LUBIN SCHOOL OF BUSINESS
Pace University
Fin 320 ADVANCED FINANCIAL ANALYSIS
Spring 2000
Prof. P.V. Viswanath

Midterm 1

 1. Read the following article from the Wall Street Journal of Feb. 7, 2000 and answer the questions that follow, using no more two pages in your exam booklet for all three questions.  Rambling answers will be penalized.
Union Fund Requests Ruling to Force Chubb On 'Poison Pill' Vote

TRENTON, N.J. -- The union fund that is suing Chubb Corp. to allow shareholders to vote on "poison pill" measures has requested an injunction forcing Chubb to include the matter in its proxy materials next month.

The Eastern States Health and Welfare Fund of the Union of Needletrades, Industrial and Textile Employees, last month filed suit in federal court in Trenton trying to undo Chubb's current poison-pill measure, which is contained in a 10-year "shareholder rights plan" Chubb's board unilaterally implemented last year. Such measures, common in corporations, make an unwanted takeover effort more expensive for the pursuing company, but some critics say it allows managements to easily thwart offers that shareholders might otherwise want.

The union fund wants shareholders to be able to vote on any such shareholder-rights plans or poison-pill measures, and wants to amend Chubb's bylaws to make such votes mandatory. It wants Chubb, of Warren, N.J., to include the amendment vote in proxy materials in advance of April's annual meeting, but Chubb has declined.

Shareholders approved such a measure last year, but Chubb decided not to amend its bylaws, implementing the poison-pill plan instead. "The proposal last year was determined by our counsel to be invalid under New Jersey law, which delegates specifically to the directors the authority to put in a poison pill and state the terms," said a Chubb spokeswoman.

A decision on the injunction request, which was filed Friday, isn't expected for several weeks.

While unions have been increasingly active in shareholder-rights issues, it is unusual for them to take the extra step of suing the company to get such measures on the ballot. "This is a fundamental issue of corporate governance for the shareholders," says Paul Fishman, a lawyer with Friedman Kaplan & Seiler, who is representing the union fund.

  1. Why should the Union fund object to the "shareholder rights plan?"  (Note that this Union fund is not a union that represents Chubb employees, but is a fund that is a Chubb shareholder.) (10 points)
  2. How might you evaluate whether the poison pill plan was deemed by the market to be desirable for shareholders or not, at the time of its adoption? (10 points)
  3. Under what circumstances, do you think, the adoption of a poison pill plan would be good for shareholders? (10 points)
(Here is a recent report of a poison pill adopted by American Homestar Corp., as reported in the Wall Street Journal of Feb. 11, 2000.

American Homestar Corp. said its board approved a poison-pill anti-takeover measure that gives shareholders the right to purchase shares at a discount in the event of an attempt to acquire the company. The manufactured-housing company said the plan is triggered when a person or group acquires 15% or more of its common stock. American Homestar couldn't be reached for comment on whether or not the adoption of the plan was in response to any known takeover attempt.

If there is a hostile takeover mounted by an opponent who has acquired a certain number of shares in the market, other shareholders obtain the right to buy new shares at a discount; this dilutes the holding of the opponent attempting the takeover.  You can use this example as a case in point to improve your understanding of what a poison pill is.)

2. (35 points) You desire to buy a new yacht, which costs $275,000.  Unfortunately, you only have $25,000.  You contact your neighborhood bank, which agrees to lend you the remaining amount.  The bank manager wants you to pay a fixed amount per month for 2 years.  However, you think that you may not have enough money to pay the monthly installment in the beginning.  After some negotiation, the manager suggests you the following deal.  You would pay a fixed amount every month at the beginning of the month for the next two years.  Furthermore, at the end of the two years, you would pay an amount equal to ten times the monthly amount that you will pay over the two years.  If the effective annual rate that the bank manager offers you is 6.1678% percent per year, what is the amount of the monthly payment that you will make under the renegotiated deal?

Hint: You may find it useful to compute the APR of the loan.  If you set up the amount of the monthly payment as an unknown variable, you can write an equation for the entire loan, and use it to solve for the monthly payment.

 3.  (All numbers in thousands of dollars.)  Here are the balance sheets for Reliant Energy, a Houston-based natural-gas and electric company, for 1997 and 1998.
 
FISCAL YEAR ENDING 12/31/98 12/31/97 Change from 1997 to 1998 Outflow
Cash 29,673 51,712 -22,039  
Receivables 726,377 962,974 -236,597  
Inventories 171,998 156,160 15,838  
Other Current Assets 741,123 347,161 393,962  
Total Current Assets 1,669,171 1,518,007 151,164  
Property, Plant and Equipment 17,030,589 16,039,224 991,365  
Accumulated Depreciation 5,499,448 4,770,179 729,269  
Net Property, Plant and Equipment 11,531,141 11,269,045 262,096  
Investments and Advances to Subsidiaries 2,041,600 1,694,102 347,498  
Deferred Charges 1,797,720 1,907,006 -109,286  
Intangibles 2,098,890 2,026,395 72,495  
Total Assets 19,138,522 18,414,555 723,967  
       
