Home / Questions / You are considering a takeover of PMT Corporation a firm that has significantly underperfo...
You are considering a takeover of PMT Corporation, a firm that has significantly underperformed its peer group over the last five years and you wish to estimate the value of control. The data on PMT Corporation, the peer group, and the best managed firm in the group are given below.
|
|
PMT |
Peer Group |
Best |
|
Return on Assets (After-tax) |
8.00% |
12.00% |
18.00% |
|
Dividend Payout Ratio |
50.00% |
30.00% |
20.00% |
|
Debt Equity Ratio |
10.00% |
50.00% |
50.00% |
|
Interest Rate on Debt |
7.50% |
8.00% |
8.00% |
|
Beta |
Not Available |
1.3 |
1.3 |
PMT Corporation reported earnings per share of $2.50 in the most recent time period and is expected to reach stable growth in five years, after which the growth rate is expected to be 6% for all firms in this group. The beta during the stable growth period is expected to be 1 for all firms. There are 100 million shares outstanding and the treasury bond rate is 7% (the tax rate is 40% for all firms).
a. Value the equity in PMT Corporation, assuming that the current management continues in place.
b. Value the equity in PMT Corporation, assuming that it improves its performance to peer group levels.
c. Value the equity in PMT Corporation, assuming that it improves its performance to the level of the best managed firm in the group.
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