When answering the questions, the work that you submit for grading must be your work. Any plagiarism will result in a grade of zero for the exam. If you have questions, please consult with the instructor.
The evaluation of the work, especially the qualitative questions depends on the organization of the material and the depth of the answers. The quantitative questions should show the computations/process not just an answer.
1. As a recent MBA graduate, you have been hired as a financial analyst by a private equity firm. Your firm along with the management of Herbalife Ltd. is investigating the possibility of taking the company private, i.e. your firm and Herbalife's management will buy all of the shares.
You have been assigned to address the issues found below. The information that you provide will be used by the decision makers to determine a price per share for the stock. For the computations use the information found on the Yahoo! Finance web pages for Herbalife Ltd. (HLF). The numbers used would be for the financials of December 31, 2014 and December 31, 2013. Other computations and issues which require more current information will be found on these webpages as well.
For discussion questions, a good source of information is found in the company's Annual Report for 2014, as well as recent articles concerning Herbalife. The link to the company's official web site can be found at the bottom of the Profile page on Yahoo! Finance. Your grade for the qualitative answers depends on the quality and quantity of relevant information, as well as the quality of writing.
a) Discuss Herbalife in the context of the forces considered in performing an environmental scan.
b) Discuss the risks that Herbalife needs to consider in conducting its operations. How do they relate to our discussion of the required rate of return?
c) Explain whether you believe that Herbalife can take on more debt. Use some computations to support your conclusion.
d) Discuss Herbalife's inventory position. Compare Herbalife's inventory position to that of GNC Holdings Inc. (GNC).
e) Construct the DuPont Identity for Herbalife andGNC. Explain your results.
f) Determine the MVA for Herbalife, GNC, and Amazon.com Inc. (AMZN) and discuss the results.
g) Determine the EVA for Herbalife. Assume that HLF's cost of capital is equal to what is found on thatswacc site. Use a tax rate of 27 percent for HLF. Discuss the results.
h) Determine HLF's free cash flow for 2014. Comment on the results.
i) Compare and discuss the PE ratios for HLF, GNC, and AMZN.
j) Go to www.gurufocus.comand indicate the Beneisch M-Score for HLF and AMZN. Discuss the results.
k) Discuss the overall financial health of HLF.
After the final price is determined for HLF, do you believe that this is evidence of an efficient or inefficient market? Explain.
2. Your stockbroker has called has called to tell you that Herbalife LTD. (HLF) would be a good buy today at $46.00 per share. The broker believes that one year from today Herbalife will be selling for $75.00. The expected return on Herbalife has a standard deviation of 30 percent. The market risk premium for the S & P 500 has averaged 5.5 percent. Herbalife does not pay a cash dividend.
Required:
a. What is the probability that you would earn less than your required rate of return?
b. What is the probability that you would earn a return that is negative?
c. Explain why you would or would not buy Herbalife.
3. Five years ago Capstone Inc. issued 30-year zero coupon bonds that were priced with a market's required yield to maturity of 6%. What did these bonds sell for when they were issued? Now that five years have passed and the market's required yield to maturity on these bonds has climbed to 9%, what are they selling for? If the market's required yield to maturity had fallen to 4%, what would they have been selling for? Explain the difference in the prices.
4. You own 1,000 shares of IBEX Mining Co.'s preferred stock, which currently sells for $75.50 per share and pays annual dividends of $5.85 per share.
Required:
a. What is your expected return?
b. If you require an 8 percent return, given the current price, should you sell or buy more stock?
5. New Generation Public Utilities recently issued a bond with a $1,000 par value and a coupon rate of 8 percent and interest paid semiannually. It matures in twenty years. The market rate of return is 6 percent.
Required:
a. Calculate the price of the bond.
b. How does the value change if the market rate increases to 10 percent or decreases to 4 percent?
c. Explain the implications of the answers for Part B as compared to the answer for Part A.
6. Assume that it is now January 1, 2016. Timor Motors, Inc. has just developed a lithium battery capable of providing energy for homes at less than 30 percent of the cost of electricity. As a result, Timor is expected to experience a 25 percent annual growth rate for the next 4 years. By the end of 4 years, other firms will have developed comparable technology, and Timor's growth rate will slow to 6 percent per year indefinitely. Stockholders require a return a 15 percent on Timor's common stock. The most recent annual dividend (Do), which was paid yesterday, was $4.00 per share.
Required:
a. Determine the price of a share of common stock for Timor.
b. If the stock was actually selling for $70.00 per share, would you buy it? Explain your answer.