January232018

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Exercise 1 The market value of the assets held by the software company XFEX is equal to € 146 million. The compan y is financed with debt (market value € 38 million, annual intere st rate 6% - the company is willing to keep the amo unt of the debt constant in the future). The average annual operating margin (difference between revenues and operating costs) is equal to € 12 million. The corporate tax rate is equal to 25%. The equity capital is made up by 73 million shares. Compute: 1. The equilibrium price of XFEX shares on the marke t 2. The earning-per-share (EPS) 3. The expected return for shareholders 4. The asset value if the same company was unlevere d, under proper assumptions 5. The expected return for shareholders, in the unl evered case One shareholder discovers that investing into 5% of the equity of the ‘levered’ company delivers the s ame expected return as investing into 5% of the equity of the ‘unlevered’ company and borrowing € 1.425 million at the 6% interest rate. Is that true? Are the two portfolios equivalent and replicating? Finally, find out the ‘optimal’ financial structure if we assume that raising debt originates bankrupt cy costs and agency costs, equal (in € million) to 0.004*D 2 (D is the value of the total debt in € million). Exercise 2 The following bonds are traded on the market: - A: maturity 10 months, annual coupon 0.5%, may be considered risk-free; - B: maturity 12 months, annual coupon 1.5% (payment each semester), risky, rating BBB; Given the information displayed in the following, compute: 1. The theoretical equilibrium price of the two bon ds (dirty price and clean price) 2. The accrual, as at today 3. The yield to maturity of the two bonds (consider ing the theoretical price) 4. The duration of the two bonds 5. The volatility of…