Foundations of Financial Management
16th Edition
ISBN: 9781259277160
Author: Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen
Publisher: McGraw-Hill Education
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Question
Chapter 20, Problem 11P
a.
Summary Introduction
To calculate: The coefficient of variation, both pre and post-merger, for Knight Corporation.
Introduction:
Coefficient of variation ( CoV ):
It is the ratio of SD (standard deviation) to the mean that shows the extent of the variability of the data in relation to the population's mean.
b.
Summary Introduction
To explain: The possible impacts on Knight Corporation’s post-merger P/E ratio assuming that there are risk-averse investors.
Introduction:
P/E Ratio:
A ratio which is computed by dividing a company’s current share price by its EPS is termed as P/E ratio. It helps in valuing a company’s profitability in the present times as well as in the future.
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There are only shares of A and B companies in the market. Currently, the market value of A and B shares is $200 million and $300 million, respectively. In addition, the risk-free interest rate (Rf) is 5 per cent. The probability and rate of return for the future state of the two entities are given as follows: (Value values with a decimal place or higher to the fifth decimal place.)
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Assume that you have an opportunity to buy the stock of CoolTech, Inc., an IPO being offered for $10.78 per share. Although you are very much interested in owning the company, you are concerned about whether it is fairly priced. To determine the value of the shares, you have decided to apply the free cash flow valuation model to the firm's financial data that you've accumulated from a variety of data sources. The key values you have compiled are summarized in the following table,
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