Firstmidtermtest

Pagina 1

Exercise 1 Clinton&Trump Industries (C&T) is a company selling caterpillars. Analysts estimate that the market valu e of the assets in place is equal to $ 800 million. The company rai sed debt and the outstanding value of the debt is e qual to $ 200 million. The equity capital is made up by 80 millio n shares. The annual cost of debt is equal to 3%. T he average annual operating income (i.e. the difference between reven ues and operating costs) expected for the future is equal to $ 100 million. The tax rate on corporate gross profits is equal to 25%. 1) Compute the theoretical price of the shares on t he market. 2) Compute the expected earning per shares (EPS). 3) Compute the expected profitability for sharehold ers k E. 4) Compute the likely value of the assets of the co mpany if it was financed only with equity capital. A new government is elected and a number of public i nvestments in civil works (walls) are expected. Thi s raises investors’ optimism and new expectations are as follows: (i) increase of the asset value up to the total value of $ 1 billion, and (ii) increase of the expected annual operating income up to the total value of $ 125 million. 5) Compute the new theoretical price of the shares on the market. 6) Compute the new expected earning per shares (EPS). 7) Compute the new expected profitability for share holders k E. After the election results, the company takes the op portunity to raise more money borrowing new debt an d buying back shares on the market (not to modify the composition of the assets). 8) Compute the amount of debt to be raised in order to deliver an expected profitability to shareholde rs kE in the future equal to 12% A bank proposes to C&T to borrow debt at cheaper conditions (i.e. annual rate 2.95% with interests paid in advance…