What factors should Amerada management consider when evaluating the reposed strategy? . Calculate Marinade’s debt-to-value ratio using both the book value and market value of the firm’s equity. How does Marinade’s debt-to-value ratio compare to that of other discount brokerage and investment service companies in Exhibit 4? In general terms, how does leverage affect the rockiness of a firm’s equity? 3. Amerada has a short history of trading, so its beta cannot be computed precisely using its own historical data.
Exhibit 4 provides some choices for comparable firms. Which of these firms do you think are appropriate to use as comparable to determine the beta of Marinade’s planned advertising and technology investments? Why? 4. Using the stock price and return data in Exhibits 5 and 6, estimate the CAMP beta and Fame-French factor sensitivities for the stocks of comparable firms. 5. Estimate the weighted-average cost of capital for Marinade’s proposed expansion. What risked rate do you use?
Are the cost-of-capital estimates similar using the CAMP and Fame-French three-factor models? Guidelines You may work on the case in groups of 3 or 4 students. Please hand-in one write-up per group. All members of the group should be prepared to discuss the case in class. State clearly any assumptions you make and provide enough information so that a reader can follow your analysis. I would expect the case write-up to be two to three pages plus supporting tables.