Management Engineering - Finance Lab + Corporate FInance

Full exam

Exercise 1 FlightItaly is close to bankruptcy, because of the huge costs paid each day. The market estimates that the asset value of the company is equal now to € 50 million. The company has € 40 million of long-run debt outstanding and shareholders are worried. The annual margin of the company is equal to € 5 million. The interest rate on debt is equal to 5%. The number of shares outstanding is equal to 10 million. Assume that there are no taxes on the income. Compute: 1. The theoretical market value of the shares 2. The earning per share (EPS) 3. The expected profitability for shareholders Now assume that the shareholders, in order to strengthen the financial structure, decide to raise new equity capital for the value of € 10 million and pay back the same amount of debt. 4. Find out the changes in the answers to questions 1. 2. and 3. 5. Show that Proposition II by Modigliani&Miller is true 6. Find out the amount of debt that the company has to pay back (instead of € 10 million) if the desired profitability for shareholders was 15% Exercise 2 In order to benefit from the low level of interest rates, Trump Inc. (which cannot be considered risk-free) is issuing three bonds: A: maturity 2 years, zero coupon bond B: maturity 5 years, annual coupon equal to 1% C: maturity 10 years, annual coupon equal to 2% The rating of the company is good, and the spread to be applied to the risk free rate in order to find out the expected return for investors is equal to 0.9%. Looking at the interest rate term structure (for risk free bonds), find out: 1. The equilibrium issue price of the bonds 2. The duration 3. The yield to maturity (YTM) 4. The volatility of the price (whenever interest rates change) Propose a portfolio investing in one or more of the three bonds with a YTM equal to 0.55% Exercise 3 The leading fashion company Vapianino SpA is planning to invest and buy some retail shops in Japan. The initial investment is equal to € 600,000. Expected cash flows, gross of taxes, are as follows: Time 1 = € 40,000 Time 2 = € 250,000 Time 3 € 400,000 Time 4 = € 600,000 Time 5 = € 500,000 The corporate tax rate is equal to 30%. The cost of capital ‘unlevered’ k* is equal to 15%. Compute: 1. The net present value of the project in the ‘unlevered’ case 2. The net present value of the project if it is financed with debt (annual interest rate equal to 6%); the amount borrowed at time 0 is equal to € 250,000; each year € 50,000 is paid back 3. The net present value of the project if it is financed with debt (annual interest rate equal to 6%); the ratio between debt and value of the project is kept constant at 50% 4. The expected profitability for shareholders in case 3. The Japanese yen is devaluating against the Euro and this hurts the expected profitability. What kind of derivative contract(s) might be used by the company to hedge against the risk of the foreign exchange rate? 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 – July 7th 2017 1 2 3 4 5 6 7 8 9 10 years 0.6% 0.5% 0.4% 0.3% 0.2% 0.1% 0%