Question

Question

(a) If a company XYZ Limited has stated retained earnings of A$100m and has in total issued 150 million ordinary shares, has drawn down bank debt of A$200 million, carries goodwill of A$87m, has no net cash and the market share price of XYZ is currently $1.40. Calculate the enterprise value of XYZ.

(b) If an investor has a short term investment horizon of 2-3 weeks then the most appropriate investment strategy for generating alpha returns above benchmark could likely be which of the following? Choose only one appropriate option and explain your reasoning.
a. technical analysis

b. fundamental analysis

c. micro-economic industry analysis

d. geo-political risk analysis

Answer 1

(a) Enterprise value = Market capitalization + total debt - cash

Market capitalization = current stock price X number of outstanding stocks. In this case it will be 150,000,000 X 1.4 = A$210 million

Total debt in this case is A$200m

There is no cash or cash equivalent in this case.

So the Enterprise value of XYZ in this case, as per formula above, will be

A$210 + A$200 - 0 = A$410

(b) The answer is (a) technical analysis.

Technical analysis is used to forecast the direction of prices through the study of past market data, primarily price and volume. This analysis can be used to forecast the return expectation within a given day / week / month.

Fundamental analysis is the analysis of a business's financial statements; health; and competitors and markets. For any business, these parameters take at least one quarter (3 months to change)

Microeconomic analysis attempts to explain the behavior of individuals and organizations in a given economy. Similar to fundamental analysis, microeconomic analysis is possible quarterly or wider time frame

Geopolitical analysis takes into account a nation's geography and the inevitable consequences of that geography. While it is possible, rarely though, that geopolitical situation can change overnight, its analysis for a shorter time frame investment would not be helpful.

So the only appropriate option is technical analysis