Management Engineering - Finance Lab + Corporate FInance

Full exam

Exercise 1 TenderLovers (TL) is an unlevered company. The market value of the assets is equal to € 58 million. The equity capital is divided into 17 million shares. The average annual operating margin of the company (revenues net of cash costs) is equal to € 11 million. Assuming that there are no taxes on corporate income, compute: 1. The expected earning per share (EPS) 2. The expected price of the TL shares on the market 3. The expected profitability for shareholders Now TL is willing to restructure the composition of liabilities. Therefore an extraordinary dividend is paid now to shareholders (total amount of cash distributed € 5 million) and debt is raised for the same amount (€ 5 million). The annual interest rate on debt is equal to 8%. Compute (assuming that the ordinary dividend related to the annual profits has also just been paid now): 4. The new expected earning per share (EPS) 5. The new price of the TL shares on the market 6. The new expected profitability for shareholders (show that Proposition II by Modigliani and Miller is true) 7. Find out if (and eventually how) TL shareholders could have obtained the expected profitability computed in question 6. in the case that the company did not pay the extraordinary dividend and did not raise debt (build a replicating portfolio) Exercise 2 The following bonds are traded on the market: - Kisses (Ks): maturity 14 months, annual coupon 1.2%, may be considered risk-free; - Hugs (Hs): maturity 8 months, zero coupon bond, may be considered risk-free; - BonJours (BJs): maturity 14 months, annual coupon 1.8% (payment each semester), risky, rating BBB; Given the information displayed in the following, compute: 1. The theoretical equilibrium price of the three bonds (dirty price and clean price) 2. The accrual, as at today 3. The yield to maturity of the three bonds (considering the theoretical price) 4. The duration of the three bonds 5. The volatility of the price of the three bonds The rating agency suddenly upgrades the rating of the BJs bond to A. Compute: 6. The new expected price of the BJs bond on the market 7. The new expected volatility and explain why it is larger (or lower) than before Term structure of interest rates (risk-free) Requested spread for rating classes AAA - AA 0.2% A 0.5% BBB 0.9% BB 1.5% B 1.8% CCC 2.5% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Months Exercise 3 Valentine shares are traded on the exchange. The price today is equal to € 3.57. The annual cost of capital estimated by shareholders is 14% while the risk free rate is equal to 1%. The equity capital is divided into 100 million shares. The consensus on the market is as follows: Year 1 Year 2 Year 3 Following Years Earnings € 40 million € 35 million € 47 million Average growth rate from year 3 = g Payout ratio 85% 90% 80% 75% 1 . Estimate the dividend per share for the next 3 years 2. Estimate the long term growth rate g expected by the market 3. Compute the present value of growth opportunity (PVGO) for the share: is it a value stock or a growth stock? 4. Assuming that in the long run (from time 4) the return on equity ROE is constant, compute its value 5. Compute the value of the forward contract, according to which we sell the share at time 6 months at the deliveryprice equal to € 4 6. Compute the value of the same forward contract, but with time to delivery 15 months Academic year 2016-2017 The test must be completed in 120 minutes. Write immediately surname and name on papers provided by the staff. During the test you cannot read personal notes or books. If – to your opinion - the text is not clear, or is ambiguous, you can introduce proper assumptions. Corporate Finance (Prof. G. Giudici) Written test – February 14th 2017 0,9% 0,8% 0,7% 0,6% 0,5% 0,4% 0,3% 0,2% 0,1%