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Exercises Session 6 « LY Exam »

Exercises Session 6 « LY Exam ». Q1 –Company and Project Valuation. Value of companies which are not yet listed Current EBIT is 2.500.000€ May be viewed as a perpetuity Perpetual debt valued at 6.000.000€ paying a yearly coupon of 3% The marginal corporate tax rate: 30%

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Exercises Session 6 « LY Exam »

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  1. Exercises Session 6« LY Exam »

  2. Q1 –Company and Project Valuation • Value of companies which are not yet listed • Current EBIT is 2.500.000€ • May be viewed as a perpetuity • Perpetual debt valued at 6.000.000€ paying a yearly coupon of 3% • The marginal corporate tax rate: 30% • The risk free rate: 3% • Unlevered company in the same sector has an expected return on equity worth 8%

  3. What is value of the unlevered company? What is then the value of the levered company and of its equity? What are the expected return on equity and the wacc worth? What would the company be worth if it had a clear policy regarding leverage and wished to rebalance the debt continuously so as to reach the target leverage of 25%? What is then the value of the wacc ? How can you explain the difference in value for the company between b and d? Give the intuition. Q1 –Company and Project Valuation

  4. Q1 –Company and Project Valuation • What is value of the unlevered company?

  5. Q1 –Company and Project Valuation b. What is then the value of the levered company and of its equity?

  6. Q1 –Company and Project Valuation • What are the expected return on equity and the wacc worth?

  7. Q1 –Company and Project Valuation • What would the company be worth if it had a clear policy regarding leverage and wished to rebalance the debt continuously so as to reach the target leverage of 25%? What is then the value of the wacc ?

  8. Q1 –Company and Project Valuation e. How can you explain the difference in value for the company between b and d? Give the intuition.

  9. Analyze a company which has a market value of 1.000.000€. Use the Merton Model Yearly volatility: 50%! The company has currently no Debt Issue a two year zero-coupon with a face value of 500.000€. Current risk-free rate (annual equivalent rate): 5%. Q2 – Risky debt Valuation

  10. Before you proceed to value the debt, your boss would like to see a graph representing the concept (do not forget to label the axes and to stress any special point if needed) See slides 21 & 22 – 6. Real Options Risky Debt: Merton Model Equity similar to a Call option on the company Risky debt = Risk-free debt - Put Q2 – Risky debt Valuation

  11. In this case, what should the bond be worth when issued (t=0, consider a binomial tree with one year steps)? Q2 – Risky debt Valuation

  12. In this case, what should the bond be worth when issued (t=0, consider a binomial tree with one year steps)? Q2 – Risky debt Valuation

  13. In this case, what should the bond be worth when issued (t=0, consider a binomial tree with one year steps)? Q2 – Risky debt Valuation

  14. In this case, what should the bond be worth when issued (t=0, consider a binomial tree with one year steps)? Q2 – Risky debt Valuation

  15. c. What is then the required rate for this bond? And the risk-premium? Q2 – Risky debt Valuation

  16. Detail the different theories related to share price reaction following IPOs. See session 8. Raising Equity Capital Q3

  17. Your boss needs to price a callable bond. He has decided to use the Black and Scholes formula. Would this be a good idea? Explain. Cfr 9. Long Term Debt – slides 20 & continued In view of the poor performance of his investments your boss has now decided to turn to alternative investments. He considers investing in artworks. Could you help him by pointing out what is known about investment in artworks when compared to other investments? Cfr 10. Alternative Investments What are the main insights from Meulbroek L. K., (1992), “An Empirical Analysis of Illegal Insider Trading”, The Journal of Finance, 47, 5, pp. 1661-1699? Go to the courses ! Q4 - Varia

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