Management Engineering - Finance Lab + Corporate FInance

Full exam

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 mad e up by 28 mi llion 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 val ue 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. Com pute 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 bond: - IT88W: annual coupon 2.2 % paid each 12 months, time to maturity 8 months, clean price 99.995 . Compute: 4. The accrued interest and the dirty price, 5. The yield to maturity, 6. The average spread requested by the market, on the bond return. Exercise 3 Wuber is going to be listed on the Stock Exchange in a few months. Financial analysts agree on the following expectations about the company: Year 1 Year 2 Year 3 Year 4 and thereafter Return on equity (ROE) ROE 1=16% ROE 2=14% ROE 3=12% ROE LT=10% Payout ratio (PR) PR 1=0% PR 2=50% PR 3=70% PR LT=80% The return on equity is the ratio between the net profit during the year and the book value of the equity capital at the beginning of the year. The company is not levered and for sake of simplicity there are no taxes on corporate income. The equity capital is made up by 100 million shares and the book value per shares is today 0.7 €. The annual cost of equity capital k E is equal to 10% while the risk free rate on the market is equal to 1%. Compute: 1. The expected dividends in the short run (and the growth rate in the long run) 2. The theoretical market value of the shares 3. The present value of growth opportunity (PVGO) 4. The theoretical value of a European call option on the shares, strike price 1 €, maturity 25 months (assume the annual volatility of the share return is 14%) 5. The theoretical value of the corresponding European put option On the market, comparable listed companies trade on average at 9 times the earnings (P/E=9) and 2 times the equity book value (M/B=2). Any comment about this? Academic year 20 18-201 9 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 1st 20 19