February142017

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Exercise 1 TenderLovers (TL) is an unlevered company. The market value of the assets is equal to € 58 million. The equity capital is divided into 17 million shares. The average annual operating margin of the company (revenues net of cash costs) is equal to € 11 million. Assuming that there are no taxes on corporate income, compute: 1. The expected earning per share (EPS) 2. The expected price of the TL shares on the market 3. The expected profitability for shareholders Now TL is willing to restructure the composition of liabilities. Therefore an extraordinary dividend is paid now to shareholders (total amount of cash distributed € 5 million) and debt is raised for the same amount (€ 5 million). The annual interest rate on debt is equal to 8%. Compute (assuming that the ordinary dividend related to the annual profits has also just been paid now): 4. The new expected earning per share (EPS) 5. The new price of the TL shares on the market 6. The new expected profitability for shareholders (show that Proposition II by Modigliani and Miller is true) 7. Find out if (and eventually how) TL shareholders could have obtained the expected profitability computed in question 6. in the case that the company did not pay the extraordinary dividend and did not raise debt (build a replicating portfolio) Exercise 2 The following bonds are traded on the market: - Kisses (Ks): maturity 14 months, annual coupon 1.2%, may be considered risk-free; - Hugs (Hs): maturity 8 months, zero coupon bond, may be considered risk-free; - BonJours (BJs): maturity 14 months, annual coupon 1.8% (payment each semester), risky, rating BBB; Given the information displayed in the following, compute: 1. The theoretical equilibrium price of the three bonds (dirty price and clean price) 2. The accrual, as at…