Below you will find a number of questions that I want you to address in your analysis
(approximate % weighting of each question is provided in parentheses).
1. Evaluate Chrysler’s past performance. Is there evidence of mismanagement? (25%)
a. Evaluate Chrysler’s financial and operating performance between 1980-1992.
What financial and investment policies did they pursue and why? How
successful were they?
b. What should Chrysler’s capital structure look like? What payout policies
should they pursue? How does that compare with the policies pursued by
current management?
2. What is the intrinsic value of a share of Chrysler stock? How does that value compare to
the market’s valuation? (45%)
• When it comes to the capital structure assumptions, one can imagine a number of
different alternatives, for example
1. Assume that the firms debt will be kept at some constant amount D.
2. Assume that Chrysler will follow some specific borrowing and repayment
schedule for a number of years, after which the leverage policy will be kept
constant.
3. Evaluate the structure of Kerkorian’s proposed deal in detail. Does it make sense? What
risks are involved? Use the downturn of 1988-1991 to model another downturn scenario.
(30%)
Assumptions:
• Market risk premium: 6%
• Tax rate: 39%
• Deferred taxes should be added back, since it is a non-cash expense. (This is tax that
we owe, but do not presently have to pay to the IRS)
• Equity in unconsolidated subsidiaries is strictly speaking not a cash income, which
implies that it is not part of the free cash flow. The equity stake is valuable, however,
and should therefore be added to the value of the firm somehow.
If you need to make additional assumptions, please state them clearly and motivate your
choices.
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