FISCAL YEAR ENDING 12/31/98 12/31/97  
Notes Payable 1,812,739 2,124,956 -312,217  
Accounts Payable 807,977 879,612 -71,635  
Current Portion of Long Term Debt 397,454 251,169 146,285  
Accrued Expenses 367,782 350,640 17,142  
Other Current Liabilities 684,990 386,537 298,453  
Total Current Liabilities 4,070,942 3,992,914 78,028  
Deferred Charges to Income 3,602,732 3,944,909 -342,177  
Long Term Debt 6,800,748 5,218,015 1,582,733  
Total Liabilities 14,474,422 13,155,838 1,318,584  
Minority Interest (Liability) 342,232 362,172 -19,940  
Preferred Stock 9,740 9,740 0  
Common Stock (Net) 3,136,826 3,112,098 24,728  
Retained Earnings 1,445,081 2,013,055 -567,974  
Treasury Stock 2,384 2,066 318  
Other Equities -267,395 -236,282 -31,113  
Shareholder Equity 4,321,868 4,896,545 -574,677  
Total Liabilities and Net Worth 19,138,522 18,414,555 723,967  

Notes: i) There was a net loss of $141,092 in 1998.
ii) Depreciation Expense for 1998 was $856,617.
iii) Deferred Charges are costs incurred but deferred because they are expected to benefit future periods or are prepaids benefiting future  periods.  Examples are prepaid pension costs and certain intangibles.
iv) Deferred Charges to Income are liabilities that have been incurred but have not been paid yet.

    What was the Net Cashflow from Operations for 1998 for Reliant Energy? (20 points)
    Compute the debt-to-equity ratio for Reliant for 1998.  How would you decide whether it was too high or too low? (15 points)

Solutions to Midterm I

1. a. The union could object to it on several grounds: one, the company adopted it unilaterally, without shareholder input; two, management might use it to thwart desirable takeovers of the company.
b. The market's reaction could be evaluated by looking at the share price reaction when the adoption of the poison pill was announced.
c.  If the company is perceived to be in a weak situation; if, for example, shareholders are very widely dispersed, then it may be too easy for opponents to takeover the company at a price too low compared to its true value, even if it might be high relative to its current market price.  Under such circumstances, poison pills might be desirable.

2. The APR can be computed to be 6%; the monthly interest rate is 0.5%.  (1.005)12 = 1.061678).  Let x be the amount of the monthly payment.  Then, the present value of the monthly payments equal x + (x/.005)[1-(1.005)23] + 10x/(1.005)24 = 250,000.  Solving, we find x + 21.676x +  8.872x = 250,000, or x = $7,931.98.

3. 
FISCAL YEAR ENDING 12/31/98 12/31/97 Change from 1997 to 1998

Outflow to Operations

Cash 29,673 51,712 -22,039  
Receivables 726,377 962,974 -236,597 -236,597 
Inventories 171,998 156,160 15,838  15,838
Other Current Assets 741,123 347,161 393,962 393,962 
Total Current Assets 1,669,171 1,518,007 151,164  
Property, Plant and Equipment 17,030,589 16,039,224 991,365 Investment
Accumulated Depreciation 5,499,448 4,770,179 729,269  -856,617
Net Property, Plant and Equipment 11,531,141 11,269,045 262,096  
Investments and Advances to Subsidiaries 2,041,600 1,694,102 347,498 Financing
Deferred Charges 1,797,720 1,907,006 -109,286 could be arguably included in operations
Intangibles 2,098,890 2,026,395 72,495 Investment
Total Assets 19,138,522 18,414,555 723,967  
       
FISCAL YEAR ENDING 12/31/98 12/31/97  
Notes Payable 1,812,739 2,124,956 -312,217  312,217
Accounts Payable 807,977 879,612 -71,635 71,635 
Current Portion of Long Term Debt 397,454 251,169 146,285 Financing
Accrued Expenses 367,782 350,640 17,142  -17,142
Other Current Liabilities 684,990 386,537 298,453 -298,453 
Total Current Liabilities 4,070,942 3,992,914 78,028  
Deferred Charges to Income 3,602,732 3,944,909 -342,177 342,177 
Long Term Debt 6,800,748 5,218,015 1,582,733 Financing
Total Liabilities 14,474,422 13,155,838 1,318,584  
Minority Interest (Liability) 342,232 362,172 -19,940 Financing
Preferred Stock 9,740 9,740 0 Financing
Common Stock (Net) 3,136,826 3,112,098 24,728 Financing
Retained Earnings 1,445,081 2,013,055 -567,974  -141,092
Treasury Stock 2,384 2,066 318 Financing
Other Equities -267,395 -236,282 -31,113 Financing
Shareholder Equity 4,321,868 4,896,545 -574,677  
Total Liabilities and Net Worth 19,138,522 18,414,555 723,967  
Total Outflows from Operations       -414,072

Hence Net Cash Flows from Operations is $414,072.


