Answer the questions in the instructions file and the ABEX Chemicals inc file. I’ve the instructions uploaded. I uploaded class notes to use it to answer some of the questions. Please I want accurate answers and not copied. ThanksI. INSTRUCTIONS
A. Your grade is based on your conviction, correctness, elaboration and elucidation of your answers.
B. Show your work. Un-shown work will receive no points.
C. Each of the questions is worth 7 points. The exception is the long problem, which is worth 30 points.
A.ESSAYS( 8 pages)
1. Because there is inflation of 4%, the central bank intervenes and decreases the money stock by 7%. Interest rates rise by 1%, or 100 basis points. Eventually, the intervention lowers the GDP and the interest rates as well as inflation. The GDP, in fact, decreases by 1.5%, the inflation rate becomes 1%, and the interest rates drop by 1.7%, or they fall from the initial level by70 basis points (.7 %.) Divide the analysis into two areas. First, address the initial effect on the bond and the stock market. Second, discuss both, after the effects have worked themselves out as I have indicated above.
2. Expound on an expansion in GDP and the effects on the stock market and bond market in two different cases. First, the economic growth does not induce inflation. Second, the economic expansion causes substantial increase in inflation. Specifically, the GDP rises by 2.5% and the inflation rises by 5.5%.
3. How do we forecast GDP? Explain the different components of it and the determinants of those components.
4. What tools have we got to foretell the values of the portions of the GDP?
5. Analyze the defense industry versus the digital mobile device industry in terms of
Ascertain that you include population, income, regulation and technology.
c) Business cycle
6. We have two individuals whom we have to advise about investments. The one is a twenty three year old who has gotten a job in investment banking and is receiving 150 k annually. The other is an eighty year old woman, Ms. Brown, who has $10 million in assets, as well as owns her house mortgage free. The expenses to sustain herself is 30k for her house costs and 45 k for all other costs. She has 2 children, and she wants to pass as many of her assets to them. Assume their return objectives and their risk profiles and recommend the appropriate investments for them.
7.a) Talk about two concepts to tell us about prospects of the firm.
b) Talk on the drawbacks of using ROE as a performance measure.
8. Define risk. Elaborate on the different cases of bheta. Explicate the 3 factors which affect it.
B. PROBLEMS (6 pages)
1. Cummings has EAT, depreciation expense, capital expenses, debt and debt principal payments of $9m, $2.8m, $1.3m, $40m and $1.5m respectively. Between the first and the second years, it has current assets of $11m and $13.4m and current debts of $5m and $6.1m respectively. Its unlevered bheta, D/E and t are 3, 40/60 and .4 respectively. The t bond rate is 2% and the risk premium is 8% and its sales are $90m. Cummings plows about 30% of its profits back into its business. Derive the value of Cummings, if the growth rate continues perpetually.
2. We know the following about Mansur. Total assets are $1000m, E is $700m, cash is $100m and the # of shares is 1m. We estimate that the market value of equity is 2 times the book value of it. Finally, a fire sale of the firm would bring 70% of the value to the co. Compute the book value, liquidation value, replacement value and enterprise value per share of Mansur.
3-See document ABEX Chemicals Inc. “Attached”
Questions 1 through 8 relate to ABEX Chemicals, Inc. A total
of 130 minutes has been allocated to these questions. It is
suggested that candidates take the first few minutes to review
the following Introduction, Tables 1 through 4 on pages 10
through 13, and the questions themselves. Because of the
interrelation of the questions, candidates should answer the
questions in the order presented.
James Dean, CPA, is a pipeline and utility analyst at a large brokerage firm. One Of the companies
he follows is ABEX Chemicals, Inc. (ABBX) that historically has been a pure pipeline company but
is now also a major producer of petrochemicals (principally polyethylene).
About six months ago Dean became uneasy as more and more companies in the petrochemical
business announced expansions, and his firm’s economist began to express concern about the
possibility of a recession in the next year or two. At that time, he compiled a summary of the relevant
industry statistics included in Table 4 on page 13, and concluded that the price of petrochemicals
produced by ABEX would likely decline over the ensuing 12 to 18 months. For this reason, he had
issued a “sell” Opinion for the ABEX common stock.
The price of ABEX common stock subsequently declined from $15 to $9. As a result of this price
decline, Dean is now not sure his sell recommendation is still correct for the longer term and feels
another detailed analysis of the company is warranted.
Dean conducts his analysis by focusing on the external environment, company fundamentals, and
stock price evaluation. A discussion of his observations follows.
Even though there is controversy about the overall direction of the economy for 1990, Dean concludes
that the key issue for the petrochemical industry is not demand. but overcapacity. As shown by the
data in Table 4 on page 13, he expects polyethylene production to remain essentially flatin‘ 1990 and
capacity to increase, thereby causing Operating rates to fall significantly. The combined impact
would result in increased competition and lower product prices. Longer term he expects the use of
polyethylene to continue to grow by 4% per annum and prices to rise by 5% per annum, beginning
ABBX’s operating earnings are dependent primarily on two businesses: pipeline distribution of
natural gas (gas transmission) and petrochemical production. The gas transmission business has
been declining because of lower gas production and pricing constraints, but Dean’s outlook is for
modest increases in volume and transmission rates. The summary of key statistics for pipeline
Operations is shown in Table 4.