FINANCIAL MANAGEMENT

FIN310 – Financial Management

Responsable du module : Guillaume SCHIER

Semestre 5 - Année 2019-2020

Consignes / Spécifications :

Final Exam Subject – December 2019

Exam Instructions:
1. Please put your name/surname on your exam sheet.
2. You have 120 minutes to complete the exam.
3. You can use only the calculator that the School provides.
4. Notes are not authorized.
5. The formulas are listed below.
6. The answers must be completed on the subject
Formulas
 Final Exam

You are an investment banker. You are asked you to carry out financial analyses in order to
advise investors on the opportunity to invest in the following two rival firms:
Global Incorporated and Towsend Plc.

Global. Incorporated Towsend. Plc.

Number of shares outstanding (in million) 15 17
Market value of Equity (in million €) 400 400
Market value of Debt (in million €) 75 80
Equity Beta 1.20 0.90
Risk free rate (rf) 1.00% 1.00%
Expected market return E(Rm) 7.00% 7.00%
Interest rate/cost of debt (Rd) 3.00% 2.00%
Tax rate 34.00% 34.00%

2018 - Balance sheet (in million €) Global. Incorporated Towsend. Plc.

Net Fixed Assets 500 300
Inventories 100 50
Accounts Receivable 60 40
Cash 40 60
= Total Assets 700 450
Global. Incorporated Towsend. Plc.
Accounts Payable 150 100
Financial Debt 300 150
Total shareholders' equity 250 200
= Total Liabilities & shareholders' equity 700 450

2019 - Income Statement Global. Incorporated Towsend. Plc.

Sales 600 450
- Cost of sales 350 300
- Administrative & General costs 200 100
= EBIT 50 50
- Interests 10 5
= Net Earnings 40 45
- Dividends 30 20
= Retained Earnings 10 25
 Questions
Part 1. Advising investors (10 points)

Question .1 (2 points)
Compute the cost of equity and the WACC for both Global Incorporated and Towsend Plc.
Explain/detail all your computations

Number of shares outstanding (in million) 15 17

Market value of Equity (in million €) 400 400
Market value of Debt (in million €) 75 80
Equity Beta 1.20 0.90
Risk free rate (rf) 1.00% 1.00%
Expected market return E(Rm) 7.00% 7.00%
Interest rate/cost of debt (Rd) 3.00% 2.00%
Tax rate 34.00% 34.00%

Global. Incorporated Towsend. Plc.

Firm value 475 480
Cost of equity 8.20% 6.40%
WACC 7.2% 5.6%
 Question 2 (2 points)
Compute the Return of Capital Employed for both Global Incorporated and Towsend Plc.

Global Incorporated Towsend Plc

Capital Employed

Global. Incorporated Towsend. Plc.

Net Fixed Assets 500 300
Working Capital 10 -10
= Capital Employed 510 290

ROCE

Global. Incorporated Towsend. Plc.

Net Debt 260 90
Shareholders' equity 250 200
= Invested Capital 510 290
EBIT after corporate taxes 33 33
ROCE 6.47% 11.38%
 Question 3. (2 points)
Compute the following ratios for both Global Incorporated and Towsend Plc

Global. Incorporated Towsend. Plc.

Dividend Pay-out Ratio 75.00% 44.44%
Dividend per share (DPS) 2.00 € 1.18 €
Price per share 26.67 € 23.53 €
Dividend yield 7.50% 5.00%
PER 10 8.9

Question 4 (2 point)
Based on your answers for questions 1. 2 & 3. would you advice to invest in Global Incorporated
or Towsend Plc (Explain & detail your answer)

Based on these data. you should advise to invest in Towsend Plc for the following reasons:

ROCE > WACC (which is not true for Global Incorporated)

PER of Towsend < Global Incorporated whereas the pay-out-ratio is lower meaning that Towsend
may be undervalued.

Question 5 (2 point)

You use the following Dividend Discounting Model:

𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒
𝑃 =
𝐶𝑜𝑠𝑡 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦 − 𝑔
What is the implied growth rate (g) of Global Incorporated and Towsend Plc?

What should be the price for these two firms of their growth rate g=2%?

Dividend growth Global. Incorporated Towsend. Plc.

implied growth rate 0.70% 1.40%
g=R-D/P
Global. Incorporated Towsend. Plc.
What should be the price if g= 2% 2%
Price = 32.26 26.74
=Part .2 Advising Global Incorporated (10 points)

Question 6. (2.5 points)

Global Incorporated is wondering to invest in one of the following projects.

