How do your valuations compare to the Dell’s announced acquisition price?

This exam requires you, among other things, to estimate the stock price for EMC Corporation (Ticker: EMC), and provide the analysis as requested. You will need to use “Sources of Financial Data” listed in Course Content[1] to obtain the necessary financial info/statements for EMC Corporation, to identify its peer companies and to obtain pricing and financial information for them.

 

  1. Choose several peer companies for EMC Corporation and justify your choice. Choose several valuation multiples and using comparable ratios of peer companies (as we did in Project 2 and discussed in Conferences) and EMC Corporation financial information from prospectus, estimate the company’s equity value on October 9, 2015. It is required for this question to list your major assumptions and properly reference sources of information that you used in your calculations.
  2. Using the same peers and industry data, please estimate EMC Corporation’s WACC Show all your data used for calculations. Again, please state all your assumptions and sources of information.
  3. On October 12, 2015 Dell announced its intent to buy EMC Corporation. How do your valuations compare to the Dell’s announced acquisition price? If your valuations differ from observed prices, can you briefly forward any possible explanations? For example, you can discuss and attempt to evaluate possible synergy and other effects of acquisition.
  4. The following information is for pedagogical purposes only and unlike earlier questions does not deal with real terms of the deal. In 2013 EMC, VMware and General Electric (GE) announced a Joint Venture called Pivotal. GE has invested $ 105 M in the venture in return for 10% ownership in the form of convertible preferred shares. In 2014 Pivotal posted $ 58 M in revenues demonstrating 24% annual growth. GE anticipates that Pivotal will go public by the end of 2018. Applying Price/Sales ratio of 16, what is the estimated 2018 value of GE‘s share in Pivotal? What is the GE‘s implied cost of capital that justified the $ 105 M investment? How would your answers change if the annual growth were only 20%? What is the advantage of having convertible preferred instead of common equity?
  5. The following information is for pedagogical purposes only and unlike earlier questions does not deal with real situation. There are rumors that Netflix is negotiating a three year agreement with Pivotal, according to which Netflix will have a right to use Pivotal’s Spinnaker software at a predetermined annual price of $ 450 M. Currently Netflix uses Amazon’s AWS product and pays $ 400 M annually, but each year this value can go up 20% or down 10% in comparison with the previous year. Over the next three years at the beginning of each year Netflix can decide, which product, Spinnaker or AWS, it will be using that year. Which product should the company use each year? If the risk-free rate is 3%, how much this agreement is worth to Pivotal? Please provide as many details as possible in your explanations and support them by numbers. Hint: think about this as a series of options. Also you might find the following option pricing formulas useful (r is the risk-free rate, p is the risk-neutral probability, Cn is the option payoff in node n)

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