Midterm II

1. Read the following article by Jason Booth from the Wall Street Journal of 3/27/2000 and answer the questions that follow:

Pakistani Stocks Have Soared More Than 70% Since October in Wake of a Military Takeover

Who says a coup d'etat is bad for the market? Five months after Pakistan's military seized power, Karachi's stock market is booming: The KSE 100 index has risen more than 70% since October, making it Asia's best-performing market this year.

Even as President Clinton visited Pakistan during the weekend and pressed for a return to democratic rule, analysts maintain the stock market's recent success is directly related to improved sentiment following the military takeover.

Despite red tape that foreign investors say can delay repatriation of funds, the market has been buoyed by hope that the military government can reduce the alleged corruption and bureaucratic cronyism many felt hobbled efforts to deal with Pakistan's economic difficulties.

"Internationally, there was a negative reaction" to the coup, says Farrukh Sabzwari, Credit Lyonnais country manager in Karachi. "But in Pakistan, there is the realization it is what we needed. Economically, we were at our lowest ebb."

In particular, the financial markets have applauded the appointment of Shaukat Aziz, who formerly headed Citibank's global private-banking operation, as finance minister. "In the previous government, there were so many political appointments that it was hard to expect any economic progress," says Saqib Masood, an analyst at Jardine Fleming in Karachi. "Because the new government has brought in technocrats, people feel the economy can get back on track."

President Clinton's visit also has helped lift the market in recent weeks, analysts say, because it is seen as acceptance of the new regime by the international community. At the same time, closer relations between Pakistan and the U.S. should prompt the government to focus more on economic and social issues than military affairs.

"The market perceives that the visit will prod the government to put more money toward [economic] development," says Arshad Arif, ABN Amro First Capital equity strategist. If the government is serious about focusing on economic development, it will be likelier to ease military tensions on Pakistan's border with India, he says. "The military realizes that Pakistan can't afford a war at this time, so they will try to improve the economy before they take action on that front."

While politics sparked the rally, economic factors have fanned it. The price of cotton, Pakistan's largest export, has rebounded strongly since the start of the year after two years of steady declines. Because Pakistani cotton farmers enjoyed a bumper crop in 1999, they have reaped significant benefit from the gain.

The most popular and most liquid stocks in Pakistan represent three of the country's biggest industries: Pakistan State Oil, Hub Power Co., the country's largest energy company, and Pakistan Telecom, whose shares have gained about 60% this year.

Stocks have become one of the few desirable investments for Pakistanis. Domestic interest rates have fallen by almost half during the past two years, making interest-bearing investments less attractive. The exchange rate between the Pakistani rupee and the U.S. dollar has remained relatively stable for months, making foreign-currency speculation difficult. Investing in property, meanwhile, looks about to become a lot less popular because of pending bankruptcy reforms that will make it easier for banks to seize the personal assets of debtors, primarily property holdings.

But while domestic investors alone have driven Pakistan's rally so far, it may require an influx of foreign investment to sustain further strong gains. The bad news for Karachi, however, is that regional fund managers say they aren't buying Pakistan's recovery story.

Brad Aham, who invests in emerging markets for State Street Global Advisors in Boston, is no stranger to risk. But he is steering clear of Pakistan. "Between nuclear testing, coups and the Kashmir conflict, there are a lot of other places we can place our bets," he says.

Besides the quite-obvious political risks, U.S. investors in Pakistan have complained about problems repatriating funds after selling shares. While the situation isn't as bad as in Malaysia, where punishing exit taxes were removed only recently, some investors say they have experienced delays exceeding two months to get their money out of the country.

"We could sell the securities," says Steven Schoenfeld, head of international equity strategy at Barclays Global Investors in San Francisco. "But we never were 100% sure we could immediately repatriate the money."

a. Is the price shock caused by potential military takeovers diversifiable risk or non-diversifiable risk? (10 points)
b. Comment on the following statement: One should not consider a potential military take-over as a source of risk because military take-overs are good for stocks. (10 points)
c. Is the risk of unexpected legislation increasing the cost of repatriating funds after selling shares, such as occurred a few years ago in Malaysia, diversifiable risk or non-diversifiable risk? (10 points)

2. Here are the results of a regression of the returns on Cisco Systems (CSCO) on the returns on a portfolio tracking the S&P 500, using data from February 1994 to December 1999:

Beta Regression for CSCO

Regression Statistics

Multiple R

0.510354

R Square

0.260461

Adjusted R Square

0.249743

Standard Error

0.093309

Observations

71

ANOVA

 

df

SS

MS

F

Significance F

Regression

1

0.211581

0.211581

24.30136

5.45E-06

Residual

69

0.600752

0.008707

Total

70

0.812332

 

 

 

 

