July1st2019

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Exercise 1 The market value of the assets of Hook&Cook (H&C) is equal to € 145 million. The market value of the outstanding debt is equal to € 17 million (the annual interest rate is equal to 7% and the debt is always constant). The equity capital is made up by 28 million shares. The average annual operating income (difference between revenues and operating cash costs) is equal to € 14.8 million. The tax rate on corporate income is equal to 33%. All the company profits are paid to shareholders. 1. Compute the market value of the equity capital and the equilibrium price of each share 2. Compute the annual net profit and the earning per share 3. Compute the expected return for shareholders 4. Compute the annual saving on taxes that Livestock Inc. obtains through debt financing Now, assume that Livestock Inc. changes its financial structure, increasing debt and reducing the equity capital, so that the assets remain unchanged. In detail new debt is raised (additional € 8 million and again the debt is kept constant in the future). 5. Compute the change in the value of the assets (list all the necessary assumptions) 6. Compute the new annual net profit 7. Compute the new expected return for shareholders: does Proposition II by Modigliani & Miller hold? Exercise 2 On the financial market we find the following bonds: - FI39G: risk-free bond, annual coupon 1.5% paid each 12 months, time to maturity 8 months, clean price 100.529 - FI24S: risk-free bond, annual coupon 1.2% paid in two parts each 6 months, time to maturity 8 months, clean price 100.333 Compute: 1. The accrued interest (accrual) and the dirty prices of the two bonds, 2. Some points of the interest rate term structure, 3. The duration of the two bonds and the estimated volatility. On the market we find also a risky…