Assignment 1

1 Federal antitrust laws exist to prevent individual corporations from assuming too much
market power such that they can limit their output and raise prices without concern for any
significant competitor reaction.
a. True
b. False
Answer: True

2 Poison pills are a commonly used takeover tactic to remove the management and board of the
target firm.
True
False
Answer: False

3. In determining whether a proposed transaction is anti-competitive, U.S. regulators look at all of the
following except for

a. Market share of the combined businesses

b. Potential for price fixing
c. Ease of new competitors to enter the market
d. Potential for job loss among target firm’s employees
e. The potential for the target firm to fail without the takeover
Answer: D

4. All of the following factors are considered by U.S. antitrust regulators except for

a. Market share
b. Potential adverse competitive effects
c. Barriers to entry
d. Purchase price paid for the target firm
e. Efficiencies created by the combination
Answer: D

5.All of the following are commonly used takeover tactics, except for
a. Poison pills
b. Bear hug
c. Tender offer
d. Proxy contest
Answer: A

Questions 6-8 are based one the following excerpt from Chicago Tribune (May 9, 2016)

Tribune Publishing's board has adopted a shareholder rights plan to defend itself against
Gannett's unsolicited bid to buy the Chicago-based newspaper company.
The publisher of the Chicago Tribune, the Los Angeles Times and other papers said Monday
the plan, commonly known as a "poison pill," would kick in if a group buys more than 20 percent
of Tribune Publishing's shares or begins a tender offer to seek a 20 percent stake from existing
shareholders.
When the plan is triggered, existing shareholders, other than an acquiring entity, could buy
preferred shares at a substantial discount, thereby diluting the stake of any acquiring company
and making a takeover more expensive. The plan expires in a year.
Tribune Publishing's adoption of the defense, widely used in hostile takeover battles, follows
its formal rejection last week of Gannett's April 12 offer of $12.25 a share to acquire the company
in a deal that was valued at $815 million, including the assumption of $390 million in debt.

6. What was Gannett’s offer to Tribune in April 2016?

12.25

7. What was the number of shares (in millions) at Tribune?

(815-390)/12.25 = 34.69 (million shares)

8. What is the triggering percentage that the poison pill would be activated? (In percentage)
20

Questions 9-10 are based one the following information

One industry has four firms and their market shares are as follows:
A: 35%
B: 30%
C: 25%
D: 10%

9. What is the Herfindahl-Hirschman index (HHI) of this industy?

35*35+30*30+25*25+10*10 =2850

10. If Companies B and D merge, what would the new HHI be?
35*35+40*40+25*25 = 3450

Assignment 2

Q1-Q3 are based on the following information

ABC Incorporated has operating income before interest and taxes in 2020 of $199.2 million. The
firm is expected to generate this level of operating income indefinitely. The firm had depreciation
expense of 10 million that same year. Capital spending totaled 20 million during 2020. At the
end of 2019 and 2020, working capital totaled 70 and 80 million, respectively. The firm’s
combined marginal state, local, and federal tax rate was 30% and its debt outstanding had a
market value of 1.2 billion. The 10 year Treasury bond rate is 2% and the borrowing rate for
companies exhibiting levels of creditworthiness similar to ABC is 5%. The historical risk
premium for stocks over the risk free rate of return is 5.5%. ABC’s beta was estimated to be 1.0.
The firm had 2,500,000 common shares outstanding at the end of 2020. ABC’s target debt to total
capital ratio is 30%.

1. The free cash flow to the firm in 2020 (in million).

FCFF2020 = 199.2*(1-.3) + 10 –20 – (80-70) = 119.44

2. The WACC is (in percentage).

WACC = 5*(1-0.3)*0.3 + (2+1.0*5.5)*0.7 = 6.3
3. The firm value is [C] million.

PV = 119.44/0.063=1895.87

Q4-Q6 are based on the following information

In the year prior to going public, a firm has revenues of $20 million and net income after taxes of $2
million. The firm has no debt, and revenue is expected to grow at 20% annually for the next five years and
5% annually thereafter. Net profit margins are expected remain constant throughout. Capital expenditures
are expected to grow in line with depreciation and working capital requirements are minimal. The average
beta of a publicly traded company in this industry is 1.50 and the average debt/equity ratio is 20%. The
firm is managed very conservatively and does not intend to borrow through the foreseeable future. The
Treasury bond rate is 6% and the tax rate is 40%. The normal spread between the return on stocks and the
risk free rate of return is believed to be 5.5%. Reflecting the slower growth rate in the sixth year and
beyond, the discount rate is expected to decline by 3 percentage points. Estimate the value of the firm’s
equity.

4. What is the beta of this firm?

u (unlevered beta) for comparable firms = ____l_____ = ___1.5___ = 1.5 = 1.34

(1 + D/E (1-t)) (1 + .2 x .6) 1.12

5. What is the cost of equity in the first five years? (Provide your answer in decimals, i.e., enter 0.1 instead
of 10%.)
COE1-5 = Rf + u (Rm – Rf) = .06 + 1.34 (.055) = 13.4% = 0.134

6. What is the total value of this firm? (Answer must be in million dollars, but write the number only.)

Answer: $63.41 million

Projected free cash flows (FCFE) to the firm during the next five years and for the
terminal year are as follows:

Year 1 2 3 4 5 Terminal
Year
Net Income $2.40 $2.88 $3.46 $4.15 $4.98 $5.23

P0,1-5 = $2.4/1.134 + $2.88/(1.134)2 + $3.46/(1.134)3 + $4.15/(1.134)4 + $4.98/(1.134)5 =

= $2.40/1.134 + $2.88/1.29 + $3.46/1.46 + $4.15/1.65 + $4.98/1.88 =

= $2.12 + $2.23 + $2.37 + $2.52 + $2.65

= $11.89

PTV = Terminal Value = {$5.23 / (.104 - .05)}/1.1345 = {$5.23 / .054}/1.88 = $96.85/1.88 = $51.52

Total PV0 = $11.89 + $51.52 = $63.41

Questions 7-10 are based one the following information

Your analyst has built the following spreadsheet for DCF analysis of the company you are
interested in buying. Somehow there are some spaces that are blank and you cannot reach
your analyst. (You can assume that all the calculated numbers are correct.)
 Growth Rate in Year 1-5 7%        
Growth Rate after Year 5 4%        
Discount rate in Year 1-5 9%        
Discount rate after Year 5 8%        
           
Year 1 2 3 4 5
FCF 10 10.7 11.449 12.25043 ???
           
PV Year 1-5 $44.22        
TV at the end of Year 5 ???        
Firm Value today ???        

7. What is the FCF in Year 5?

12.25 (1+0.07) = 13.11

8. What is the terminal value (TV) of the firm at the end of year 5?
TV=13.11*(1+0.04)/(0.08-0.04) = 340.81

9. What is the total firm value today?

44.22 + 340.81/(1+0.09)^5 = 265.72

10. If you increase the discount rate after year 5 while keeping other parameters the same,
will the firm value
a. increase
b. decrease
c. stay the same