# Project #25487 - FIN 501

think about the Darden Restaurant company and the possibility of its merging with another company. Write a 2- to 3-page paper answering the following questions:

1.If you were to pick one company for your SLP company to merge with, what would it be? Explain your choice with respect to possible benefits of this merger and why you would choose this company over any other choice for a potential merger.

2.How would you finance a takeover of this chosen corporation? Explain your reasoning.

3.What would your second and third choices be for a merger with your SLP company?Again, explain your reasoning for wanting to merge with these companies, and why they would be second or third choices rather than your first choice.

Reference all of your main sources of information

We are going to use the Capital Asset Pricing Model (CAPM) to estimate the rate of return that our shareholders require on their investment. This is the minimum rate of return that these shareholders require. As stated above, we call this rate “the cost of equity” and it is expressed in percentages or in a decimal format.

The CAPM states the following equilibrium relationship between the (excess) rate of return that shareholders of a particular company "j" require (or actually in some sense “deserve” if they fully diversify their investments) and the (excess) expected rate of return on the market portfolio:

Rj - RF = βj [RM - RF]

E(rj) - The cost of equity

RF - Risk-free rate of return

ßj - Beta of the security

RM - Return on market portfolio

It follows that the rate of return that shareholders require or expect to earn on their investment in the shares of the company, or “the cost of equity” is:

Rj = RF + βj [RM - RF]

Assignment Expectations

To estimate the cost of equity for your company, obtain an estimate of the company's “beta” or systematic risk coefficient, on the annual rate of return on a risk-free investment, and on the expected rate of return on on a risk-free investment, and on the expected rate of return on the “market portfolio.” You can easily find that information by going to the following web site: http://finance.yahoo.com and inserting the name of your company. The beta of the company is reported on that website.

Click on the "Key Statistics" link on the left-hand side of the screen to find the beta and other information.

First find out what is the present Yield to Maturity (YTM) on a U.S. Government bond that matures in one year or 13 weeks Treasury Bill Rate http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield. That rate is the “risk-free rate.”

Next, it is customary to assume that the difference between the expected rate of return on the “market portfolio” and the risk-free rate of return is on the “market portfolio,” RM, is 6%. Multiply the “beta” of your SLP company by 5.0%. That will be the equivalent of your company's βj [RM - RF]. Add to that number the current yield to maturity on a U.S. Government bond (see previous paragraph). You are free to try to research and find more up-to-date values of RM and RF, but to simplify this assignment you can also assume that RF = 1, RM =5 and [RM - RF]= 4.

The above procedure provides you with an estimate of the rate of return that the shareholders of your SLP company require on their investment. This rate is called the cost of equity of your company.

After going through these calculations, write a 2- to 3-page paper with the following information:

1.Show the work you did to obtain the cost of equity for your SLP company.

2.Is this cost of equity higher or lower than you expected? The average cost of capital for a firm in the S&P 500 is 8.2 percent. Would you think your firm should have a lower or a higher cost of capital than the average firm?

3.Look up the betas for some of the other companies that you compared your SLP company to for your Module 2 SLP.These are the companies that you had to explain had a higher or lower discount rate than your SLP company. Using these betas, compute the cost of equity for these firms. How do they compare to your SLP company? Are you surprised that some firms have a higher or lower cost of equity than your SLP company?

You can find company beta by using the website http://ca.finance.yahoo.com/. For example, you want to find beta of General Electric Company. Key in company code “GE” and then click on “Key Statistics” (http://ca.finance.yahoo.com/q/ks?s=GE). You will be able to find beta of the company.

1.How would you go about finding the cost of equity using the dividend growth model or the arbitrage pricing theory for your SLP company? You do not have to do any calculations; just explain how you would go about doing these calculations and explain what kind of additional information you might need.

Note: Your report/assignment will not be accepted without proper citations and references

 Subject Business Due By (Pacific Time) 03/21/2014 12:00 pm
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