Management Engineering - Finance Lab + Corporate FInance

Full exam

Exercise 1 The following bonds are traded on the market: - Bond Blue; it is considered risk-free; maturity 15 months, annual coupon 0.5%, clean price 100.751 - Bond Emerald; it is considered risk-free as well; maturity 3 months; zero coupon, price 100.125 - Bond Yellow: it is considered risky; maturity 15 months, annual coupon 2%, clean price 101.110 - Bond Red: it is considered very risky; maturity 15 months, annual coupon 5%, clean price 103.155 Compute: 1. The accrual and dirty price, where possible 2. Some points of the interest rate term structure 3. The yield to maturity (YTM) and the duration of all the bonds 4. The spread requested by the market on the yield, for the two risky bonds Exercise 2 Alberto is planning to open a workshop in Sicily to produce pistachio cream. The initial investments required to build the manufacturing plant is equal to € 450,000. The following cash flows, gross of taxes, are expected in the future: first year € 80,000; second year € 120,000; third year € 480,000; fourth year € 280,000. The tax rate to be applied to cash flows is equal to 26%. The cost of capital (unlevered) is equal to 12%. Alberto is considering four different opportunities to finance the project: 1. Equity capital only 2. Equity and debt (loan € 200,000 to be paid back in 4 years, i.e. € 50,000 must be paid back each year; annual interest rate 5%) 3. Equity and debt (loan with leverage L=debt to value of the project equal to 60% each year; annual interest rate 6%) 4. Equity and grant from the European Union; € 100,000 are granted as a contribution (not to be paid back) and € 100,000 are granted as a subsidized loan (must be paid back at time 4 but no interests are paid) Compute the net present value of the project under the four alternatives. Compute the expected profitability for shareholders under the four alternatives. Exercise 3 University professors in Italy are on strike! Their wage is on average 50% compared to their colleagues in EU countries, and (unique case in the public administration) it has not changed in the last 20 years. Therefore they all go to Rome and ask to the Minister if she is able to solve this exercise. A company just paid the dividend (€ 0.9 per share) and closed its annual account. The book value of the equity capital is now € 230 million, divided into 36 million shares. The company will pay to shareholders each year 80% of the profits. The profitability (return on equity ROE, i.e. annual net profit on equity book value at the beginning of the year) will be equal to 18% in the next 12 months, 15% in the subsequent year, 10% thereafter. Assuming that the annual cost of equity capital k is equal to 9% and the risk free annual interest rate is equal to 0.5%: 1. Find the expected earning per share (EPS) and dividend per share for the next 5 years 2. Compute the theoretical target price of the shares, now 3. Compute the present value of growth opportunity (PVGO) 4. Explain why the value of the PVGO is positive (or negative) Now assume that the share price on the market is equal to € 9.86: 5. Assuming that all other expectations are confirmed, compute the long-term ROE expected by the market from time 3 (instead of 10%) 6. Compute the value of a forward contract on the share with delivery price 8 € and delivery date 8 months 7. Compute the value of the forward contract with delivery price 8 € and delivery date 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 – September 7 th 2017