代做FN2191 Principles of Corporate Finance帮做Python语言程序

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FN2191

Principles of Corporate Finance

Question 1

The firm Parke is entirely funded by equity, and the market expects a cash flow of £90 million in one year from the firm’s existing projects. Parke is considering a new project that requires an investment of £40 million of outside equity now, and will pay a cash flow in one year of either £50 million (probability 0.5) or £35 million (probability 0.5). Assume a discount rate of zero and that Parke raises £40 million now to finance the investment in the new project.

(a) Assume there is no information asymmetry between the managers of Parke and all potential investors. What fraction of equity must Parke offer to new investors? What will be the expected payoff from the project to the original shareholders? (6 marks)

(b) Assume now that there is information asymmetry between the managers of Parke and all potential investors. The market values the cash flow in one year from the firm’s existing projects at £90 million. What will be the payoff from the new project to Parke’s original shareholders, if the managers know that cash flow from the existing projects will be

(i) £100 million;

(ii) £80 million?

In each case, state whether the project will be accepted by Parke’s managers, assuming they wish to maximise the payoff to the existing shareholders. (6 marks)

(c) Considering your answers to part (b), what will the market infer if Parke issues equity to finance its new project? (4 marks)

(d) According to pecking order theory, what stock price responses are expected to issues of riskless debt, risky debt, and equity, and why? (maximum of 120 words) (5 marks)

(e) To what extent does empirical evidence support pecking order theory?

(maximum of 100 words) (4 marks)

(Total = 25 marks)

Question 2

The firm Direc has 24 million equity shares whose current market price per share is £9.84, and no debt. The firm’s annual cash flow, before interest and tax, is £21.2 million and this is expected to remain constant in future. All earnings are paid out as dividends. The corporation tax rate is 20%. The market is semi-strong form efficient.

(a) What is Direc’s cost of equity (return on equity), and its weighted average cost of capital? (4 marks)

Assume now that the managers of Direc decide to change the firm’s capital structure, by raising £36.5 million in debt finance which will all be used to repurchase a number of equity shares. The annual interest rate of the debt will be 5%.

(b) As soon as the plan has been announced, but before the restructuring has happened, what will Direc’s share price be, and why? (4 marks)

(d) After the restructuring, what will be the firm’s earnings per share and cost of equity (return on equity)? (6 marks)

(e) What is Direc’s weighted average cost of capital after the restructuring? Does this differ from your result in part (a)? Explain the reasons why/why not. (7 marks)

(Total = 25 marks)

Question 3

Hall plc, a firm that manufactures office furniture, is planning a takeover of Cole plc, a kitchen equipment manufacturer. Relevant information for the two firms is shown in

Table 1

	Hall plc	Cole plc
Number of shares in issue	60,000,000	10,000,000
Annual earnings after tax	£41,500,000	£12,000,000
Annual dividend payout	£10,500,000	£4,000,000
Share price	£12.45	£4.95

As a result of the takeover there will be expected cost savings for the merged (post- acquisition) firm, with a total present value of £20 million. Cole’s shareholders will agree to the takeover if the premium paid by Hall is 20%.

(a) What is the dividend per share for each of the two separate firms before acquisition? What will be the value of the merged firm? (4 marks)

(b) If Hall makes a share offer for Cole, how many new shares must be issued to Cole’s shareholders? What is the merged firm’s share price? (6 marks)

(c) If Hall makes a cash offer for Cole, how much must the payment be? What is the merged firm’s share price? (4 marks) (d) Assume that Hall chooses to acquire Cole by issuing the number of shares calculated in part (b). Following the acquisition, Hall will continue to pay the same dividend per share every year as before the acquisition. What change in the value of their shareholdings, and dividend income, will result from the takeover for an investor who:

(i) held 1,000 shares in Cole?

(ii) Held 1,000 shares in Hall? (5 marks)

(e) Explain why, if there are no personal taxes or transaction costs, the shareholders can be indifferent to changes in the amount of dividend the firm pays out. (maximum of 160 words) (6 marks)

(Total = 25 marks)

Question 4

Tomas plc, a manufacturer of roof tiles, has developed and tested a new type of tile (called the MTE) which is better quality than other tiles.

