Esercitazione Corporate Finance con soluzioni

THE ALGEBRA AND TO SHOW CALCULATIONS

This is an individual assignment.

Part a. Estimate Business Value Weight Unlevered beta

Storage Device 400 0.22

Electronics 600 0.33

Social Media 800 0.45

Business Value = 1800

Equity = 1200

Debt = 600

D/E ratio = 0.5

Levered beta = 1.82

Part b. Estimate Business Value Weight Unlevered Beta

Electronics 600 0.375

Social Media 1000 0.625

Business Value = 1600

Equity = 1200

Debt = 400

D/E ratio = 0.3333

Levered beta = 1.89

Country risk premium = 5%

Ke in Chinese currency = 24.34%

2. Beta and financial leverage

Beauville Inc. is a small entertainment firm operating in the US. It has 20 million shares outstanding, trading at $10 a share and $50 million in outstanding debt. The firm's only business is making movies, but it does have

$25 million as a cash balance. The firm has a regression beta (actual levered beta) based upon two years of stock returns of 1.85. The unlevered beta, corrected for cash holdings, for firms in the movie business is 1.20. The corporate tax rate is 40%.

Name: __________________ Surname:________________ Student ID: ______________________

MSc in Governo e Direzione d'Impresa

Corporate Finance

Oliviero Roggi - Alessandro Giannozzi

Problem set 1 - Risk and Return in practice

Please answer to all questions and show necessary work. The test is a take-home assignment due by 09/10/2019 at 11.59pm. REMEMBER TO INCLUDE THE ALGEBRA AND TO SHOW CALCULATIONS. THIS IS AN INDIVIDUAL ASSIGNMENT.

a. Estimate the bottom-up beta for Beauville. (3 points)

b. The firm is considering borrowing $100 million and using the proceeds, in conjunction with the cash it has on hand, to enter the entertainment software business. The unlevered beta for firms in this business is 2.0. Estimate the new company's beta

after the transaction (3 points) a. Market value of equity = 200 Firm value = 250 incorrect: -0.5 points b. Did not consider cash: Debt value = 50 Cash = 25 -1 point Operating c. Debt to Equity ratio Debt to equity ratio = 0.25 assets 225 wrong; -0.5 point Unlevered beta corrected for cash = 1.2 ! 1.2(225/250)+ 0 Unlevered beta company 1.08 (25/250) Levered beta = 1.242 ! 1.08(1+(1-.4)(.25)) ! Old debt + New debt a. Wrong weights on new b. New total debt = 150 issue businesses: -0.5 point b. Wrong debt to equity Equity = 200 ! Stays unchanged ratio: -0.5 point New Debt/Equity ratio = 150/200 = 0.75 enterprise value = 350 New unlevered beta = 1.2*(225/350)+2*(125/350) = 1.486 Movie = 225 New levered beta = 1.486*(1+ 0.6*0.75) = 2.154 Software = 125 3. Clarix Inc is a US publicly traded firm in two businesses: the entertainment business, having a market value of assets of $600 million, and the electronics, having a market value of $400 million. There are 100 million shares outstanding tradingcapital (WACC) for the company after this change in financial leverage. (3 points)

capital (considering Unlevered Beta estimated in point b.) (2 points)

Name: __________________

Surname:________________

Student ID: ______________________

MSc in Governo e Direzione d'Impresa

Corporate Finance

Oliviero Roggi - Alessandro Giannozzi

Problem set 1 - Risk and Return in practice

Please answer to all questions and show necessary work. The test is a takehome assignment due by 09/10/2019 at 11.59pm. REMEMBER TO INCLUDE THE ALGEBRA AND TO SHOW CALCULATIONS. THIS IS AN INDIVIDUAL ASSIGNMENT.

d. Starting from the levered Beta estimated in point c., estimate the cost of equity for the company in case the marginal investor will be not diversified and assuming the correlation between the stock return and the market is 0.60. (1 point) -1 for mistake in A. weights

Ke=3.5%+1.15*(5%)=9.25%

Kd = (3.5%+1.5%)*(1-0.4) =3%

WACC=9.25%*(800/800+200)+3%*(200/800+ =8%200)

Newb. New weights value Weights Unlevered beta-1p if NO

Entertainment 600 0,666 1,1 unlevered beta

Electronics 300 0,334 0,85

1. 1.1*0.66+0.85*0.33
2. New unlevered beta = 1.017
3. New Debt =200-50= 150 -1p if mistake in
4. New Equity 750 New D/E
5. New D/E ratio = 150/750 0,20 !
6. 1.017* (1+(1-.40)(.20))
7. New levered beta = 1,14
8. c. New levered beta=1.017*(1+(1-0.4)*(1.5))=1,93 -0.5 if wrong D/E or wrong cost of debt
9. New cost of equity= 3.5%+1.93(5%)=13.15% -0.5p if did not relever Unlevered Beta
10. New cost of debt = (3.5%+1.5%+3%)*(1-0.4)=4.8%
11. New WACC=13.15%*0.4+4.8%*0.60=8.14%
12. d. Total beta = 1.93/06=3.22
13. Ke=3.5%+3.22(5%)=19.6%
14. 4. You have been asked to assess the impact of a proposed acquisition on the beta of a firm and have been providedthe following information on the two firms involved in the deal:
15. The riskfree rate is 4% and the equity risk premium is 6%.
16. Name: __________________ Surname:________________ Student ID: ______________________
17. MSc in Governo e Direzione d’Impresa
18. Corporate Finance
19. Oliviero Roggi - Alessandro Giannozzi
20. Problem set 1 – Risk and Return in practice
21. Please answer to all questions and show necessary work.

