© 2000 John Petroff
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© 2000 John Petroff |
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Assignments, Cases & Exercises
Research assignments:
R-3.1 Study the basis of bond ratings of S&P (or some other service) and compare that to Moody's basis for bond ratings presented in the text. Establish the parallel and possible disparities.
R-3.2 Find updated recent median key financial ratios of industrial companies by S&P rating categories from Standard & Poor's Corporate Finance Criteria (which should be available in most libraries, but not on-line). Compare these updated statistics with those presented in the text in Table T-3.3. Offer explanations, if possible, and if needed.
R-3.3 Take a bond quotation from the financial press. Look up the coupon and principal payment dates on the corporate investor relations web site. Find bond rating of this bond and yields to maturity of comparable bonds. Calculate what the bond value should be. Compare the calculated value to the quoted price. If a discrepancy exists, look for reasons. Repeat the process for two other bonds of different companies.
R-3.4 Obtain bond indentures. List the major clauses most often found. Identify restrictive covenants, collateral offered and special rights offered to prospective investors.
R-3.5 Take a municipal bond quotation. Obtain the bond rating of this bond and yields on comparable bonds. First, calculate the value of the bond before incorporating the tax exemption and verify that the bond is not a desirable purchase. Second, calculate the value of the bond assuming the owner is subject to the maximum personal income tax rate. Finally, determine the approximate threshold marginal tax rate that makes the bond no longer attractive.
R-3.6 Obtain from a major bank their corporate loan application form and documentation. Inquire about the loan review procedure and the basis for loan approval or rejection. Identify (or approximate) the elements that the bank incorporates in its loan pricing as accurately as possible. Repeat the process for one or two more banks, and compare.
R-3.7 If you have access to a bank's loan ranking system, compare it to the one described in the text.
R-3.8 Randomly choose a dozen common share stocks that have paid dividends. Find BETA estimates for each stock from investment services or brokers' web sites and calculate the expected rates of return. Apply the discounted dividend formula to each stock, and compare that value to recent price quotations. Categorize stocks by the size of disparities between the theoretical value and the market quotation, and offer explanations for these disparities.
R-3.9 Choose four preferred share stocks, and calculate their values with the discounted dividend formula. If the values obtained are different from market quotation, offer reasons for the differences.
R-3.10 Take the same stocks used in question R-3.8. Determine the rate of growth of the dividends over at least the past five years. Apply the discounted dividend formula with the growth of dividends. Establish that there is a significant improvement is the value estimation.
R-3.11 Duplicate the values of P/E, growth rate and payout rate for all the companies and industries listed in Table T-3.5 with up-to-date figures. Compare the values, and comment.
R-3.12 Take the same stocks used in question R-3.8 once again. Apply the P/E valuation formula using average industry P/E values obtained from investment services or derived from the previous question.
R-3.15 Obtain or make copies of rights, warrants, put and call options. Read the text present in these options, rights and warrants. List what the holder of each such title can claim. Compare and contrast.
R-3.16 Read Black-Scholes article on options valuation (or a detailed explanation of it in an advanced finance textbook devoted to options). Summarize the reasoning for the construction of the formula.
R-3.17 Study articles that make use of Black-Scholes option valuation formula. Determine the method of obtaining each of the different elements of the formula. Duplicate the evaluation performed in one of the articles on updated values of similar options.
R-3.18 Refer to the same companies used in R-3.11. Obtain each company sales volume, average stock price and number of shares outstanding for the most recent year available for all companies (i.e. same year for all companies). Calculate the sales multiple for each company. Construct averages for industries. Determine which companies may be under or over valued.
R-3.19 Read an advanced textbook on capital budgeting (or corporate finance) dealing with comparison between NPV and IRR. Summarize the issues and arguments of the comparison. Point out whether a clear conclusion is reached.
R-20 Read an advanced manual on public finance dealing with cost-benefit analysis. Make note of the type of situations where the method is recommended. Summarize the guidelines for conducting cost-benefit analysis.
R-21 Return to the capital budgeting textbook used for R-3.19, and read the chapters dealing with project selection methods other than NPV and IRR. Make a list of the cases where such method are used, and the reasons why they are used.
R-22 Research articles that deal with key personnel compensation. Record the different types, conditions and magnitudes of compensations customarily considered for crucial individuals for companies. Outline how the value of such individuals relate to the value of the overall company where they work.
Cases:
Determine the rights of the different types of shares issued
by KV Pharmaceutical Company presented in Case
- KVa. Explain what attracts different investors to each of
these issues.
Review the historic pattern of ProBusiness in Case
- PRBZ. Establish that only the sales multiple approach of
valuation is suitable. Obtain estimates of sales multiples for
comparable companies. Check whether ProBusiness stock price in
the late 1990's is or not overpriced.
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