1. The book value of a firm in 31/12/2019 was 1.000 M euros. It is forecasted that...

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Question:

1. The book value of a firm in 31/12/2019 was 1.000 M euros. It is forecasted that ROE

during 2020 will be 20%. If the payout ratio of the company is 40% and it is expected

that it will remain at this value in the next few years, what is the expected value of the

book value of equity in 31/12/2020?

2. In the shareholders' meeting of BETA S.A. 5 board members must be elected. There are

200,000 shares issued. How many shares do you need to have to secure that you are

able to elect one board member if:

a) the company has a majority voting rule.

b) the company has a cumulative voting rule.

3. ZETA Limited has common shares issued in the amount of 2.000.000.000 (face value)

and Retained earnings of 4.000.000.000 . The face value of the common shares is 500

and the total number of shares issued is 4.000.000. DISNEY wants to raise new equity in

500.000.000 issuing 1.000.000 new shares. Determine:

a) The value of a share before and after the issue.

b) Profits or losses of a new shareholder per share.

c) Profits or losses of an old shareholder per share.

d) DISNEY does not want to hurt previous shareholders with the new issue of shares,

how can it achieve this objective and still issue new shares? Determine the theoretical

value of a subscription right and show that with a right issue the old shareholders are

not harmed.

4. The equity and debt of a firm are valued at 50 and 30 million dollars respectively. Investors require a return of 16% on equity and 8% on debt.

a) If the firm issues an additional 10 million dollars in common shares and uses it to

retire debt, what will happen to the expected return on equity? (Assume that M&M

assumptions hold and the return on debt does not change)b) If the risk of debt decreased, would your answer underestimate or overestimate the

expected return on equity?

5. A firm is all-equity financed and it has an expected EBIT of 25,000 (the EBIT is expected

to remain at this level perpetually). The corporate tax rate is 35% and the expected

return on assets is 10%.

a) What is the market value of this firm?b) Consider that the firm issues 100,000 in debt that pay annual interests at a rate of

6% and uses these funds to buy back shares. Debt is perpetual and has a nominal

value of 50,000. What will happen with the value of the firm?c) Recalculate the value of the firm considering that issuing debt increases the

probability of default. The levered firm has a 30% probability of bankruptcy in three

years. If it goes bankrupt, it will incur in bankruptcy costs of 200,000. Consider a

discount rate of 10%. Should the firm issue debt?

6. Consider an all-equity firm. The face value of the shares is 15 and the book value of equity is 225 M. The annual EBIT is 36 M and the firm has a pay-out ratio of 100%.

a) If there are no taxes and the required return on equity is 12% calculate the price per share and the market value of the firm.

b) Management is considering a change in the financing of the firm by issuing 100 M in perpetual debt paying interests at 7%. If the firm uses the proceedings from the debt issue to distribute an extraordinary dividend, in t=0 and under M&M assumptions, recalculate the value of the firm and the share value after the dividend is paid.

c) Recalculate the share value if instead of paying an extraordinary dividend the firm repurchased own shares with the proceedings from the debt issue.

d) Given the new debt to equity ratio and the return on debt, recalculate the expected return on equity. Has it changed? Explain.

e) Consider that the firm must pay corporate taxes at a 35% tax rate and interest payments are tax deductible. What is the value of the firm and the value of its shares (consider the values debt=100 M , annual EBIT 36 M and required return on equity before debt is 12%).

f) In addition to corporate taxes, the gains on equity are taxed at 40% and the gains on debt are taxed at 20% and the market value of debt increased 30%. Determine the market value of the firm and the value of each share.