Management Engineering - Finance Lab + Corporate FInance

Second partial exam

Exercise 1 Snapfat just raised money on the market and is planning to invest into a new business unit. The business plan highlights these numbers: - Initial investment in new capital expenditures: € 20 million (of which € 4 million for a technical plant) - Expected cash flows (gross of taxes on corporate income): € 3 million (year 1), € 6 million (year 2), € 10 million (year 3), € 14 million (year 4), € 6 million (year 5) - Cost of capital (unlevered) k*: 12% - Tax rate to be applied on cash flows: 22% Compute the net present value of the project under the following financing options: 1. The project is financed with the cash raised 2. The project is financed partially with cash and partially with a new equity issue (the costs for the issue are equal to € 0.5 million, paid immediately, and are deductible from the taxable income) 3. The project is financed partially with cash and partially with debt: the debt (€ 10 million) is raised at time 0 and paid back 50% at time 3, 50% at time 4 (annual interest rate on the debt: 5%) 4. The project is financed partially with cash and partially with debt: the company wants to keep the leverage (debt to value V of the project) always equal to 30% (annual interest rate on the debt: 5%) Compute in case 4. the expected profitability k E for shareholders and the debt to be raised at time 0. Compute the net present value of the project in this last case: 5. The technical plant is not bought at time 0 (avoiding to spend the money immediately) but is obtained through a leasing contract, with the payment of an annual fee (deductible from the taxable base) equal to € 1 million, from time 1 to time 5; other capital expenditures at time 0 are financed with cash available Should we expect in case 5. a profitability for shareholders k E lower, larger or equal than 12%? Why? Exercise 2 Students competing in the CFA-for-dummies contest are analyzing Bold&Gold shares. The 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 students are convinced that Bold&Gold 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 90 minutes. Write immediately surname and name on papers provided by the staff. During the test you cannot read personal notes or books. If the text is not clear, or is ambiguous, you can introduce proper assumptions. Corporate Finance (Prof. G. Giudici) Second written test – January 25th 2017