Coefficients

Standard Error

t Stat

P-value

Lower 95%

Upper 95%

Intercept

0.027427

0.012218

2.244826

0.027988

0.003053

0.051801

RCSCO

1.387554

0.281472

4.929641

5.45E-06

0.826034

1.949075

a. What is the estimated beta of CSCO? (5 points)
b. What percentage of the return on CSCO cannot be explained by movements in the S&P 500? (5 points)
c. The average 1 year T-bill rate over the same period was 5.45%. What is the implied monthly rate? (5 points)
d. Can you reject the hypothesis that the average return on CSCO can be explained by the CAPM over the sample period, taking into account the uncertainty in the system? Use the point estimate of the CSCO beta to answer this question. (10 points)
e. The beta estimation for CSCO over the sample period is given below:

Regression using April 1990 to Dec. 1993

Regression Statistics

Multiple R

0.447362

R Square

0.200133

Adjusted R Square

0.181531

Standard Error

0.121373

Observations

45

ANOVA

 

df

SS

MS

F

Significance F

Regression

1

0.158494

0.158494

10.7589

0.002062

Residual

43

0.633449

0.014731

Total

44

0.791943

 

 

 

 

Coefficients

Standard Error

t Stat

P-value

Lower 95%

Upper 95%

Intercept

0.062248

0.018806

3.309956

0.001895

0.024321

0.100174

RCSCO

1.62435

0.495217

3.280077

0.002062

0.62565

2.623049

The one-year T-bill rate as of the end of Dec. 1993 was 3.61% per annum. What would your required rate of return be on CSCO over the following year (that is, from January 1994 to December 1994), according to the CAPM? Assume a 8% expected rate of return on the market portfolio over and above the one-year riskfree rate the next year. (10 points)

f. The five-year constant maturity Treasury rate was 5.15% per annum at the end of December 1993. Assume that the expected rate of return on the market portfolio, itself, for the next five years is 24.8% per annum (not the market risk premium). (This, by the way, was the actual rate of return on the S&P 500 portfolio over the next 5 years.) Using the CSCO beta that is available to you as of December 1993, what would be your annualized required rate of return on CSCO over the next five years (i.e. from January 1994 to December 1998). (For your information, the actual return on CSCO from from January 1994 to December 1998 was 66.83%; note that this information is totally irrelevant in order to answer the question.) (10 points)

g. (Bonus question) Did the true beta risk of CSCO change from the 1990-1993 period to the 1994-99 period? Explain your answer. If you believe it did change, what in your opinion, caused the change? (5 points)

3. a. The beta of WalMart (WMT) is 1.17, according to Yahoo (http://biz.yahoo.com/p/w/wmt.html). It’s debt-equity ratio according to Yahoo is 0.95. According to the financial statements available on Yahoo (http://biz.yahoo.com/fin/l/w/wmt.html), Income before income taxes, minority interest and equity in unconsolidated subsidiaries for the three months ended October 31, 1998 was $1651 m. Income before minority interest and equity in unconsolidated subsidiaries for the same period was $1040 m. Compute WalMart’s unleveraged beta. (15 points)

b. Total Shareholder Equity as of Oct. 31, 1999, according to information provided by Global Access is $24.279 billion. If Wal-Mart increased its total debt by $10 billion, what would be the new stock beta of WMT? Take into account the fact that the increased leverage will decrease the marginal tax rate to 30%. (10 points)

Solutions to Midterm II:

1. a. The price shock due to the coup d'etat clearly affects the entire Pakistani economy; hence for Pakistani investors who may legally find it difficult to diversify outside Pakistan, the shock is non-diversifiable.  For global investors, it is clearly diversifiable, since the military takeover would not have broad, global implications.  However, a military takeover, say, in a country like the US (as we have seen in several alarmist movie scenarios) would have global implications, and such a risk would be non-diversifiable to a greater extent.

1. b. Risk derives from uncertainty.  Hence, to the extent that we are not sure of the precise impact of the military takeover, there is uncertainty and hence risk.  Furthermore, it is not possible to predict beforehand the occurrence of a military takeover, which also generates uncertainty, and hence potential risk (qualified by the answer to 1.a.)

1.c. The answer to this is similar to that of 1a., as far as global investors are concerned.  However, for Malaysian investors the risk is a second order risk, since they do not have to worry about repatriation of funds.  On the other hand, the reduction in foreign demand for Malaysian stocks might affect the value of Malaysian investor portfolios.  It is also necessary to take into account the possibility that repatriation legislation in one country might spawn similar legislation in neighboring countries, or a whole geographical area.  This would then move the risk closer to a non-diversifiable risk for global investors.

2. a. The estimated beta can be read out from the Coefficients column as 1.387554, or approximately 1.39.

2. b. The R2 of a regression measures the proportion of the variance of the dependent variable that can be explained by the independent variable.  Hence, in this case, the percentage of the return on CSCO that cannot be explained by movements in the S&P 500 is 1 - 0.260461 or approximately 74%.

2. c. The monthly rate is (1.0545)1/12 –1 = 0.4432%

2. d. The predicted value of the intercept, using the CAPM, and assuming that the estimated beta is correct is (1-1.3876)(0.004432) = -0.001718, which is outside the 95% confidence limits for the intercept. This suggests that the CAPM has underestimated the return on CSCO for the period.

