July 11th 2022

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Exercise 1 (10,5 points) The equity capital of Melting company is composed by 40 million shares. The market value of the company assets is equal to € 200 million, while the outstanding financial debt is valued € 40 million (annual interest rate on debt equal to 6%). Expectations about the operating margin (revenues net of cash costs) in the short-run are as follows: year 1 = € 20 million; year 2 = € 25 million; year 3 = € 23 million. All the profits will be distributed as dividends. In the following years (after year 3), we expect that net profits will grow up by 5% each year, compared to the year before. The tax rate on corporate income is equal to 27%. Determine: 1) The market value of the shares 2) The expected net profits in the next 4 years (assuming that the value of debt will be constant) 3) The cost of capital for shareholders, implicit in the market valuation (also assuming that the value of debt will be constant) 4) The value of the company if the existing assets were financed only with equity capital (introduce detailed proper assumptions) 5) The ‘unlevered’ cost of capital for the company, if it was financed only with equity capital Suddenly, the management announces that the financial strategies of the c ompany will change: indeed, the value of the debt will be ‘adjusted (starting from time 1) each year, with the objective to keep constant the ratio L between value of the debt and value of the assets. Should we expect a change in the assets value? A positive or negative variation? Why? Exercise 2 (10 points) Financial analysts are studying two companies, selling electric cars. Their debt is very low. The following table summarizes expectations about the two companies: Company Dividend per share just distributed Expected future profitability ROE (net profit…