International Finance

II Midterm
Prof. Gimede Gigante
20156
Mock Exam

Exam rules
1. Every answer is equally weighted.
2. Please be precise in presenting calculations made.
3. Write clearly.
4. You are not allowed to use books, notes and handouts. You are only allowed to use a non
programmable calculator.
5. Cheating is absolutely forbidden. Exam of people caught in the act of cheating, whispering
and/or looking to someone else’s exam will be immediately withdrawn and the name of the
student will be signalled to the discipline committee of the University.

Question 1

In the context of an M&A transactions,

1. What are the available tools for managing risk & closing the gap on price.

Now focus now on the following deal:

BIDDER TARGET
Share price 40 20
Net Income 2000 750
# of Shares 1000 740

Synergies are expected to result in annual increased revenues and cost cutting of 250 after taxes. The Bidder is willing
to pay a premium of 10% (+2 per share). Assume furthermore that bidder can borrow at 10% interest rate and that the
corporate tax rate is 30%.

Consider first a pure stock deal and then the case in which 50% is paid cash and 50% is paid stock, please determine in
both circumstances:

2. the number of shares issued by bidder for the stock portion of the deal;
3. how the share ownership of an investor that that holds a 10% stake in the bidder is affected, if at all, by the
transaction and if the transaction is accretive or dilutive in terms of EPS;

Solution Question 2

Solution to points 1

– Escrow Accounts
– Earn-outs
– Contingent Value Rights (CVRs)

Solutions point 2 and 3 in the table below (for calculations click two times on the table):
 BIDDER TARGET
Price 40 20
NI 2000 750
# of shares 1000 740

Synergy 250
Premium 10%
Interest on Debt 10%
Corporate Tax Rate 30%

EPS pre-acquisition 2,00

Post-acquisition EPS # of Shares % owned by A

Question 2

1. Focus on the Pricing/Allocation phase of an IPO.

a. What key issues are faced by underwriters?

b. Why does a Company decide to go Public?

a.

As discussed in class, choosing the right price involves a trade-off between leaving too much of the issuer’s money on the table and
covering the total order book. Another issue to take into account is that quality of demand matters- investors placing their orders on the
higher end of the price range are usually those that have performed an extensive due diligence on the company, such as “buy & hold”
investors (vs. other funds with more aggressive short-term arbitrage strategies) that guarantee a stable after-market during the launch;
bankers have to consider whether the price they are setting is too low or they may find themselves to face a high-volatile after-launch
phase (and potential complaints of the issuer).

b.
You have to refer to the reasons that we have listed in class related to Financial, Strategic and Governance issues.

Question 3
Focus on the execution process of a right issue. An Italian leading insurer wants to raise €450 mil. of new capital in a
right issue. The company has 120 mil. of shares outstanding that are currently trading at €6.5:

1. Calculate TERP (Theoretical Ex-Rights Price) if the subscription price is set equal to €5
2. Compute the value of the right
3. Compare the wealth of a shareholder that owns 100 shares, in the case he exercises the rights and in the
alternative case in which he sells the rights. Which option brings him the highest increase in total net worth?

1.
n: Number of old shares= 120mil
N=number of new shares= 450.000.000$/5$=90mil
P: current market price=6,5$
S=subscrption price= 5$

TERP= (120x6,5$+90x5$)/120+90= 5,857142857

2.
 Value of 1 right= P-Terp=6,5$-5,85$= 0,64$

3.

WEALTH Initial # shs

DATA CALC NW bought Proceeds/(Costs) Value Tot NW
€ €
# old shs 120.000.000 TERP € 5,86 Exercising R 650,00 75,00 (€ 375,00) 1.025,00 € 650,00
Price P € €
(mkt) € 6,50 (Right) 0,643 Selling R 650,00 0,00 € 64,29 € 585,71 € 650,00
# new
shs 90.000.000
Price
(tgt) € 5,00
Ratio
old/new 0,750
Owned
To change shs/Rights 100

Question 4

Consider the following example.

A private equity fund has a committed capital of 200 milioni euros, all contributed by the investors at t0. The
fund regulations include a hurdle rate for investors of 5% of the committed capital and a carried interest of
25%.

The fund proceeds with divestitures according to the following timetable:

t1: 120 mil. euros

t2: 180 mil. euros
t3: 50 mil. euros

Considering the above mentioned data and clearly presenting the calculations,

1. show the total amount of funds paid out to investors under the following two hypotheses:

a. simple carried interest

b. carried interest with catch up clause and hurdle rate

Herebelow you can find the solutions:

Please during the exam write a similar table in order to answer correctly:

Caso T1 T2 T3
Carried interest (simple) 0 0 350 – 200 = 150
extraprofit x 25% = 37.5
carried interest

Carried interest with
hurdle rate
120 mil to investors
Total to investors:
350-37.5= 312.5
80 mil to investors for 50 mil splitted between
reimbursement of the carried interest ( 12.5)
committed capital and investors (37.5)
(80+120=200)

10 mil as hurdle rate to

investors (5% of 200
milioni)

100 mil splitted between

carried interest
(25%=25) and investors
(75% = 75)