Problem:
The stock beta, stock volatility, debt/value ratio, and price/earnings ratio of the Kumquat Company compared to some of their principal competitors are listed below.
Firm Beta Volatility D/V P/E
Kumquat 1.30 48% .25 10
Quince 1.35 30% .25 14
Soursop 1.30 34% .25 15
Feijoa 1.25 34% .25 16
Carombola 1.20 32% .25 13
Breadfruit 1.40 30% .25 17
S&P Index 1.00 .16% .20 20
Riskless (government) interest rates are 4.0%; expected inflation is 3.0%. All these firms (including Kumquat) have borrowing rates of about 6%. The corporate tax rate is 40%.
Kumquat currently has a stock price of $40, and pays no dividend.
Q1. How do Kumquat's future growth prospects compare with those of its competitors?
Q2. If the S&P stock index goes up 14% over the next year (10% more than cash), how much would you expect Kumquat to go up over the next year?
Q3. Quince is considering making an offer to acquire Kumquat. Quince believes it could run Kumquat more efficiently, and Kumquat would be 40% more profitable (as measured by equity earnings). If this is true, how much can Quince afford to bid?
Q4. Breadfruit is considering making an offer to acquire Kumquat. Breadfruit believes it could run Kumquat more efficiently, and Kumquat would be 20% more profitable (as measured by equity earnings). If this is true, how much can Breadfruit afford to bid?
Q5. What price should Kumquat sell for [in this acquisition, contested between Quince and Breadfruit]?
Q6. On a separate note, Kumquat's management is considering an investment in real assets, planning to spend 500; returning 100, 200, and 300 in years 1, 2, 3 (these are after-tax numbers). Should they make the investment?