2. e. Required ROR = 0.0361 + 1.624(0.08) = 16.60%

2. f. Required ROR = 0.0515 + 1.624(0.248 – 0.0515) = 37.06%

2. g.  It certainly looks like the beta changed; the point estimate went from 1.624 in the earlier period to 1.388 in the later period.  However, the 1.624 number is within the 95% confidence interval for the later period beta; the 1.388 in the later period is also within the 95% confidence interval for the earlier period beta.  This makes it more difficult to insist that the beta has decreased.  Similarly, it would probably be difficult to claim that the operations of CSCO have changed from the first period to the second.  On the other hand, CSCO was a new stock in the earlier period with an unproven technology; in the last five to ten years, it has matured somewhat, and it is conceivable that this has decreased the sensitivity of CSCO's stock price to market movements.

3. a. The taxes paid are $1651m.- $1040m. = 611m. Unlevered beta = 1.17/[1+(1-611/1651)0.95] = 0.732.

3. b. If total shareholder equity = 24.279 billion, and the debt-equity ratio = 0.95, total debt = 24.279(0.95) = 23.065. If this is increased by $10 billion, total debt would be 33.065, and the debt-equity ratio would be 33.065/24.279 = 1.36. The leveraged or stock beta will now be 0.732[1+(1-0.3)(1.36)] = 1.43


Final

 

         Show all your computations and formulae.  Make all your assumptions explicit.  If your approach is correct, you will get some credit, even if your arithmetic answer is wrong.  So concentrate on getting your logic right.

         If you answer a question, I have the discretion to award you some points, even if you are completely wrong.  If you don't attempt the question at all, I can give you no points!  So attempt every question.

         Your answers should be very clear and legible.  I will ignore and/or penalize any answers that I cannot read easily.

  Here is some information about Amkor Techonology Inc. (AMKR) from different sources, as identified below:

  1. Business Summary (from Yahoo)

  2.  Share Ownership Information  (from Yahoo)

  3. Assorted Market Information about AMKR (http://biz.yahoo.com/p/a/amkr.html)

  4. Yield on Treasury securities as of the close of trading, May 2, 2000 (http://www.bloomberg.com/markets/C13.html)

  5. Financial Statements for 1996-1999 from Disclosure, Inc.

  6. Regression of weekly AMKR returns on weekly S&P 500 returns.

  7. S&P bond ratings classes, with normal spreads over the treasury bond rate

  8. Additional Information from SEC form 10-Q filed on November 15, 1999 (http://biz.yahoo.com/e/l/a/amkr.html)

  9. News articles about AMKR

    1. Dow Jones Newswires article on Amkor’s acquisition of factories from Anam Semiconductor, Inc., May 2, 2000.

    2. S&P rates, affirms Amkor Technology debt; Standard & Poor’s press release, April 11, 2000.

Using all the information provided, answer the following questions:

a.       (10 points) Estimate the cost of Amkor’s Equity.

b.      (10 points) Estimate the cost of Amkor’s convertible debt.

c.       (10 points) Estimate the cost of Amkor’s non-convertible long-term debt.

d.      (15 points) Estimate Amkor’s WACC.  (Ignore current assets and current liabilities in computing the firm’s capital structure.  Assume that the cost of funding the firm’s Other Long Term Liabilities is the same as the cost of the non-convertible long-term debt.)

e.       (20 points) Suppose Amkor paid off all its debt with an issue of equity; however, it has not paid off or otherwise funded its Other Long Term Liabilities.  Assume, further, that the cost of funding the Other Long Term Liabilities will drop by 20 basis points after the capital structure change.  Compute the new cost of equity and the new cost of funding the Other Long Term Liabilities.  Use this to compute the new cost of capital for the firm.

f.        (15 points) What would be the resultant change in firm value after the capital structure change?

g.       (20 points) Amkor pays no dividends.  Explain why.

h.       (Bonus; 10 points) Explain why Amkor has chosen to fund the deal in the manner described in the last paragraph of the article “Amkor Technology Closes $1.4B Anam Semiconductor Deal.” 

  A. Business Summary (from Yahoo):

  Amkor is the world's largest independent provider of semiconductor packaging and test services. The Company is also one of the leading developers of advanced semiconductor packaging and test technology. The Company offers a broad and integrated set of packaging and test services, which are the final procedures to prepare semiconductor devices for further use. The Company also provides final testing and related services that validate the operating specifications of the finished semiconductor device. In January 1998, the Company began marketing wafer fabrication services provided by Anam Semiconductor, Inc.'s (ASI) new semiconductor wafer foundry. ASI is the Company's primary supplier of semiconductor packaging and test services from four factories they own in Korea. The Company has more than 150 customers, including many of the largest semiconductor companies in the world.

