Fuqua School of Business



HSBC’s Acquisition of KEBFinance 663: International FinanceProfessor Campbell R. Harvey DATE \@ "MMMM d, yyyy" March 2, 2014Prepared by: Alok ChakrabortyChris Donghui LeeArindam MandalHarsh SinghExhibit 1Korea Exchange Bank (KEB) Timeline (Y-axis represents share prices in KRW):Exhibit 2Korea Exchange Bank – Balance Sheet Till 2007 (Source: Capital IQ)Exhibit 3Korea Exchange Bank – Income Statement Till 2007 (Source: Capital IQ)Exhibit 4Korea Exchange Bank – Cash Flow Statement Till 2007 (Source: Capital IQ)Exhibit 5.1Preparing Cost of Capital Work Sheet (Following Prof. Harvey’s guidelines)ICCRC: Institutional Investor country credit rating (0-100)Rf: US risk free rateCalculate:Anchored Cost of Equity Capital for project of average risk in country (ICCRC) = Rf + 100*(0.898-0.177*LN(ICCRC of Korea))-((Rf+100*(0.898-0.177*LN(ICCRC of US)))-(Risk Premium(US)+Rf))Country Risk Premium = Anchored Cost of Capital - Rf - Risk Premium (US) Sector Adjustment = Rf + Beta (Industry)* Risk Premium (US) - Rf - Risk Premium (US)Now we have adjust for Project Specific Risks, as per the guidelines mentioned below, and compute the Impact on Country Premium:The weights are fixed, whereas we have to input the scores based on our perception of project risk on specific criteria relative to the country risk. Here is how we calculate Impact on Country Premium:Impact on Country Premium = Country Risk Premium * Weights * ScoreProject Cost of Capital = Rf + Risk Premium (US) + Country Risk Premium + Sector Adjustment + Sum of Impact on Country PremiumsExhibit 5.2Exhibit 6Korean Banks – Price to Book Value ratios, Return on Equity, and 5 year Beta respective to markets they are listed in (Based on Aug, 2007).Source: Capital IQ (Aug, 2007) Exhibit 7Korean Banks – Price to Book Value ratios, Return on Equity, and 5 year Beta respective to markets they are listed in (Based on Aug, 2008).Source: Capital IQ (Aug, 2008) Exhibit 8Global Banks (Ex US) – Price to Book Value ratios, Return on Equity, and 5 year Beta respective to markets they are listed in (Based on Aug, 2007).Source: Capital IQ (Aug, 2007) Exhibit 9Global Banks – Price to Book Value ratios, Return on Equity, and 5 year Beta respective to markets they are listed in (Based on Aug, 2008).Source: Capital IQ (Aug, 2008) Exhibit 10.1Institutional Investor Country Credit Ratings 2007:Exhibit 10.2Institutional Investor Country Credit Ratings 2008:Exhibit 11Korea Nominal GDP (1988 – 2007)Exhibit 12CLSA Analyst projection on possibility of the deal going throughExhibit 13Lone Star and KEB Time LineExhibit 14Main controversies over “Lone Star – KEB Deal”Exhibit 15Lone Star’s Investment Activities in South Korea Note) all the figures are in Korean Won (KRW). Roughly, U$1 = KRW1,000Exhibit 16: Financial performance metrics of HSBCExhibit 17: Snapshot of HSBC’s performance ................
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