July72017

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Exercise 1 FlightItaly is close to bankruptcy, because of the huge costs paid each day. The market estimates that the asset value of the company is equal now to € 50 million. The compa ny has € 40 million of long-run debt outstanding an d shareholders are worried. The annual margin of the company is equal to € 5 million. The interest rate on debt is equal to 5%. The number of shares outstanding is equal to 10 million. Assume that there are no taxes on the income. Compute: 1. The theoretical market value of the shares 2. The earning per share (EPS) 3. The expected profitability for shareholders Now assume that the shareholders, in order to stren gthen the financial structure, decide to raise new equity capital for the value of € 10 million and pay back the same amount of debt. 4. Find out the changes in the answers to questions 1. 2. and 3. 5. Show that Proposition II by Modigliani&Miller is tr ue 6. Find out the amount of debt that the company has to pay back (instead of € 10 million) if the desir ed profitability for shareholders was 15% Exercise 2 In order to benefit from the low level of interest rates, Trump Inc. (which cannot be considered risk- free) is issuing three bonds: A: maturity 2 years, zero coupon bond B: maturity 5 years, annual coupon equal to 1% C: maturity 10 years, annual coupon equal to 2% The rating of the company is good, and the spread t o be applied to the risk free rate in order to find out the expected re turn for investors is equal to 0.9%. Looking at the interest rate term structure (for risk free bonds), find out: 1. The equilibrium issue price of the bonds 2. The duration 3. The yield to maturity (YTM) 4. The volatility of the price (whenever interest r ates change) Propose a portfolio investing in one or more of the three bonds with a…