You Are a Research Analyst for a Major Investment Bank

Essay

You are a research analyst for a major investment bank and have been asked to evaluate three candidates for a takeover and recommend one.You estimate the risk-free rate to be 5% and the market risk premium to be 8%.You also have the following data:
$\begin{array}{llll}&\underline{\text {MTT Corp.}}&\underline{\text {NOR Corp.}}&\underline{\text {TECH Corp.}}\\\text { current price } & \$ 20 & \$ 25 & \$ 200 \\\text { number shares } & 100,000 & 80,000 & 10,000 \\\text { current EPS } & \$ 4 & \$ 2.50 & \$ 5 \\\text { payout ratio } & 50 \% & 20 \% & 10 \% \\\text { (First 5 yrs) } & & & \\\text { beta } & 1.0 & 1.25 & 1.5 \\\text { growth rate: } & & & \\\text { first 5 yrs. } & 5 \% & 10 \% & 50 \% \\\text { beyond 5 yrs. } & 5 \% & 0 & 10 \% \\\text { D/E ratio } & 0 & & 0 \\\text { ROA: } & 10 \% & 25 \% & 55.56 \% \\\text { first 5 yrs. } & 10 \% & 20 \% & 25 \% \\\text { beyond 5 yrs. } & 10 \% &\end{array}$

Which firm is the best candidate for a takeover?