Purchase Solution

Equity Beta and Implied Market Value of Bear Stearns

Not what you're looking for?

Ask Custom Question

My M&A professor is asking us to calculate the new equity beta and cost of capital for question #5. I am alo being asked to come up with an implied market value for Bear Stearns. I chose $236 million as my answer but I am not sure if this is right. Please see the attached Word document.

Question #5

After reading all about the tax advantages of having a high leverage ratio, the CEO of LevCo is considering a leveraged recapitalization and wants to know the new cost of equity capital subsequent to the recap. The firm currently has $27 million in assets and $12 million in debt and is interested in taking on an additional $9 million in debt. LevCo's closest competitor has a debt-to-equity ratio of 0.5 and an equity beta of 1.25. Ten-year treasuries currently yield 2.3% and the expected return on the S&P 500 is 10.0% per annum. The marginal corporate tax rate is 40%. What will the new equity beta and required return for equity capital for LevCo's shareholders subsequent to the transaction?

Question#6

On the evening of Sunday March 16, 2008, with the assistance of the Fed, JP Morgan Chase (JPM) announced that they were acquiring Bear Stearns Cos. (BSC) and were paying $2 for each of BSC's 118,091,000 shares. When the markets closed on the following trading day (St. Patrick's Day), JPM settled out at $40.31 per share. As of the previous Friday, JPM was trading at $36.54 and had 3,396,539,000 shares outstanding. Assume that the investors did not infer that JPM's existing assets or growth opportunities were any more or less valuable due to the Fed's backing of the transaction, there were no expected synergies from the deal, and markets are otherwise efficient. Using the JPM investor reactions to the deal, what was the implied market value of BSC?

Purchase this Solution
Solution Summary

This solution is comprised of answers related with cost of capital.

Solution Preview

See the attachment for the full response.

Question #5

After reading all about the tax advantages of having a high leverage ratio, the CEO of LevCo is considering a leveraged recapitalization and wants to know the new cost of equity capital subsequent to the recap. The firm currently has $27 million in assets and $12 million in debt and is interested in taking on an additional $9 million in debt. LevCo's closest competitor has a debt-to-equity ratio of 0.5 and an equity beta of 1.25. Ten-year treasuries currently yield 2.3% and the expected return on the S&P 500 is 10.0% per annum. The marginal corporate tax rate is 40%. What will the new equity beta and required return for equity capital for LevCo's shareholders subsequent ...

Solution provided by:
Jayant Kumar, MBA
Education
  • MBA, Indian Institute of Finance
  • Bsc, Madras University
Recent Feedback
  • "I've posted a similar question for another course. It's post 657940, and it's a practice problem that I'd like to use for the final exam. Your help will be greatly appreciated. "
  • "thank you!"
  • "Thank you again Jayant. You are super fast. "
  • "Thank you Jayant. You are appreciated. "
  • "Again, thank you Jayant. You are wonderful. "
Purchase this Solution
Free BrainMass Quizzes
Situational Leadership

This quiz will help you better understand Situational Leadership and its theories.

Motivation

This tests some key elements of major motivation theories.

Six Sigma for Process Improvement

A high level understanding of Six Sigma and what it is all about. This just gives you a glimpse of Six Sigma which entails more in-depth knowledge of processes and techniques.

Cost Concepts: Analyzing Costs in Managerial Accounting

This quiz gives students the opportunity to assess their knowledge of cost concepts used in managerial accounting such as opportunity costs, marginal costs, relevant costs and the benefits and relationships that derive from them.

Learning Lean

This quiz will help you understand the basic concepts of Lean.

View More Free Quizzes
Related BrainMass Solutions

  • Pre and Post acquistion calculations

    The T-bill rate is 5%, and the market risk premium is 10%.

  • hostile takeover

    In 2008, JPM acquired Bear Stearns allowing Bear Stearns to avoid insolvency after Bear Stearns stock price suffered a precipitous decline, with its market capitalization dropping by 92%.

  • Reasons for the demise of Bear Stearns

    508429 Reasons for the demise of Bear Stearns Delineate the reasons for the demise of Bear Stearns and evaluate the role of misaligned organizational architecture. Please remember that we here at BrainMass cannot write a paper for you.

  • liquidity programs

    Bear Stearns and AIG The Federal Reserve System used its emergency lending powers to prevent the disorderly failure of two systemically important firms, Bear Stearns and AIG.

  • Enterprise value and beta of business assets

    559216 Enterprise value and beta of business assets In Mid-2012, AOL Inc. had $100 million in debt, total equity capitalization of $3.1 billion, and an equity beta of .90 (as report on Yahoo! Finance).

  • Intrinsic value of HP stock

    the expected return on the market portfolio is 15%, and the stock of HP has a beta coefficient of 1.2.

  • Capital Asset Pricing Model of a Portfolio Share

    Using a risk-free rate of 5 percent and a risk premium on the market portfolio of 6 percent, what is the present value of the cash flow? If the beta of the firm doubles, what happens to the present value of the cash flow? 4.

  • WACC / beta / required return

    4) What unleveraged beta is implied by r? 5) What would you say about the estimates in parts (1) thru (4) if you learned that the market model estimated a (leveraged) beta of 2.2 for JBH's common stock?

  • JP Morgan Chase stock: research background, ROE, future, ROR with CAPM, value

    crisis and the losses it absorbed on its purchase of Bear Stearns.

View More Related Solutions