  B. Share Ownership Information (from Yahoo)

Insider: 70%

Over the last 6 months: one insider sell; 10.0K shares

Institutional: 35% (116% of float) (202 institutions)
Net Inst. Buying: 3.72M shares (+7.55%)
(prior quarter to latest quarter)

  C. Assorted Market Information about AMKR (http://biz.yahoo.com/p/a/amkr.html)

Share price as of May 2, 2000, 4 p.m.: $ 61 5/8

Shares Outstanding: 131.0M

Float: 39.3M (Float refers to number of shares of a corporation that are outstanding and available for trading by the public, excluding insiders or restricted stock on a when issued basis; definition from http://www.duke.edu/~charvey/Classes/wpg/bfglosf.htm)

D. Yield on Treasury securities as of the close of trading, May 2, 2000 (http://www.bloomberg.com/markets/C13.html)

 E. Financial Statements for the last four years (courtesy of Disclosure, Inc.)

BALANCE SHEET

 

 

 

 

Annual Assets (000s) Fiscal Yr. Ending

12/31/99

12/31/98

12/31/97

12/31/96

CASH

98,045

227,587

90,917

49,664

MRKTABLE SECURITIES

136,595

1,000

2,524

881

RECEIVABLES

157,281

109,243

102,804

170,892

INVENTORIES

91,465

85,628

115,870

101,920

OTHER CURRENT ASSETS

23,864

48,577

46,307

41,930

TOTAL CURRENT ASSETS

507,250

472,035

358,422

365,287

NET PROP & EQUIP

859,768

416,111

427,061

324,895

INVEST & ADV TO SUBS

63,672

25,476

19,821

69,244

OTHER NON-CUR ASSETS

27,858

28,885

29,186

20,699

INTANGIBLES

233,532

26,158

NA

NA

DEPOSITS & OTH ASSET

63,009

34,932

21,102

24,739

TOTAL ASSETS

1,755,089

1,003,597

855,592

804,864

 

 

 

 

 

Annual Liabilities (000s) Fiscal Yr. Ending

12/31/99

12/31/98

12/31/97

12/31/96

NOTES PAYABLE

22,674

52,086

197,082

206,331

ACCOUNTS PAYABLE

122,147

96,948

113,037

45,798

ACCRUED EXPENSES

88,577

77,004

43,973

30,156

INCOME TAXES

41,587

38,892

26,968

12,838

OTHER CURRENT LIAB

37,913

15,722

15,581

33,379

TOTAL CURRENT LIAB

312,898

280,652

396,641

328,502

CONVERTIBLE DEBT

53,435

207,000

NA

NA

LONG TERM DEBT

634,021

14,846

196,934

167,444

OTHER LONG TERM LIAB

16,994

10,738

161,860

247,180

TOTAL LIABILITIES

1,017,348

513,236

755,435

743,126

MINORITY INT (LIAB)

NA

NA

9,282

15,926

COMMON STOCK NET

131

118

46

46

CAPITAL SURPLUS

551,964

381,061

20,871

16,770

RETAINED EARNINGS

189,733

109,738

70,621

32,340

OTHER EQUITIES

-4,087

-556

-663

-3,344

SHAREHOLDER EQUITY

737,741

490,361

90,875

45,812

TOT LIAB & NET WORTH

1,755,089

1,003,597

855,592

804,864

 

 

 

 

 

Annual Income (000s) Fiscal Yr. Ending

12/31/99

12/31/98

12/31/97

12/31/96

NET SALES

1,909,972

1,567,983

1,455,761

1,171,001

COST OF GOODS

1,577,226

1,307,150

1,242,669

1,022,078

GROSS PROFIT

332,746

260,833

213,092

148,923

R & D EXPENDITURES

11,436

8,251

8,525

10,930

SELL GEN & ADMIN EXP

145,233

119,846

103,726

66,625

INC BEF DEP & AMORT

176,077

132,736

100,841

71,368

NON-OPERATING INC

-25,425

-13,996

-7,594

-6,111

INTEREST EXPENSE

45,364

18,005

32,241

22,245

INCOME BEFORE TAX

105,288

100,735

61,006

43,012

PROV FOR INC TAXES

26,600

24,716

7,078

7,876

MINORITY INT (INC)

NA

559

-6,644

948

INVEST GAINS/LOSSES

-1,969

NA

-17,291

NA

OTHER INCOME

NA

NA

NA

-1,266

NET INCOME

76,719

75,460

43,281

32,922

  F. Regression of weekly AMKR returns on weekly S&P 500 returns (Depositary Receipts: SPY)

Time period of regression: April 27, 1998 to May 1, 2000. 

Regression Statistics

 

 

 

 

 

Multiple R

0.433869

 

 

 

 

 

R Square

0.188242

 

 

 

 

 

Adjusted R Square

0.180361

 

 

 

 

 

Standard Error

0.125124

 

 

 

 

 

Observations

105

 

 

 

 

 

 

Coefficients

Standard Error

t Stat

P-value

Lower 95%

Upper 95%

Intercept

0.017164

0.012282

1.397532

0.165257

-0.00719

0.041522

SPY Return

2.012696

0.411827

4.88724

3.77E-06

1.195936

2.829457

 Annualized SPY return for the time period of the regression: 18.09%

Annualized return on AMKR over the same time period: 236.53%

  G. S&P bond ratings classes, with normal spreads over the 30-year treasury bond rate (http://www.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ratings.htm)

