You Are a Research Analyst for a Major Investment Bank

question 69

Essay

You are a research analyst for a major investment bank and have been asked to evaluate three candidates for a takeover and recommend one.You estimate the risk-free rate to be 5% and the market risk premium to be 8%.You also have the following data:
$\begin{array}{llll}&\underline{\text {MTT Corp.}}&\underline{\text {NOR Corp.}}&\underline{\text {TECH Corp.}}\\\text { current price } & \$ 20 & \$ 25 & \$ 200 \\\text { number shares } & 100,000 & 80,000 & 10,000 \\\text { current EPS } & \$ 4 & \$ 2.50 & \$ 5 \\\text { payout ratio } & 50 \% & 20 \% & 10 \% \\\text { (First 5 yrs) } & & & \\\text { beta } & 1.0 & 1.25 & 1.5 \\\text { growth rate: } & & & \\\text { first 5 yrs. } & 5 \% & 10 \% & 50 \% \\\text { beyond 5 yrs. } & 5 \% & 0 & 10 \% \\\text { D/E ratio } & 0 & & 0 \\\text { ROA: } & 10 \% & 25 \% & 55.56 \% \\\text { first 5 yrs. } & 10 \% & 20 \% & 25 \% \\\text { beyond 5 yrs. } & 10 \% &\end{array}$

Which firm is the best candidate for a takeover?

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Definitions:

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The skin's elasticity or ability to return to its normal shape after being pinched; a measure of hydration and skin health.

Anaphylactic Reaction

A severe, potentially life-threatening allergic reaction that can occur rapidly and affect multiple body systems.

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A hormone and medication, also known as adrenaline, that increases heart rate, tightens blood vessels, and opens airways to alleviate severe allergic reactions.

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A medical technique used to access the circulatory system for administering medications, fluids, or for blood sampling.