Showing posts from May, 2020

Stock-Price Beta Estimation for Google, Inc. (Case Study)

A.                        Describe some of the attributes of an ideal risk indicator for stock market investors. B.          On the Internet, go to Yahoo! Finance (or msnMoney) and download weekly price information over the past year (52 observations) for GOOG and the Nasdaq market.   Then, enter this information in a spreadsheet like Table 16.6 and use these data to estimate GOOG = s beta.   Describe any similarities or dissimilarities between your estimation results and the results depicted in Figure 16.8. C.                        Estimates of stock-price beta are known to vary according to the time frame analyzed; length of the daily, weekly, monthly, or annual return period; choice of market index; bull or bear market environment; and other nonmarket risk factors.  Explain how such influence can undermine the usefulness of beta as a risk indicator.  Suggest practical solutions. CASE STUDY SOLUTION A.                             An ideal measure of stock

Time Warner, Inc., Is Playing Games with Stockholders (Case Study)

A.                Was Paramount ’s above-market offer for Ti me , Inc. consistent with the notion that the prevailing market price for common stock is an accurate reflection of the discounted net present value of future cash flows?   Was manage me nt’s rejection of Paramount ’s above-market offer for Ti me , Inc. consistent with the value-maximization concept? B.               Assu me that a Ti me Warner shareholder could buy additional shares at a market price of $90 or participate in the company’s rights offering.   Construct the payoff the matrix that corresponds to a $90 per share purchase decision versus a decision to participate in the rights offering with subsequent 100%, 80%, and 60% participation by all Ti me Warner shareholders. C.                Describe the secure ga me theory strategy for Ti me Warner shareholders.   Was there a dominant strategy? D.                Explain why the price of Ti me Warner common stock fell following the announce me nt o

Market Structure Analysis at Columbia Drugstores, Inc. (Case Study)

A.                Describe the overall explanatory power of this regression model, as well as the relative importance of each continuous variable. B.                Based on the importance of the binary or dummy variable that indicates superstore competition, do superstores pose a serious threat to Columbia ’s profitability? C.                What factors might Columbia consider in developing an effective competitive strategy to combat the superstore influence? CASE STUDY SOLUTION A.                The coefficient of determination R 2 = 77.7% me ans that 77.7% of the total variation in Columbia ’s profit‑margins can be explained by the regression model.   This is a relatively high level of statistically significant explanation (F = 13.38) for a cross-section study such as this, suggesting that the model provides useful insight concerning the determinants of profitability.   The standard error of the estimate (S.E.E. = 2.1931%) me ans that there is roughly a 9

Effect of R&D on Tobin’s q (Case Study)

A.                Explain how any intangible capital effects of R&D intensity can reflect the effects of market power and/or superior efficiency. B.                A multiple regression analysis based upon the data contained in Table 12.3 revealed the following (t statistics in parentheses):                                q   =   1.740 + 0.041 Profit Margin + 0.018 Growth - 0.421 Beta + 0.057 R&D/S                                          (2.33)    (1.74)                           (0.31)                (-1.43)              (2.15) R 2 = 41.1%, F statistic = 4.36 Are these results consistent with the idea that R&D gives rise to a type of intangible capital? CASE STUDY SOLUTION A.                Intangible R&D capital can be derived from the value obtained from patents and other monopoly protections offered to firms making significant new discoveries and innovations.   Alternatively, significant R&D capital can result from the unpatente

The Most Profitable S&P 500 Companies (Case Study)

A.                Describe so me of the advantages and disadvantages of ROE as a me asure of corporate profitability.   What is a typical level of ROE, and how does one know if the ROE reported by a given company reflects an adequate return on invest me nt? B.                Define the profit margin, total asset turnover, and financial leverage components of ROE.   Discuss the advantages and disadvantages of each of these potential sources of   high ROE. C.               Based upon the findings reported in Table 11.3, discuss the relation between P/E ratios and profit margins, total asset turnover, and financial leverage.  In general, which component of ROE is the most useful indicator of the firm’s ability to sustain high profit rates in the future? CASE STUDY SOLUTION A.                For successful large and small firms in the United States and Canada , ROE averages roughly 10 to 15% during a typical year.   This average ROE is comprised of a typical profit

Profitability Effects of Firm Size for DJIA Companies (Case Study)

A.                Based on the findings reported in Table 10.2, discuss the relation between firm size and profitability, and the link, if any, between firm size and profit rates.   In general, does a large firm size increase profitability? B.                Using a spreadsheet, sort the DJIA according to profit rates and firm size.   Use firm-specific information found on company websites or invest me nt portals, like Yahoo! Finance or MSN Money, to explain the superior profitability of these corporate giants. C.                What other important factors might be included in a more detailed study of the determinants of corporate profitability? CASE STUDY SOLUTION A.                Using a simple ordinary least squares regression approach to investigating the firm size-profit rate relation, there is no apparent profit advantage to large firm size.   These results are perhaps surprising because it is commonly perceived that larger firms enjoy revenue and c