Analytical Methods for Lawyers

Textbook: Jackson Kaplow, Shavell, Viscusi & Cope, ANALYTICAL METHODS FOR LAWYERS  (Foundation Press 2d ed. 2010)

Supplement: To be distributed in class

Key to Assignments:
PAGES  - Study cited pages in text book, Analytical Methods for Lawyers. Be sure you can duplicate any example given in text.

ASSIGNMENT FOR FIRST CLASS

SUPP 1-2, (write out answers to problems)  (Supp 1-2 is reproduced below)

PAGES v-xxii, 1-14, 21-24

SUPP 3:  Simple Settlement Problem (SUPP 3 is reproduced below)

Turn in a copy of your work at the beginning of class.

SUPP 1-2:

            There are two basic ways of determining whether a stock is a good buy at the prevailing market price.  One is called fundamental analysis; the other is called technical analysis.

            Fundamental analysis is based on the principal that underlies most of the valuation questions we will tackle during this course, namely, that the value of an asset is determined by the financial returns expected from it over the life of the asset.  For a stock, this means the dividends that will be received over the life of the company. 

Problem A: Amalgamated Edison Company is a utility company.  Its rates are set by the Public Utilities commission. The commission sets its rates so that Amalgamated always earns $3 per share.  Every year, Amalgamated pays $3 per share in dividends.  Always has, always will.  Savings accounts are paying 6% per annum interest.

(1) How much would you have to put into a savings account to earn $3 a year in interest? (In case you’ve forgotten the math involved, divide $3 by .06.) 

(2) What would you pay for a share of Amalgamated Edison?

In the real world there are some factors that make the valuation of utility stocks more complex, but these are relatively small adjustments.  The kind of calculation you just did will give you a ballpark idea of what a utility stock should be selling for. 

Problem B: On the day this problem was written, Clayton Homes was selling for $18 a share.  Clayton Homes (which is now owned by Warren Buffett’s company) was then paying dividends of eight cents per share.  During the preceding fiscal year, Clayton Homes had earnings of $1.10 a share.  (Earnings per share is the total earnings of the company divided by the number of shares outstanding.)

(1) How much would you have to put into a savings account at 6% to get eight cents a year?

(2) Why would a person pay $18 for Clayton Homes if they can get eight cents a year with so much smaller an investment?

(3) Why would Clayton Homes pay a tiny fraction of its earnings in dividends while Amalgamated Edison pays all of them?

(4) Stock market investors are quite concerned with the price-earnings ratio or P/E of a stock.  The P/E is the stock price divided by the earnings per share.   What is the P/E of Clayton Homes?  What is the P/E of Amalgamated Edison? (Assume Amalgamated Edison is selling for $50 a share.)

(5) Which is the better buy, Amalgamated Edison or Clayton Homes?

SUPP 3:

Decision Analysis for Lawyers: Simple Settlement Problem

You are an associate working with Bill, a senior partner, defending a lawsuit for Imperial

Mining & Petroleum (IMP). You are at a meeting with Sheila, IMP’s in-house counsel, to discuss Paula Plaintiff’s settlement demand, which is a “nonnegotiable” $1.1 million. Bill suggests that the demand should not be accepted. Why? First of all, the plaintiff has only a 50-50 chance of prevailing on liability. Second, if she prevails, her damages are only $1 million. Trial costs would only be $50,000. Thus, he concludes, the $1.1 million request is ridiculous. Sheila asks if there is any more serious downside to rejecting the demand. Bill suggests that there is a slight chance — only 10% — that a jury would award punitive damages, for a total recovery (compensatory plus punitive damages) of $25 million, but, he continues, this is indeed a remote possibility, and, moreover, it must be downplayed in the light of the fact that the plaintiff has only a 50% chance of prevailing on liability in the first place. How might you contribute to this conversation?