January 24th 2022

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Exercise 1 MagPie (MP) is a company financed with equity capital only. There are 30 million shares outstanding and the price of each share on the market is equal to € 2. The annual operating margin of the company on average is equal to € 10 million and the corporate tax rate is equal to 25%. Compute: 1) The market value of the company assets 2) The annual EPS (earning per share) and the return kE offered to shareholders Skata (SK) is another company very similar to MP: same revenues, same operating costs, same physical assets. The only differences are: (a) the company is financed also with debt (€ 10 million, annual interest rate 3%, the amount is kept constant in the future) and (b) the number of shares outstanding is equal to 50 million. Compute: 3) The market value of SK assets (properly specify the assumptions) and the market value of the equity capital 4) The equilibrium market price of the shares, the annual EPS and the return k E offered to shareholders 5) The weighted average cost of capital (WACC) for SK company 6) The optimal financial structure of company SK and the equity value if we consider that there are costs of financial distress and agency costs related to debt, in € million, equal in present value to 0.004*D3 where D is the value of the debt in € million (e.g. if the debt is € 2 million the costs are € 0.032 million) Exercise 2 Elster Inc. wants to raise money on the market. The company is rated BBB by the top rating agencies. The interest rate structure and the average credit spreads are reported below. Two different types of bonds will be issued on the market: A) Annual coupon 2%, paid annually, maturity 4 years B) Annual coupon 1.5%, paid annually, maturity 3 years Term structure of interest rates (risk-free) Requested spread for rating notches…