UNIVERSIDAD CARLOS III DE MADRID

FINANCIAL MANAGEMENT EXAM. JUNE 2015

TYPE A

Name and NIU______________________________________________________________________________________

Each correct answer adds 0.5 points. Each wrong answer subtracts 0.15 points. There is

only one correct answer per question. You have 2.5 hou rs.

1. A Company that is financed only with equity expects to generate net earnings next period (at t=1)

for the amount of 100,000€. The book value of equity of this company today (at t=0) is 1,000,000€,

and the required return on equity for investments of similar risk is 12%. If the company continues

investing in projects with the same ROE as the current one, what is the optimal reinvestment rate of

the company? That is, at which rate should the company be undertaking new investments so as to

increase the value of the company?

a) 10%

b) 50%

c) 0%

d) None of the above since, by investing, the company destroys value.

2. Company Isla SA is financed with debt and equity. The market value of its perpetual debt is 3

million euro, and the market value of its equity is 2.1 million euro. If the corporate tax rate is 30%,

what is the value of the unlevered firm?

a) 4.2 million euro

b) 5.1 million euro

c) 2.1 million euro

d) None of the above

3. A Company that is financed only with equity has 28,000 shares listed at a price of 20 euros per

share. The company wants to increase its capital by issuing 4,000 new shares with subscription

rights. If the market value of the subscription right attributed to each old share (i.e. the market

value of each subscription right) is 0.5 euros, what is the price at which the new shares will be

issued?

a) 17 €

b) 16 €

c) 15 €

d) None of the above

4. Company Gamma is financed with perpetual debt and equity. The nominal value of its equity is 1

million euros, with an annual coupon of 6%. This company wants to issue more debt with a nominal

value of 300,000 euros, an annual coupon of 7%, and the same seniority as the existing debt. If the

company generates an EBIT equal to 300,000 euros, and the risk free rate is 2%, what is the

reduction (in percentage terms) of the market value of the company’s initial debt? Assume that the

new debt is no destined to make new investments, that the market risk premium is 8%, and that the

debt spread depends on the interest ratio according to the following table:

RC Spread

>6 1%

4 – 6 4%

2 – 3.9

a) 25%

b) 20%

c) 22.5%

d) None of the above

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UNIVERSIDAD CARLOS III DE MADRID

FINANCIAL MANAGEMENT EXAM. JUNE 2015

TYPE A

Name and NIU______________________________________________________________________________________

Each correct answer adds 0.5 points. Each wrong answer subtracts 0.15 points. There is only one correct answer per question. You have 2.5 hours.

A Company that is financed only with equity expects to generate net earnings next period (at t=1) for the amount of 100,000€. The book value of equity of this company today (at t=0) is 1,000,000€, and the required return on equity for investments of similar risk is 12%. If the company continues investing in projects with the same ROE as the current one, what is the optimal reinvestment rate of the company? That is, at which rate should the company be undertaking new investments so as to increase the value of the company? a) 10% b) 50% c) 0% d) None of the above since, by investing, the company destroys value.
Company Isla SA is financed with debt and equity. The market value of its perpetual debt is 3 million euro, and the market value of its equity is 2.1 million euro. If the corporate tax rate is 30%, what is the value of the unlevered firm? a) 4.2 million euro b) 5.1 million euro c) 2.1 million euro d) None of the above
A Company that is financed only with equity has 28,000 shares listed at a price of 20 euros per share. The company wants to increase its capital by issuing 4,000 new shares with subscription rights. If the market value of the subscription right attributed to each old share (i.e. the market value of each subscription right) is 0.5 euros, what is the price at which the new shares will be issued? a) 17 € b) 16 € c) 15 € d) None of the above
Company Gamma is financed with perpetual debt and equity. The nominal value of its equity is 1 million euros, with an annual coupon of 6%. This company wants to issue more debt with a nominal value of 300,000 euros, an annual coupon of 7%, and the same seniority as the existing debt. If the company generates an EBIT equal to 300,000 euros, and the risk free rate is 2%, what is the reduction (in percentage terms) of the market value of the company’s initial debt? Assume that the new debt is no destined to make new investments, that the market risk premium is 8%, and that the debt spread depends on the interest ratio according to the following table:

