AB Investments

AB Investments Corporation (ABIC) is a Philippine holding company with

subsidiaries involved mainly in operating department stores, supermarkets, appliance
distribution and a few other retail businesses. It was established in 1958 with a initial
capitalization of P10 million. Since its inception, ABIC has expanded from a single
department store located in downtown Manila to become the largest department store and
supermarket chain in the country with branches in the major cities.
In 1985, ABIC listed its stocks at the Philippines Stock Exchange with the IPO
price at twenty times its par value of P 0.10 The past two weeks, the market price of an
ABIC share of stock hovered around P3.20 per share. Total shares outstanding is 1.5
billion, of which only 40% is traded in the market.
ABIC has several investment projects lined up for serious considerations. These
projects will increase its present annual cash income of P800 million by 50%. It is
considering issuing 500 million more shares to raise capital for the new investments. Its
financial advisers recommended that the new shares be priced at P3.50. As CFO of
ABIC, you are asked to evaluate the proposed price.
In your evaluation, you learned of the following: Interest rate of a 10 year
Treasury Bill is 6%; Interest rate for a 5 year Time Deposit with Citibank is 8%, and the
Savings Account interest rate of Metrobank is 1%. Returns of the PSE Stock Index is
12%. Betas for Real Estate Industry, Food Industry and Retail Industry are 1.50, 0.90,
and 0.75, respectively.
Questions:
1. What is the cost of equity of ABIC? (10%)
2. What are the values of the firm before and after the investment projects?(10%)
3. Is the current stock price of ABIC underpriced in the market? (10%)
4. Is the proposed price of the new shares overpricing the stock in the market?
(10%)