Loose Ends
1
Closed End Funds

You are investing in a closed end mutual fund that invests in stocks.
Given the risk of the stocks it invests in and assuming a reasonable
equity risk premium, your required return is 10%. Omaha Oracle, the
manager of the mutual fund, though, has historically earned 2% more
than required. If you assume no growth in the fund’s size and Barren
will continue to outperform the market, estimate the premium or
discount on the fund. (Hint: Think of investing $ 100 in this fund and
estimate the value of the excess returns to you…)

Would your answer change if you were told that Omaha is 81 years
old?
2
Cross holdings









Company A owns 60% of company B and the financial statements are
consolidated. If these financial statements are used to estimate cash
flows & value, how much of company B is incorporated in this value?
None of company B
60% of company B
100% of company B
40% of company B
Company A owns 10% of company B. If your use company A’s
financial statements to estimate cash flows & value, how much of
company B is incorporated in this value?
None of company B
10% of company B
100% of company B
3
Management Options

Assume that you have valued equity in a firm to be worth $ 1 billion,
by discounting free cash flows to equity at the cost of equity. The firm
has 100 million shares outstanding. What is the value per share?

Now assume that the firm grants 10 million options to its CEO, with a
strike price set equal to $ 10. What is the value per share?




$ 9.09 (1000/110)
$ 10 (The options have no exercise value)
Between $9.09 and $ 10
Something else
4