September62018

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Exercise 1 (10 points) Leboni’s Inc. is financed by equity capital only. The current market value of the assets is equal to € 120 million while the accounting value of the assets is equal to € 40 million. The number of shares outstanding is equal to 80 million. The annual operating margin on average is equal to € 10 million. Assuming that there is no taxation on corporate income, compute: 1. The equilibrium market price of the shares 2. The earning per share and the expected market re turn for shareholders k E Now Leboni’s managers are willing to restructure the liabilities. They buy back a part of the equity capital (amount € 20 million) and borrow debt from a bank for the same amount (annual interest rate 5%). Compute: 3. The new equilibrium market price of the shares 4. The new earning per share and the new expected m arket return for shareholders k E 5. Show that Proposition II by Modigliani and Miller predicts the previous answer After the buyback, Mr. Alby buys on the market 100 shares of the levered company. Explain to him how he could replicate the same risk/return profile by investing into shares of Leboni’s company before the buyback and borrowing/investing in the company debt. Another investor, Mr. Cachi, after the buyback buys on the market 100 shares of the levered company and invests into the company debt for an amount equal to € 20. Compute the expected market return of the investment, and try to use Proposition II by Modigliani and Miller to predict the answer. Exercise 2 (10 points) Atlantis is an investment company involved in many business areas, including the management of some toll freeways. The equity capital is made up by 600 million shares and its accounting book value today is equal to € 2 billion. Analysts estimate the following figures for…