Rating is

Spread is

D

10.00%

C

7.50%

CC

6.00%

CCC

5.00%

B-

4.25%

B

3.25%

B+

2.50%

BB

2.00%

BBB

1.50%

A-

1.25%

A

1.00%

A+

0.80%

AA

0.50%

AAA

0.20%

  H. Additional Information from SEC form 10-Q filed on November 15, 1999 (http://biz.yahoo.com/e/l/a/amkr.html)

We continue to invest significant amounts of capital to increase our packaging and test services capacity. In the nine months ended September 30, 1999, we made capital expenditures of $176 million excluding the acquisition of K4.. We intend to spend approximately $225 million in capital expenditures in 1999, primarily for the expansion of our factories. Due to the expected growth in our business in the year 2000, we believe our capital expenditures in the year 2000 could exceed our current year capital expenditures.

At September 30, 1999, in addition to the $625 million of senior and senior subordinated notes sold to purchase K4, our debt consisted of $15.7 million of borrowings classified as current liabilities, $10.3 million of long-term debt and capital lease obligations and $207.0 million of 5 -3/4% convertible subordinated notes due 2003. We had $103.7 million in borrowing facilities with a number of domestic and foreign banks, of which $80.8 million remained unused. Certain of the agreements with our banks require compliance with certain financial covenants, contain other restrictions and are collateralized by our assets. These facilities are typically revolving lines of credit and working capital facilities that are renewable annually and bear interest at rates ranging from 8.0% to 10.75%. Long-term debt and capital lease obligations outstanding have various expiration dates through April 2004 and bear interest at rates ranging from 5.8% to 13.8%.

Subsequent to September 30, 1999 the holders of the Company's convertible subordinated notes exchanged convertible notes with a face value of $78 million for 6,290,930 shares of common stock. In the fourth quarter 1999, the Company will incur a non-cash charge of approximately $8.9 million representing the fair market value of the shares of common stock issued in the exchange in excess of the shares required for conversion, which represents a premium for early retirement.

We believe that our existing cash balances, cash flow from operations and available equipment lease financing will be sufficient to meet our projected capital expenditures, working capital and other cash requirements for at least the next twelve months. We may require capital sooner than currently expected. We cannot assure you that additional financing will be available when we need it or, if available, that it will be available on satisfactory terms. In addition, the terms of the senior and senior subordinated notes, recently sold by us, significantly reduce our ability to incur additional debt. Failure to obtain any such financing could have a material adverse effect on our company. 

I. News articles about AMKR

Amkor Technology Closes $1.4B Anam Semiconductor Deal

Dow Jones Newswires, May 2, 2000.

WEST CHESTER, Pa. -- Amkor Technology Inc. (AMKR) bought three semiconductor assembly and test factories in Seoul from Anam Semiconductor Inc.

In a press release Tuesday, Amkor said it also made an investment in the semiconductor wafer foundry.

The value of both transaction was about $1.4 billion.

Buying the plants gives Amkor direct ownership of all of its packaging and test operating assets, the contract microelectronics manufacturer said Tuesday in a press release. Amkor now owns and operates seven semiconductor packaging and test facilities.

The entire output of three new plants had been dedicated to Amkor. With the acquisition, Amkor will generate higher operating margins on its overall packaging and test business, since the revenue derived from the three plants won't be subject to a contractual gross margin.

For the twelve months ended December 31, the plants contributed about $793 million of Amkor's $1.6 billion in packaging and test revenue.

The company expects to generate "significantly more" earnings before interest, taxes, depreciation and amortization than before, facilitating the repayment of debt incurred in the transaction.

As reported in The Wall Street Journal, the transaction will increase the company's EBITDA by $240 million a year. Amkor had 1999 net income of $76.7 million, or 63 cents a diluted share.

Amkor will pay $950 million for the three factories and $459 million for Anam shares. The investment increases Amkor's stake in the company to 42% from 18%, according to The Wall Street Journal story.

Amkor will fund the deal with a combination of $410 million in private equity capital, $259 million in convertible subordinated notes and $750 million in bank debt.

S&P rates, affirms Amkor Technology debt

Tuesday April 11, 3:25 pm Eastern Time (Press release provided by Standard & Poor's)

NEW YORK, April 11 - Standard & Poor's today affirmed its double-'B'-minus corporate credit and senior unsecured debt ratings on Amkor Technology Inc. and its single-'B' subordinated debt rating on the company.

All ratings are removed from CreditWatch, where they had been listed with negative implications.

At the same time, Standard & Poor's assigned its single-'B' rating to Amkor's new $258 million convertible subordinated note issue and its double-'B' rating to the company's new $850 million bank loan package.

The outlook is stable.

The ratings affirmation reflects Standard & Poor's belief that Amkor will be able to integrate the acquired packaging facilities into its operations, that its increased level of ownership in Anam Semiconductor Inc. will not entail significant additional business risk, and that the company's financial profile will remain consistent with the rating level.

