Expert Answer :Financial Question

  

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1. A new enterprise after struggling for a few years has finally become a viable candidate
for an IPO. The investment bankers with the aid of the management forecast net earnings
after taxes (net income) of $30,000, $40,000, 50,000, and $60,000 for each of the next
four years. Depreciation is estimated to be $3,000, $3,500, $4,000, and $4,500 in each of
the next four years. The tax rate is 35%. The firms in the industry were compiled and
those closest to the firm were isolated and their average beta of 1.5 was considered as the
best estimate for the firm. The risk-free rate is 4% and the return on market averages
12%. The bankers after considerable thought decided on an annual rate of 5% beyond
year 4. The bankers one time net cost inclusive of all the fees and concessions is
estimated to be around 5% of the value of the firm.
How many shares will be issued if the bankers set the price at $10 per share?
2. Describe securitization. How are these liabilities securitized? Give an example. What are
the advantages and disadvantages of this form of financing?
3. What are the advantages and disadvantages of going public? (Refer to your finance
book). Contrast this with the advantages and disadvantages of going private; make assure
you define going private.
4. Discus fully the future of internet investment banking. What are the advantages of such
banking compared to what we have currently which is not fully internet?
5. You are estimating the beta for a private firm that manufactures home appliances. You
have betas of the firm that are publicly traded that also manufacture home appliances.
Firm
Beta
Debt
MV of Equity
Fedders
1.20
5
200
Maytag
1.20
540
2,250
National
0.70
8
300
The private firm has a debt/equity ratio of 25% and a tax rate of 40%. The other firms
also have a tax rate of 40%.
a. Estimate the beta for the private firm.
b. what are some of the concerns about using the betas of comparable firms

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