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1. Regarding of your satisfaction about Pixars animation film, you decide to be one of Pixarinvestor. Before you make any investment in Pixar Studio, as a risk-averse investor, you haveto detailed-analyze Pixars securities. There are 2 options of the securities, bond and stock. Fortoday, the bond market price is $1,089/share and the stock market price currently sells at$22.55/share.

Bond: Pixar has just issued a 10-year, 14% coupon interest rate, $1,000-par bond that paysinterest annually. Your required return is 12% currently.

a. Calculate the bond value (B0).

b. Regarding to your answer in a, what is the bond status (discount/par/premium)? Why?

Stock: First DataPixar most recent (2010) annual dividend payment was $1.95 per share. You estimatethat these dividends will increase at a 2.75% annual rate over the next 3 years (2011 2013). At the end of the 3 years, you believe that Pixar would grow more because ofthe new technology of animation, resulting an increase in dividend growth rate to 4.5%

per year, for the foreseeable future. You need 12% as the required return.c. Calculate theP0 (P2010).

Second Data

The firms weighted average cost of capital is 8.25%, and it has $3,500,000 of debt atmarket value and $800,000 of preferred stock at its assumed market value. Theestimated free cash flows over the next 5 years, 2011 through 2015, are given below.Beyond 2015 to infinity, the firm expects its free cash flow to grow by 3.35% annually.

Free Cash Flow

Year FCF

2011 $450,000

2012 $555,0002013 $875,000

2014 $930,000

2015 $1,150,000

d. Estimate the value of Pixar Animation Studios entire company (Vc) by using the free cashflow valuation model.

e. Use your finding in part d, along with data provided above, to find Pixars common stockvalue (Vs).

f. Pixar has 600,000 shares of common stock outstanding. Estimate Pixars common stockvalue per share.

g. What is your final decision regarding to Pixars securities? Would you be an Pixars nextinvestor? In what securities? State your reason (relate it with under/overvalue and yourestimation of Pixars future).

2.

Salvatore is considering to buy stocks. His consultant picked a companys stock and bond for him.

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a. The history and expectation for this stock: Last year the company paid a dividend of $2.25;for 3 years later, it expects 6.5% growth; for 2 years after that, it expects 8% growth; andthen it would become constants with 5% growth per year forever. If the market price ofstock is $17.5 per share today, what is your recommendation for Salvatore, if he wants 18%of required return?

b. The companys bond has $1,000 par value, the coupon interest rate is 8.5%. It will maturein 15 years. If the market price of bond is $790 per share today, what is yourrecommendation for Salvatore, if he wants 13% of required return?