  Solutions: 

a.       Using the CAPM, we can determine the cost of equity as 6.01 + 2.012696 (5.5) = 17.08%.  The appropriate riskfree rate is the 30 year T-bond rate, since the WACC is used to make long-term decisions.  The average market risk premium from 1926 to 1990 (from Damodaran) is used, rather than the difference between the average return on the S&P in the last few years less the T-bond rate.  This is because the market premium computed in the second way comes to about 12%, which would seem to be too large.  In fact, some authors (e.g. the book “Dow at 40,000”) claims that the market risk premium is zero.  The high return on the S&P in recent years would seem to be the result of a string of unexpectedly good news.

b.      The convertible debt has a coupon of 5.75% according to the 10-Q information in section H.  If we value this convertible debt as straight debt, it would yield 9.26% as computed below in part c.  Under this scenario, the convertible debt would sell for 88.48% of par.  This can be computed by valuing 5.75% coupon debt with a maturity of 4 years using a yield of 9.26% (Section H provides the maturity of the convertible).  Hence the cost of convertible debt is the weighted average of 9.26% and 17.08%, where the weights are 88.48% and 11.52% respectively, as shown above.  (Implicitly, we are assuming that the convertible debt is selling at par.  If not, we need to subtract out the equivalent straight value portion from the market value of the convertible to get the implied left-over value of the equity.)  This works out to 10.16% before tax.  The marginal tax rate paid by Amkor is given by the increase in tax provisions for 1999 over 1999 divided by the increase in taxable income for 1999 over 1998.  This works out to (26600-24716)/(105288-100735) or 41.38%.  Hence the after tax cost of convertible debt capital is (1-0.41)10.16 = 5.99%.  The results obtained here can be used to divide the total convertible debt of 53.435 into straight debt of 47.28 (0.8848 x 53.435) and equity of 6.15 (011528 x 53.435).

c.       The cost of the non-convertible debt is 6.01% plus a spread of 3.25 percentage points.  As explained in the last article in section I, Amkor’s subordinated debt is rated single B by Standard and Poor’s.  According to the table provided in section G, this means that Amkor’s debt should yield an additional 3.25 percentage points over the Treasury bond.  Corporate debt, unless otherwise specified is usually subordinated to other debt; hence it’s the single-B rating that’s relevant.  After tax, this works out to 5.46%.

d.      The market value of Amkor’s equity is given by the number of shares outstanding times the share price, i.e. 131m. x 61 5/8, which works out to $8072.875 m. 
The book value of its non-convertible debt is $634.021 (long-term debt) plus $16.994 (other long-term liabilities, from the Balance Sheet) or $651.015m.
The book value of the convertible debt is $53.435m.  Using these numbers, the total value of the firm’s assets excluding current assets and liabilities is $$8777.325m.

The WACC is given by , which works out to 16.15%.

e.       The existing debt-equity ratio of Amkor equals 0.0864.  This is computed in the following fashion.  Existing equity is 8072.875; the portion of convertible debt that can be thought of as equity is equal to 6.15 (0.1152 x 53.435, as explained above in part b.) for a total of 8079.025 of effective equity.  Effective debt equals 698.295 (651.015 of straight debt and Other Long-Term Liabilities plus 47.28 of imputed debt from the convertible debt).  This old debt-equity ratio can be used to compute the unlevered beta of Amkor according to the formula blevered/[1+(1-t)D/E] or 2.0127/[1+(1-0.41(0.0864)] or 1.915. 

If Amkor paid off its convertible and non-convertible debt, but not its Other Long-Term Liabilities, it would end up having equity worth 8760.331(existing equity of 8072.875 plus the convertible debt of 53.435 and non-convertible debt of 634.027) and debt (Other long-term Liabilities) of 16.994.  The debt-equity ratio works out to 16.994/8760.331 or 0.002.  We can now compute the new levered beta as 1.915[1+(1-0.41)0.002] = 1.917. 

 The new cost of equity is now 6.01 + (1.917)(5.5) or 16.555%.  The cost of funding the Other Long-Term Liabilities equals 9.26 – 0.2 or 9.06%.  The new WACC is given by (9.06)(1-0.41)(0.002/1.002) + (16.555)(1/1.002) = 16.533%.

f.        The change in firm value is (0.1615 – 0.16533)(8777.325)/0.16533 or a $203m. decrease in firm value.

g.       Amkor pays no dividends, probably for two different reasons.  One, it is a growing company, and needs lots of funds.  And two, Amkor probably has volatile earnings, which would reduce its optimal level of dividends.

Given the nature of Amkor’s assets, costs of financial distress would be high.  For example, as a technology company, it probably has many growth options.  These options can allow the company to raise the firm’s return volatility if equityholders so desire: this would increase agency costs of debt.  Consequently, raising funds through equity is preferable to raising funds through debt.  And if it does raise funds through debt, that should have equity characteristics (convertible debt) or involve close supervision and be amenable to modification of covenants if necessary (bank debt).  So, why not use equity directly?  Why go in for these forms of debt?  The answers to these questions probably lie in the fact that Amkor is closely held and the current owners do not want to dilute their control.