<p> Corporate Finance Final Exam 2 – Spring 2010/2011</p><p>2 hours </p><p>This exam consists of 4 problems. This is a closed book exam. You are allowed one double- sided page of notes. Calculators are permitted. Good luck!</p><p>______Print Name</p><p>______Print Number</p><p>1 Problem 1 Zé Tolo is a well known businessman and is planning a new investment project. The project will last forever and requires an acquisition of fixed assets with a value of €100,000 and that will be depreciated in 10 years. He would need to invest in Working Capital as well. He would start the project with €5,000 invested in Working Capital and he must sustain that level to support operations. For the first 4 years of the project the values for EBIT are as follows:</p><p>1 2 3 4 EBIT €6,000 €8,000 €10,000 €10,500</p><p>EBIT, net fixed assets and working capital will grow at a rate of 3% after year 4. In this industry the average debt-to-equity ratio is 2, cost of debt is 5% and levered beta is 1.25. The expected return on the market is 7%, the risk-free rate is 3% and corporate tax rate is 25%. a) What is the NPV if the initial investment is entirely financed by Tolo’s equity? b) What is the NPV if the target debt-to-equity is 1/2 and the cost of debt is equal to the cost of debt in the industry? c) What is the NPV if the project is entirely financed with a government subsidy that is 75% refundable at the end of year 4 and 25% non-refundable?</p><p>Problem 2 In the CAPM world every investor holds a mix of the world market portfolio and the risk-free asset. The world market portfolio has an expected return of 12% and a standard deviation of 25%. The risk-free asset return is 7%. a) Simone moved to the CAPM world to go to college. Her wealth is €1,000,000 and is investing €1,250,000 Euros in the world market portfolio. What is the expected return and standard deviation of Simone’s portfolio? b) Jessica, Simone’s best friend, has a quadratic utility function and risk aversion coefficient of 2. What is the optimal portfolio expected return and standard deviation for her? c) Warner Co. common stock has a correlation coefficient of 0.5 with the world market portfolio and a standard deviation of 40%. What is the beta and expected return of Warner Co? d) What is the stock price of Warner if the company is paying a dividend per share of €2 tomorrow and dividends will grow forever at 3%?</p><p>Problem 3 Consider the following term structure of interest rates (effective annual rates):</p><p>Spot rate 1 month 2.0% Spot rate 7 months 2.4%</p><p>2 A coupon bond with a coupon rate of 6% (semi-annual frequency), face value of 100, and that matures in 13 months has a quoted price of 103.52. A zero coupon bond with 18 months to maturity is being traded at 95.4% of its face value. a) What is the spot rate for 18-month maturity? b) What is the forward rate from month 1 to months 7? c) What is the spot rate for 13-month maturity?</p><p>Problem 4 Pingu Ltd. is a very successful company in the mortar industry. The company has 2,500,000 shares outstanding and has on its balance sheet 75,000 perpetual bonds with a €1,000 face value and 9.5% annual coupon rate. The company’s cost of debt and cost of equity are 7% and 15%, respectively. The corporate tax rate is 25%. The company’s CFO expects that the company is able to generate the following unlevered free cash flows in perpetuity:</p><p>Recession (40%) Expansion (60%) Free Cash Flow €15 million €60 million a) What is the market value of company, value of the equity and value of debt? b) What is the weighted average cost of capital?</p><p>Pingu Ltd. has now the opportunity to invest in a new major project. To finance the project the company will issue shares in the market (only available to new shareholders). The discount rate for the project is 15%. The project has an initial investment of €120 million and will generate incremental unlevered free cash flows in perpetuity as follows:</p><p>Recession (40%) Expansion (60%) Free Cash Flow €12 million €30 million c) How many shares will be sold to new shareholders? d) Are the old shareholders better off with the project? Why?</p><p>3</p>