235.09 Part A: What is the estimate of equity value per share based upon EBITDA, taking an average of three valuations derived from EBITDA? Part B: What is the estimate of equity value per share based upon EBIT, taking an average of three valuations derived from EBIT? Part C: What is the estimate of equity value per share based upon EPS, taking an average of three valuations derived from EPS?
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