RC Spread

6 1% 4 – 6 4% 2 – 3.9 6%

a) 25% b) 20% c) 22.5% d) None of the above

A company has 1 million listed shares. The investors require a return on equity (Re) equal to 15% in order to invest in those shares. The market expects the depreciation of the company during year 2015 to be 400,000 euros, the investments in fixed assets to also be 400,000 euros, and the increase in net working capital to equal 100,000 euros. It is also expected that the free cash flows will increase at a constant rate of 4% forever. At the end of 2014, the company has debt with a market value of 5 million euros and a weighted average cost of capital (WACC) equal to 12% (expected to remain constant in the future). The corporate tax rate is 50%. What is the expected EBIT at the end of 2015 that justifies a price per share equal to 10 euros at the end of 2014? a) 2,600,000 € b) 2,080,000 € c) 2,165,000 € d) None of the above
A Company is financed with debt and equity. The market value of its debt is 100 million euros and the market value of its equity is also 100 million euros. Its weighted average cost of capital (WACC) is 12%, and the cost of debt (Rd) is 5%. If the corporate tax rate is 40%, the risk free rate is 3%, and the market risk premium (Rm – Rf) is 8%, what is the levered beta equity of the company? a) 2. b) 2. c) 2. d) None of the above
Dunkin’ Donuts had net earnings for 147 million dollars in 2013. The Price/Earnings multiple of Starbucks in 2013 was 34. Suppose we can assume that Starbucks is a comparable company to Dunkin’ Donuts since both are in the fast food sector. What was the market capitalization of Dunkin’ Donuts in 2013? a) 9,560 million dollars b) 4,998 million dollars c) 7,279 million dollars d) None of the above
A mining company is thinking about investing in an electricity project (a very different project from an operating point of view). The shareholders of the company, that has a leverage ratio (D/V) equal to 30%, require a return on equity (Re) of 17%. The weighted average cost of capital (WACC) of electricity companies that are comparable to the project have a leverage ratio (D/V) of 50%. Beta debt is 0.2 in both the mining and electricity sectors. The risk free rate is 4%, the market risk premium (Rm –Rf) is 6%, and the corporate tax rate is 40%. What is the return on assets (Ra) of the new project? a) 9.5% b) 12.5% c) 14.5% d) 15.0%
Assume that a logistics company wants to develop a project which is an atypical project for this company. The project will be financed entirely with equity, differently from the typical projects in the company, which are financed with a leverage ratio (D/E) of 0.5. The considered project generates a return such that the covariance of the return of the project with the market return is 0.15, and the variance of the market return is 10%. The risk free rate is 2%, the market risk premium is 5%, and the spread of the company’s debt is 4%. Determine the cost of capital of the project. a) 7.5% b) 9% c) 8.125% d) None of the above
Assume that company CONTINUA has 2,000,000 shares and that its equity (book value) is worth 20,000,000 euros at the beginning of period 1. The company has reached a maturity stage such that

b) 17% c) 18% d) None of the above.

A Company has no debt. Its shares are listed at a price of 20 euros per share, and its net earnings this period are 2,000,000 euros. The company is considering changing the way of distributing dividends. Until now the company had distributed constant dividends equal 3 euros per share, but from now onwards, due to the expected increase in its earnings, the company expects that its dividends will grow at a constant growth rate of 2.5% every year. If we assume that the required return on equity remains constant, what will be the increase in the value of this company’s shares?

a) 2.6 euros

b) 3.5 euros

c) 4.6 euros

d) None of the above

A company is financed with 50% debt (D/V). The target ratio of debt to equity (D/E) is 1/3, the risk free rate is 4%, the spread is 1.4%, and the market risk premium is 7%. Currently, the beta equity levered is 1.25, and the beta asset is 0.725. What is the WACC that you should use to determine the valuation of this company? Assume no tax and a beta debt of 0.2. a) 9.075% b) 10.4% c) 11.06% d) None of the above
The book value of equity of a company in 2010 is $1,000M. Its ROE is 20% and the payout ratio is 40% (both constant). If the book value of equity in 2011 is $1,120M, what are the retained earnings in 2011? a) 120 b) 200 c) 240 d) None of the above
Company Kappa is a local Spanish power production company that has no debt, and a single shareholder that cannot diversify her portfolio. The company is studying the possibility of expanding internationally by investing in a new power plant that would be installed in South Africa and which would be financed only with equity. The current required return on equity of the company is 10% and this is the discount rate used by the firm to discount the expected cash flows of the new project. a) The new project is of lower risk than the current assets of the company and therefore the company is overvaluing the new project. b) The new project is of higher risk than the current assets of the company and therefore the company is overvaluing the new project. c) The new project is of higher risk than the current assets of the company and therefore the company is undervaluing the new project. d) None of the above.
The representative investor’s personal tax on interest earnings and dividend earnings are tD=36% and tE=20%, respectively. If the corporate tax rate is 25%, what is the optimal amount of

debt for the firm? Assume that the firm operates under the assumptions of M&M with taxes. a) As much debt as possible b) No debt at all c) The company is indifferent regarding the amount of debt d) 50% debt

Company Theta operates in an economy with the following fiscal system: shareholders are taxed 25% when they receive dividends, shareholders are not taxed when they receive capital gains. On January 1st, company’s shares are listed at $20 per share. On January 5th the company announces that it will distribute a dividend per share of $4. The ex-dividend date will be on January

15 and the dividend payment date will be on January 25th. If this is the only information that the market receives during that time, and there is no other relevant information that determines the price of the company’s shares, what will happen with the share price of Theta? a) On January 5th the share price will fall by $3 and on January 25th it will fall $1 more. b) On January 15th the share price will fall by $1 and on January 25th it will fall $3 more. c) On January 5th the share price will fall $4. d) On January 5th the share price will fall by $1 and on January 15th it will fall $3 more.

EXAMEN FINAL, Exámenes de Administración de Empresas

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UNIVERSIDAD CARLOS III DE MADRID

FINANCIAL MANAGEMENT EXAM. JUNE 2015

TYPE A

a) 2.6 euros

b) 3.5 euros

c) 4.6 euros

d) None of the above