Business

Problem 1

Question: What types of details might you recommend him to look for in trying to justify the price of the house?

Response: Home size (total square feet, number of bedrooms and bathrooms), size of the garage, history of the house (years it has been built, any past flooding or fire damage), utility costs, neighborhood security, quality of public school and hospital, access to public transportation

Question: What if the owners had an asking price of $1.35 million? What would you recommend Radha do and why?

Response: I would recommend Radha to purchase the house if the asking price is $1.35 million based on the comparables. By averaging the selling price per sq. ft. of Comparable 1 and 2, it can be estimated that Price/Sq. feet multiple is 465. Since the selling house has 3000 sq. ft. living area, its reasonable price is $3000/sq. ft. * 465 sq. ft. = $1.395 million. The asking price $1.35 million is lower than the reasonable price, thus I recommend Radha to buy.

Problem 2

(a) Price = 15.01 * $1.57 = $23.57

Highest = 15.01 * (1 + 51%) * $1.57 = $35.58

Lowest = 15.01 * (1 - 42%) * $1.57 = $13.67

(b) If KCP’s leverage is 60% that is higher than the comparables average of 0.5, I would expect the share price in (a) to be too high. Firms with higher leverage are considered riskier, thus have lower PEs because they have a higher cost of equity.

(c) If KCP’s expected earnings growth rate is 20% that is higher than the comparables average of 15%, we would expect the share price in (a) to be too low. Since the stock price P = Div/(r-g), the higher the growth rate g, the higher the stock price if dividends and return on equity remain the same.

(d) Estimated from industry average

PE = 15.26 + 5 * 0.15 - 2 * 0.5 = 15.01

Price = 15.01 * $1.57 = $23.57

Estimated from data given in part (b) and (c)

PE = 15.26 + 5 * 0.20 – 2 * 0.6 = 15.06

Price = 15.06 * $1.57 = $23.64

(e) If KCP is a private firm, we would expect it to have a lower PE than...