ExamJan15th2020

Page 1

Exercise 1 PowerTin is a company financed with equity capital and debt. The number of equity shares outstanding is equal to 6 million and the value of the shares on the market is € 9 each. The value of the debt outstanding is equal to € 16 million (annual interest rate 5%). On average, each year the operating margin of the company is equal to € 7 million. Assuming that there is no taxation on corporate income and that the net profit is distributed as a dividend each year, compute: 1. The market value of the assets and of the equity capital and the earning per share EPS 2. The expected profitability of the assets (kA) and of the equity capital (kE) 3. Show that Proposition II by M&M predicts the value of kE PowerTon is a company very similar to PowerTin: same assets, same operating margin, same employees, same cost and revenue functions. The only difference is that it is not financed with debt (but with equity capital only). 4. Find how investors on the market can ‘replicate’ a portfolio of Power Tin shares investing into Powerton shares and investing into debt (or borrowing) Just after paying a dividend, PowerTon announces to the market that starting from the following year a part of the profits each year (40%) will be ploughed back and reinvested. Assuming that the capital reinvested in the company will deliver the same percentage profitability as the other existing assets, each year, compute: 5. The new expected value of the company earnings for the next 3 years and the growth rate in the long run 6. The value of the equity capital after the announcement to the market 7. The expected value of the equity capital 12 months after the announcement (according to the information available today) Exercise 2 On the bond market the following securities are traded: - XS11:…