FINSTRAL SL has identified 3 financing plans for a necessary investment of EUR 500,000: Plan A raising

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Question:

FINSTRAL SL has identified 3 financing plans for a necessary investment of EUR 500,000:

Plan A raising 100 new shares at EUR 10 each,

Plan B contracting a loan of EUR 150,000 at a 6% interest rate, and

Plan C contracting a loan of EUR 300,000 at a 6% interest rate.

The company's common equity is of EUR 500,000 and its corporate tax rate is 24%.

What would be the change in percentage of the EPS for each plan with an EBIT of EUR 50,000 and of EUR 100,000, considering that the number of outstanding shares is currently 1,500?

Which plan presents the higher change in percentage in EPS?

FINSTRAL SL's chose plan B and generated positive earnings, hence its decision to distribute all earnings (net income) plus a cash dividend of EUR 2 to all shareholders.

Computing indifference points, what would be the break-even level of EBIT and EPS for both plan A and B?

From a shareholder point of view and according to the dividend payout ratios you have calculated, which plan would you have preferred the company to chose, and at which level of EBIT?

Calculate the tax shield for both plan B and C

Exercise 2. AXA is planning to pay EUR 2.7 nillion in dividend to its common shareholders this year. Enclosed the following earnings and market price information for AXA:

Net income EUR 3,200,000

Number of shares 350,000

Earning per share1,50

Price/ earnings ratio20

Expected market price per share after the dividend payment26

As an alternative to paying dividends, AXA is considering 2 options:

Option A - repurchase share at a price of EUR 21, which is the current market price plus the value of the proposed dividend of EUR 1. Evaluate the company's share price after the repurchase by calculating the EPS and estimated share price.

Option B - announce a 2 for 1 share split for its shareholders.

Assuming that AXA chose option B, how many shares outstanding would the company have and what would be its EPS after the split?

If you own 100 shares before the split, what would be your total earnings for your share before and after the split?

Would you be better off financially before or after the split?

Exercise 3. FOOD plc is considering launching a new ready-made product line across Europe: soups (project A), salads (project B) and sandwiches (project C) which will imply the following initial investments and expected cash flows:

Project AProject BProject C

II (initial investment)200,000350,000400,000

Cash Flow year 150,00070,000100,000

Cash Flow year 2150,000150,000120,000

Cash Flow year 380,000220,000110,000

Calculate the payback period for each project and advice which product line the company should chose.

Considering that the discount rate is 3%, calculate the NPV for each project and compare the discounted pay back periods with the payback periods. Which product line should the company chose according to the discounted payback period?

Which project would you recommend from an IRR and BCR points of view?

FOOD plc chose the soup product line and generates revenues of GBP 3,000,000 the following year. Fixed costs are of GBP 250,000 and variable costs of GBP 150,000, whilst increasing depreciation is of GBP 50,000 per year.

Calculate the company's operating cash flow knowing that corporate tax rate in the UK is of 25%.

The company has to spend GBP 150,000 on manufacturing equipment maintenance and its difference between current assets and liabilities is of GBP 250,000. What is FOOD plc free cash flow?

Exercise 4. Imagine TOP HAT Prefabs issued common shares at a market price of GBP 88 and paid dividends of GBP 6 in 2020. If dividends in 2021 are expected to grow by 5%, the market by 8%, and flotation costs are 20% of market price, what would the company's cost of equity be?

Current market price is GBP 99 and the gilt bond (UK government) gives a 1% rate.

If TOPHAT Prefabs was planning to provide a constant growth rate of dividends, what would this growth rate be considering that the UK Gilt rate is 1,5%, the expected rate of return of the market is 3% and the CAPM is 12%?

The company needs to purchase raw materials and decides to contract 2 loans for a period of 5 years, as follows: a GBP 80,000 with a 3% semi-annual interest rate and a GBP 150,000 with a 2% quarterly interest rate. What is the effective interest rate for TOPHAT Prefabs?

The company decides to renew its manufacturing equipment and sell 2 assembling machines at a price of GBP 15,000 and GBP 25,000 respectively. The machines' book values are of GBP 20,000 each. What would be the amount of tax recovered / paid from the sale of each machines, knowing that the corporate tax in the UK is of 25%?

Exercise 5. SOCKS SA is evaluating its financial requirements for the coming year based on iti balance sheet from 2019:

Balance sheet % of sales

Current assets EUR 5,000,00025%

Net fixed assets EUR 10,000,00050%

Liability and equity

Accounts payableEUR 4,000,00020%

Long-term debtEUR 3,000,000

Total liabilities EUR 7,000,000

Common stock EUR 1,000,000

Paid-in capital EUR 1,500,000

Retained earningsEUR 900,000

Common equity EUR 3,400,000

TotalEUR 13,800,000

Estimate RIBOT's financing requirements (total assets) for 2020 and its discretionary financing needs, considering that sales are expecting to grow by 5% in 2020.

So far the company has generated the following revenues in 2020:

JanuaryEUR 3,670,000

FebruaryEUR 4,150,000

MarchEUR 2,900,000

April (projected)EUR 2,750,000

Exercise 6. As an analyst for a car company, you are asked to calculate the breakeven units level considering that sales price per unit is of EUR 60,000; total fixed costs are of EUR 1,350,000 and the variable costs per unit is EUR 3,000. Explain your result.

However, as a car is a multiproduct company therefore you prefer calculating the break-even level of revenues. Considering that the company generated sales for EUR 4 million this year, what would be the break even level of revenues?

The car company holds debt as 30% of its revenues last generated and equity for 40%. The cost of equity of the company is of 1,5% and the cost of debt of 2,5% and the company pays a corporate tax rate of 19%. What would be its WACC (weighted average cost of capital)?