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Magid Corporation: Securities Valuation

The book is: Aswath Damodaran, Investment Valuation, Tools and Techniques for Determining the Value of Any Asset, Second University Edition, John Wiley & Sons, 2002 [ISBN 0-471-4190-5 (paper)]

1. Assume Magid Corporation has the following debt issues outstanding. Calculate the estimated market value of Issues 1 and 2 if the yield-to-maturity is 7.5%. Assume the settlement (valuation) date for all issues is March 22, 2010, frequency is 2, and basis is 0. If one could purchase Issue 3 at 104.060, what would the the yield-to-maturity be? (Hint: Use the Excel function PRICE( ) or similar cell equation.)
Coupon Maturity date
Issue 1 7.375% March 15, 2015
Issue 2 7.950% October 30, 2022
Issue 3 5.250% September 15, 2026

2. Calculate the Macaulay duration of Magid's 5.250s of 2026. If the yield on this bond was expected to decrease by 1%, what effect should you expect on the value of this bond (quantative answers required)? Define bond duration. Define immunization in the finance-investment context, and relate how duration is useful in immunization.

3. Annual operating earnings after taxes is $150 million when the marginal tax rate on income is 34%. Depreciation expense is $575 million. Normalized Capital expenditures is $700 million. Net working capital is expected to increase from $1.256 billion to $1.590 billion.
a. Calculate the annual free cash flow to the firm (FCFF).
b. If the tax rate increased to 40%, quantify the impact on operating earnings after taxes.

4. If cash dividends are $1.369 per share annually over last 12 months while the cost of equity is 12%, estimate the value per share using the dividend discount model. Note the annual dividends recently paid listed below. Then progression below of cash dividends is expected to continue in the long term.
Year Annual cash dividend
2005 $0.850
2006 0.935
2007 1.029
2008 1.131
2009 1.244
2010 1.369

5. A Magid Corporation goal for the year is to have a return on equity of 25%. If Net profit/Pretax profit is 66%, Pretax profit/EBIT is 80%, EBIT/Sales is 20%, and Assets/Equity is 125%, how many dollars of Sales must each dollar of assets earn to meet its ROE goal?

Solution Summary

The solution explains some questions relating to securities valuation.