February132018

Pagina 1

Exercise 1 Industrial Inc. is an unlevered company. The market value of the assets today is equal to € 360 millio n, and there is no financial debt. The equity capital is divided into 20 million shares. The annual operating margin on a verage is equal to € 40 million. Assuming that there is no taxation on corporate income, compute: 1. The expected earning per share (EPS) 2. The expected profitability for shareholders 3. The theoretical price of the shares on the marke t The company announces a new investment. The net pre sent value of the project NPV is equal to € 4 million ; the initial investment required I is equal to € 10 million (it’ s the cash necessary now to buy new assets) and is totally financed with a new equity issuance. The risk of the project is t he same as the average risk of the other existing assets. Again, there is no taxation on corporate income. 4. Compute the new market value of the assets after the equity issuance and the investment 5. Compute the expected increase in the annual oper ating margin caused by the new investment (assuming that such increase is permanent, forever) 6. Find out the changes in the expected profitabili ty for shareholders 7. Find out the changes in the operating margin, in the share price and in the expected profitability for shareholders if the initial investment of the project is totally financed with a debt issuance (on the market there is a unique annual interest rate on debt, equal to 5% and the debt is kept constant in the future, forever) 8. Show that Proposition II by Modigliani & Miller pre dicts the change in the expected profitability for shareholders Exercise 2 Stark Enterprises released its industrial plan for the future, and analysts expect the following figures for the company: Year 1 Year 2 Year 3 Year 4…