Tomas is now planning a project to manufacture and sell the MTE for five years. The firm estimates that there will be either “high demand” (45,000 per year, probability 0.5) or “low demand” (30,000 per year, probability 0.5) for the MTE. The contribution per MTE (selling price minus variable production costs) will be £15.

The investment cost of the machinery needed to produce the MTE will be £2 million, and after five years of production its value will be zero. Depreciation allowances for tax purposes will be 20% of the original cost in each year.

The tax rate is 20% and tax is payable in the same year as taxable profit is made. Assume that all cash flows occur at the end of the year except for those that occur now, and that the appropriate cost of capital for the project is 10%.

(a) Calculate the net present value (NPV) of the “high demand” and the “low demand” cases for the MTE project. What is the expected net present value of the project? (11 marks)

(b) Assume that after one year, Tomas can choose to stop manufacturing the MTE and sell the machinery that was used for the project for £1.6 million. What is the value now of the option to abandon the project? What is the expected net present value of the project now? (7 marks)

(i) If Tomas delays starting the MTE project for one year, it can pay a market research firm to find out whether demand for the MTE will be 45,000 per year or 30,000 per year;

(ii) Tomas will finance the project by raising equity by a rights issue of shares.

Explain whether or not each piece of information is relevant for the analysis of the MTE project. If it is relevant, explain briefly how to incorporate it into the analysis. (no calculations are needed for this part). ( maximum of 160 words) (7 marks)

(Total = 25 marks)

Question 5

Seth plc, a British furniture firm, will need to make a payment in US dollars ($) in one year to a US firm that supplies Seth’s raw materials. The amount to be paid is $500,000. Seth’s directors are concerned about the exposure risk that they face from changes in the exchange rate between the dollar and sterling (£).

The current spot exchange rate is $1=£0.81, and the one-year forward exchange rate is $1=£0.84. One-year call options on the dollar are available, with an exercise price of £0.83 and a cost of £0.03 per dollar. The one-year interest rates (for either borrowing or depositing) are 2.75% for the dollar, and 5.25% for sterling.

(a) Assume Seth chooses to buy call options to hedge its exposure risk from the payment of $500,000. Explain what Seth’s net payment in sterling will be if the

spot exchange rate in one year is:

(i) $1=£0.85;

(ii) $1=£0.82? (7 marks)

(b)

(i) Explain briefly how the one-year forward price in sterling of the dollar should be linked to the spot exchange rate now and the interest rates of the two countries. Using the covered interest rate parity relationship, what is the expected forward price in this case? (6 marks)

(ii) Assume Seth is able to borrow £60,000 cash now. Using the information provided in this question, explain whether or not there is an opportunity for the firm to profit from a covered interest arbitrage strategy. What, if any, profit can the firm make from this? (6 marks)

(c) What is meant by ‘over-hedging’? Explain why a firm’s manager may be motivated to over-hedge, and what potential disadvantages this may have for

the firm. (maximum of 150 words) (6 marks)

(Total = 25 marks)

Question 6

Assume you founded a software firm five years ago. At the start, you invested £24,000 of your own money and received 150,000 shares in return. You also sold an additional 50,000 shares to angel investors for £8,000.

(a) Two years ago, you raised more capital from a venture capitalist who invested £3 million and received 500,000 newly issued shares. After this transaction, what was the valuation of the whole firm, the percentage of shares owned by you, and the value of your shareholding? (5 marks)

You now take your firm public with an initial public offering (IPO) of shares. The number of shares in the IPO is 1 million. The direct issuance cost is 7% of the gross proceeds.

(b) Assume you set the price in the IPO at £7.50 per share, and all are sold to investors. At the end of the first day of trading, the market price per share is £9.00.

(i) How much was raised for your firm by the IPO, and what is the market value of your firm after one day of trading? (5 marks)

(ii) What is the implied valuation per share of your firm, before the IPO? (4 marks)

(iii) What is the total cost to you of taking your firm public? (4 marks)

(Total = 25 marks)