Shanghai Hai Xing Shipping Company

1)

a) How do "H" share companies compare to Hong Kong companies? Is there any evidence indicating that the financial markets see "H" share companies as riskier? Hint: Use Exhibit 2 to examine the betas and PE ratios of "H" shares companies and their comparable Hong Kong companies.

b) What is your estimate of the required rate of return for Shanghai Hai Xing's equity? Hint: Use the comparable Hong Kong companies information in Exhibit 10 to estimate the beta for Shanghai Hai Xing Shipping, then use the CAPM to estimate its required rate of return.

Note that not all the companies listed in Exhibit 10 are exactly comparable to Hai Xing. You may single out Continental Mariner and IMC as most comparable and use them as benchmarks for the estimation of beta (with whatever adjustment necessary to reflect the difference in riskiness, if any, between the Hong Kong and "H" share companies as suggested by (a)).

c) What is your estimate of the value of Shanghai Hai Xing Shipping shares? Hint: Discount the after tax cash flows of Hai-Xing at the required rate otreturn obtained in (b). Assuming that the firm will experience a constant growth rate in after-tax cash flows from 1997 onwards, use the constant growth model to estimate the terminal cash flows for 1997. Then, discount the after-tax cash flows corresponding to 1995, 1996 and 1997 to arrive at a value for 1994. Note that the 1997 after-tax cash flows is the sum of the annual affer-tax cash flows for 1997 plus the terminal value. Try growth rate of 5%; 10% wad 15% etc. for the above computation.

Note that the after-fax cash flows for year t is :

CF_t = PAT_t + Dep_t - CapExp_t - ΔNWC_t

Where PAT_t, is the profit alter tax for year t,

Dep_t is the depreciation for year t,

CapExp_t, is the capital expenditures for yeat t,

ΔNWC_t is the change in net working capital for year t.

d) What risks are unique to this investment?

2) Bill Miller and Value Trust

a) What is the efficient market hypothesis? What does it imply for the performance of mutual funds?

b) What would Miller say in response to the claim that his success is due to luck? What is his investment styles?

c) How easy will it be to sustain Miller's historical performance record into the future? What factors support your conclusion?

d) Suppose that you are an advisor to wealthy individuals in the area of equity investments. In 2005, would you recommend investing in Miller's Value Trust?

3) GMO: The Value Versus Growth Dilemma

a) What are the differences between value and growth investing? What are their relative merits?

b) Why wouldn't GMO consider including Cisco Systems in its portfolio at this time? Is Cisco a good stock? Why would GMO consider CVS and R.R. Donnelley as a potential stock to add to its portfolio? Hint: compute the annual/real return to current shareholders for CVS and R. R. Donnelley by following the procedure streamlined in Exhibit 5 and compare them with the corresponding figures obtained from Cisco Systems.

c) Should GMO change its strategy? Would you invest with GMO?

4) Warren E. Buffett 2005

a) What does the stock market seem to be saying about the acquisition of PacifiCorp by Berkshire Hathaway? Specifically, what does the $2.17 billion gain in Berkshire's market value of equity imply about the intrinsic value of PacifiCorp?

b) Based on the multiples for comparable regulated utilities, what is the range of possible values for PacifiCorp equity? Is Buffett paying too much to acquire PacifiCorp?

c) What is your assessment of Berkshire's investments in Buffett's "Big Four" : American Express, Coca Cola, Gillette and Wells Fargo?

d) Please critically assess Buffett's investment philosophy and identify points where you agree and disagree with him.

5) Gold as a Portfolio Diversifier:The World Gold Council and Investing in Gold

a) What are the most compelling arguments for and against investing in gold? (Refer to Exhibit 1 and the presentation of WGC at the Bloomberg industry conference - YouTube weblink is given by footnote 1)

b) Using the annual return data for the U.S. large cap equities, U.S. bonds and gold provided in case Exhibit 2, compute the mean, standard deviation for each asset class, and the cross-correlation for the three asset classes. Which of these asset classes would you be most/least interested in investing in? Are these results consistent with the WGC's claim of superior risk-adjusted returns?

c) Again, using the return data from Exhibit 2, compute the annual returns from 1988 to 2011 for the following three portfolios :

i) 60% U.S. large cap, 40% U.S. bond
ii) 50% U.S. large cap, 40% U.S. bond, 10% gold
iii) 34% U.S. large cap, 33% U.S. bond, 33% gold

From these returns, compute the mean and standard deviation of each  portfolio. Which portfolio would you prefer and why?

d) Use the means, standard deviations and cross-correlation for U.S. large cap equities, U.S. bonds and gold in Exhibit 3 and with the three-asset mean-variance optimizer provided by the spreadsheet, compute the optimal portfolio weights and expected return of the following two portfolios when target standard deviation of the portfolios is set at 10%:

i) A portfolio consisting ONLY U.S. large cap equities and U.S. bonds (i.e., the portfolio weight of gold is fixed at 0%)
ii) A portfolio consisting U.S. large cap equities, U.S. bonds and gold. (i.e., the portfolio weights of all 3 asset classes are allowed to vary)

e) Repeat (d) by setting the target standard deviation at 2%, 6%, 14% and 18% for the two portfolios. Plot the resulting efficient frontier for the two portfolios (with and without gold). How does the inclusion of gold in the portfolio affect the frontier? Is this a compelling argument for diversification?

6) Arcadian Microarray Technologies, Inc.

a) Base upon the results from Exhibit 3, is terminal value a material component of firm value?

b) Drawing on Exhibit 4, when would the various terminal value estimators be appropriate?

c) Estimate the terminal value for Arcadian with the Earnings Multiples approach and the Discounted Cash Flow approach using the earnings and cash flow forecasted by (i) Arcadian Management (Exhibit 1) and (ii) Sierra Capital Analysts (Exhibit 2). Use PE ranges from 15 to 20 and constant growth rate from 4% to 6%.

d) What are the sources of discrepancy in the estimated fum value resulting from (i) and (ii) in part (c)?