Homework

CY/SPWR Questions:

1. A)  What is the market value of equity for Cypress (CY)?

1. B)  What is the market value of SunPower (SPWR) owned by CY?

1. C)  What is the market value of equity for CY excluding the SPWR business implied by the current market prices?

1. D)  What is the Enterprise Value implied by the current market prices for CY excluding the SPWR business?

1. E)  What value do the current market prices assign to each dollar of revenue for CY’s business?  (i.e. what is the revenue multiple for CY excluding the value of SPWR?)

1. F)  You determine from your research of comparable businesses and CY’s historical valuation ranges that CY alone should be valued at 1.5 times its revenues.  What stock price would that imply for CY?  (This is the price CY stock actually “should” trade at in the market.  This price would include the value of SPWR in the price of CY.  Assume that SPWR’s stock price does not change in value.)

1. G)  Do you see an investment opportunity here?  If so, what?

1. H)  What circumstances could create an opportunity in a situation like this?  Why could such an opportunity exist in what some academics say is a highly efficient market?

1. I)  If you decided you wanted to own CY’s operating business, but not SPWR, how would you implement this in a portfolio?  (i.e. how many shares of each company might you buy or sell if you wanted to have the position?)

1. J)  What are the issues to keep in mind when taking a position such as this?  What could go wrong?

1. K)  If you were an analyst at a hedge fund, what would you say to your portfolio manager if she asked you to evaluate this position?  (Should you take a position?  If so, how large?  Etc.  What exactly would you say to her?)

1. L)  If your fund has $100 million in total assets under management, what size position would you recommend?

1. M)  Consider how this paired position fits with the rest of the portfolio.  Would you expect the pair’s profit or loss to be correlated with the market?

1. N)  Consider what would happen if Cypress did a stock spinoff/dividend of SunPower shares as a Class B stock which was not identical to the currently trading stock.  The currently trading SunPower Class A stock would have less voting rights, but would be otherwise identical to the Class B stock spun out from Cypress.

From a valuation point of view only, how should the Class A and Class B stock prices differ?

From a market trading point of view only, how might the Class A and Class B stock prices differ?  (Think of who owns what and how they would behave after a spinoff.)

Considering both valuation and trading behavior factors, how would you predict SunPower Class A and Class B stock prices will differ after a spinoff?  Why?