Corporate Finance
CORPORATE FINANCE
Master in Banking and Finance
2012
FINAL EXAM A. PROBLEMS (20 points each problem) 1. FAGE Manufacturing is currently an all-equity firm with 20 million shares outstanding and a stock price of $7.50 per share. Although investors currently expect FAGE to remain an all-equity firm, the company plans to announce that it will borrow $50 million and use the funds to repurchase shares. FAGE will pay interest only on this debt, and it has no further plans to increase or decrease the amount of debt. FAGE is subject to a 40% corporate tax rate. a) What is the market value of FAGE’s existing assets before the announcement? b) What is the market value of FAGE’s assets (including any tax shields) just after the debt is issued, but before the shares are repurchased? c) What is FAGE’s share price just before the share repurchase? How many shares will FAGE repurchase? d) What are FAGE’s market value balance sheet and share price after the share repurchase?
2. EPSILON company has assets in place (with idiosyncratic risk) worth:
State | Probability | Assets | Good | 1/2 | 100 | Bad | 1/2 | 10 |
In addition, EPSILON has $15M in cash. This money can be either paid out as a dividend or invested in a project which requires an investment outlay today of $15M, and next year it provides a safe cash inflow of $22M (assume a risk free rate of 10%). Please explain your answers and the economic intuition). a) Should EPSILON undertake the project? b) Now assume EPSILON has debt with face value $35M due next year. Will EPSILON’s shareholders fund the project? c) Can the funds to finance the project be obtained from new equity or from new debt? d) Suppose after restructuring negotiations creditors reduce the face value of debt to $24M conditionally on the firm raising new equity to fund the project. Will the company go ahead with the project?
3. You are considering the acquisition of DELTA Enterprises.
Master in Banking and Finance
2012
FINAL EXAM A. PROBLEMS (20 points each problem) 1. FAGE Manufacturing is currently an all-equity firm with 20 million shares outstanding and a stock price of $7.50 per share. Although investors currently expect FAGE to remain an all-equity firm, the company plans to announce that it will borrow $50 million and use the funds to repurchase shares. FAGE will pay interest only on this debt, and it has no further plans to increase or decrease the amount of debt. FAGE is subject to a 40% corporate tax rate. a) What is the market value of FAGE’s existing assets before the announcement? b) What is the market value of FAGE’s assets (including any tax shields) just after the debt is issued, but before the shares are repurchased? c) What is FAGE’s share price just before the share repurchase? How many shares will FAGE repurchase? d) What are FAGE’s market value balance sheet and share price after the share repurchase?
2. EPSILON company has assets in place (with idiosyncratic risk) worth:
State | Probability | Assets | Good | 1/2 | 100 | Bad | 1/2 | 10 |
In addition, EPSILON has $15M in cash. This money can be either paid out as a dividend or invested in a project which requires an investment outlay today of $15M, and next year it provides a safe cash inflow of $22M (assume a risk free rate of 10%). Please explain your answers and the economic intuition). a) Should EPSILON undertake the project? b) Now assume EPSILON has debt with face value $35M due next year. Will EPSILON’s shareholders fund the project? c) Can the funds to finance the project be obtained from new equity or from new debt? d) Suppose after restructuring negotiations creditors reduce the face value of debt to $24M conditionally on the firm raising new equity to fund the project. Will the company go ahead with the project?
3. You are considering the acquisition of DELTA Enterprises.