February3rd2021

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Exercise 1 Itsasin Inc. is a company financed with equity capital only. The number of shares outstanding is equal to 40 million and the share price on the market is equal to € 3. The annual operating margin on average is equal to € 20 million and every year all the profits are paid as dividends to shareholders. Assume that there is no taxation on corporate income. Compute: 1) The market value of the company assets 2) The earning-per-share (EPS) 3) The expected profitability for shareholders Gowest Ltd is a company absolutely s imilar to Itsasin (same assets, same products, same technology , same dividend policy) but is financed also with debt (the amount of the debt is € 30 million, the annual interest rate on debt is 5%). Compute: 4) The market value of the company assets (introducing explicitly the needed assumptions) 5) The market value of the equity capital 6) The expected profitability for shareholders (check that Proposition II by Modigliani and Miller is right) Now imagine that just after paying a dividend the managers of Itsasin announce that starting from the end of the next 12 months the company will reinvest every year 40% of the annual profits to finance interesting business opportunities. Assuming that the profitability of the assets will not change, compute: 7) The change in the value of the equity capital at the announcement 8) The earning-per.share and the dividends in the next 3 years 9) The growth rate of the dividends in the future Exercise 2 On the stock exchange sovereign bonds issued by two governments (A and B) are traded. Bonds issued by country A are considered risk-free, while bonds issued by country B are considered risky, because of the significant stock of public debt. In particular, consider the following bonds, that have the same par…