1. How do the stock prices of publicly traded companies behave when corporate and/or financial restructuring (e.g., divestiture, rationalization) is involved? Please explain why by citing two real world examples, and if appropriate, clarify the circumstances that affect the stock price movement.
2. Which of the valuation methodologies have you found to be most useful, relevant or applicable in completing your valuation term paper? What are the reasons that have made those particular methodologies appropriate for your valuation work? What are the merits and demerits of the methodologies you have chosen?
3. LIS Corporation, an environmental service provider, had revenues of $209 million in 2002 and reported losses of $3.1 million. It had earnings before interest and taxes of $12.5 million in 2002, and had debt outstanding of $109 million (in market value terms). There are 15.9 million shares outstanding, trading at $11 per share. The pre-tax interest rate on debt owed by the firm is 8.5%, and the stock has a beta of 1.15. The firm’s EBIT is expected to increase 10% a year from 2003 to 2006, after which the growth rate is expected to drop to 4% in the long term. Capital expenditures will be offset by depreciation, and working capital needs are negligible. (The corporate tax rate is 40%, market return is 12%, and the treasury bond rate is 7%.)
A. Estimate the cost of capital for LIS.
B. Estimate the value of the firm.
C. Estimate the value of equity (both total and on a per share basis).