The test is a takehome assignment due by 09/10/2019 at 11.59pm. REMEMBER TO INCLUDE THE ALGEBRA AND TO SHOW CALCULATIONS. THIS IS AN INDIVIDUAL ASSIGNMENT.

a. Estimate the unlevered beta of the combined firm. (3 points)

b. Now assume that Trident plans to retire all of Achilles’ debt and that it will be able to buy Achilles’s equity at the current market price. If Trident would like to have a levered beta of 1.35 for the combined firm after the transaction, estimate how much new debt it will need to raise to finish this acquisition. (2 points)

c. Finally, assume that the bond rating for the combined firm will drop to A+ after the transaction, with a default spread of 1.5%, estimate the cost of capital for the combined firm after the merger.

Problem 1 Achilles Trident (acquirer) (Target)

Levered Beta 1,2 1,5

Tax rate 40% 40%

Market value of equity 12000 6000

Book value of equity 8000 8000

Market & Book value of debt 3000 4000 ! Used book value instead=1.2/ =1.5/ of market:

-1(1+0.6*(3000/12000)= (1+0.6*(4000/6000))=a. Unlevered beta 1,04 1,07 pointWrongweights oncompanies: -1Value of the firm = 15000 10000 pointWeights of the Math errors:firms = 60,00% 40,00% -0.5 pointUnlevered beta forthe combined firm =1.04*0.6+1.07*0.4= 1,0546b.Levered beta aftertransaction = 1,35 ! Kept equityvalue fixed; -1To compute D/E ratio point1.05 ( 1+ (1-.4)* D/E) Math errors:= 1.35 -0.5 point eachSolving for the D/Eratio ! You cannot keep equityvalue fixed while youDebt to equity = 46,67% solve for debt.Value of combined Instead, you have tofirm estimate the value of the=12000+3000+6000+400 $25.000,00 combined firm0=Debt in combined and take the proportionfirm =(0.4667/ $7.955,23 that is debt.(1+0.4667))*25000Debt in existing firms= $3.000,00New debt for deal = $4.955,23c.Name: __________________ Surname:________________ Student ID: ______________________MSc in Governo e Direzione d’ImpresaCorporate FinanceOliviero Roggi - Alessandro GiannozziProblem set 1 –

Risk and Return in practice

Please answer to all questions and show necessary work. The test is a takehome assignment due by 09/10/2019 at 11.59pm. REMEMBER TO INCLUDETHE ALGEBRA AND TO SHOW CALCULATIONS. THIS IS AN INDIVIDUALASSIGNMENT.

Cost of equity = 12.1% * (4% + 1.35 * 6%)

Cost of debt = (4% + 1.5%) * 0.6 = 3.3%

Debt to capital ratio = 7955.23 / 25000 = 31.821%

Cost of capital = 12.1% * (1 - 0.3182) + 3.3% * (0.3182) = 9.30%

5. Clarus Corp is a company that operates in two businesses, steel and technology, and in two countries, the US and Brazil. The table below summarizes the revenues by business and by country (in millions):

	US	Brazil	Total
Steel	$800.00	$400.00	$1,200.00
Technology	$600.00	$300.00	$900.00
Total	$1,400.00	$700.00

You have estimated unlevered betas of 0.90 for steel and 1.20 for technology and equity risk premiums of 6% for the US and 9% for Brazil. The US Treasury bond rate is 3% and the Brazilian $ denominated bond rate is 5%. Clarus Corp has 315 million shares, trading at $10/share, no debt.

outstanding and no cash balance. The corporate marginal tax rate is 40%.

a. If you assume that market value is 1.5 times revenues in both businesses, estimate the US$ cost of capital for Clarus. (2 points)

b. Now assume that Clarus plans to borrow $1.2 billion at 5% (pre-tax cost of debt) to pay a special dividend of $450 million and to reinvest the rest ($750 million) in its technology business in Brazil. Estimate the cost of capital for the company in US$ after the debt issue and expansion. (4 points)

Part a

For beta Unlevered 1. Wrong risk free rate: -1/2 point

Value Weight beta 2. Used revenue weights on beta: -1/2 point

Steel $1.800,00 57,14% 0,9 3. Wrong ERP: -1/2 point

Technology $1.350,00 42,86% 1,2 4. Math errors: -1/2 point

$3.150,00 1,02857

For ERP Value Weight ERP

US $2.100,00 66,67% 6%

Brazil $1.050,00 33,33% 9%

$3.150,00 7,00%

Name: __________________ Surname:________________ Student ID: ______________________

MSc in Governo e Direzione d'Impresa

Corporate Finance

Oliviero Roggi -

Alessandro Giannozzi

Problem set 1 – Risk and Return in practice

Please answer to all questions and show necessary work. The test is a takehome assignment due by 09/10/2019 at 11.59pm. REMEMBER TO INCLUDETHE ALGEBRA AND TO SHOW CALCULATIONS. THIS IS AN INDIVIDUALASSIGNMENT.

6%*0.6667+9%*0.3