Project 1 (in million €)

Years 0 1 2 3 4 5
Cash flows -62.5 10 15 25 25 30

Project 2 (in million €)

Years 0 1 2 3 4 5
Cash flows -175 25 35 50 75 100

We suppose that Global Incorporated’s WACC is 7%.

6.1. Compute the NPV for both projects (1.5 point)

Project 1 (in million €)

Years 0 1 2 3 4 5
Cash flows -62,5 10,0 15,0 25,0 25,0 30,0
DCF -62,5 9,35 13,10 20,41 19,07 21,39
NPV 20,8
IRR 16,79%
Project 2 (in million €)
Years 0 1 2 3 4 5
Cash flows -175 25 35 50 75 100
DCF -175 23,4 30,6 40,8 57,2 71,3
NPV 48,3
IRR 14,75%

6.2 The internal of return (IRR) of project 1 is equal to 16.79% and the IRR of project 2 is equal
to 14.75%. In which project do you advise to invest and why (detail your answer) (1 point)

You should accept project 2 because its NPV is greater even if project 1’s IRR is higher.

When there is a conflict of rules between NPV and IRR. you should always prefer NPV.
 Question 7. Bond Financing (2.5 points)
You advise Global Incorporated to investigate the bond market to finance both projects for a
total amount of 62.5+175 = 237.5 million €.

7.1 Draw the yield curve using the following zero-coupon bonds quotes (1 point)

Zero-coupon bonds quotation

Maturity (in years) 1 2 3 4 5

Quotes 98.00% 95.00% 90.00% 86.00% 82.00%

Maturity (in years) 1 2 3 4 5

Interest rate 2.04% 2.60% 3.57% 3.84% 4.05%

Yield Curve
8,00%

7,00%
Yields (interest rates)

6,00%

5,00%

4,00%

3,00%

2,00%

1,00%

0,00%
0 1 2 3 4 5
Maturity in years
7.2 To finance the two projects. you imagine a bond issue with the following features:

Total amount: 237.5 million €

Number of bonds: 237 500
Face value of one bond: 1000 €
Coupon rate: 4%
Annual Coupon payment

Compute the price of one bond (using the yield curve). compare the face value and conclude
(1.5 points)

Coupon rate 4,0%

Face Value 1000
Coupon 40 40 40 40 40
Principal 1000
Total Bond payment 40,0 40 40 40 1040
Discounted Payment 39,2 38 36 34,4 852,8
Bond value 1000,4

The market value is closed to the face value but still trading at a (small) premium.
 Question 8. Loan Financing (2.5 points)
Global Incorporated finally wonders whether to finance the two projects through a classical bank
loan.

8.1. Compute the amortization table for a bank loan with the following features (1 point).

Total loan amount: 237.5 million €

Stated interest rate: 4%
Length of loan: 5 years
Frequency of payment: annually
Equal total payment

Write the results in millions (round to two decimal places)

Beginning Total Ending

No. Principal Interest
Balance Payment Balance
1 237.50 53.35 43.85 9.5 193.65
2 193.65 53.35 45.60 7.75 148.05
3 148.05 53.35 47.43 5.92 100.62
4 100.62 53.35 49.32 4.02 51.30
5 51.30 53.35 51.30 2.05 0.00

8.2 Global incorporated wants to investigate the impact of a monthly payment on the total
amount of interest paid. You are asked to compute the equal total payment with monthly
payment and compare total amount of interests in both cases (explain). (1.5 points).

Annual payment Monthly payment

Loan amount (total) 237.5 237.5
Interest rate 4% 0.00333333
Number of periods 5 60
Equal total payment 53.35 4.37
Total amount of interests paid 29.24 24.94
(Equal total payment x number of periods - Loan Amount)

You pay less interests with a monthly payment

 Question 9. Equity financing (2.5 points)

To finance both projects Global Incorporated is considering a capital increase. A new investor.
GreyRock. is willing to invest the needed 237.5 million €.

9.1 Compute the number of new shares to be issued if the subscription price is equal to the
current price per share (cf. question 3) and the % of voting rights of GreyRock just after the
capital increase (1.5 points).

Capital increase option

Amount (in million €) 237.5
Subscription price 26.67€
Number of new stocks (=Amount / price) 8.91
% of voting rights (=8.91 / (15 +8.91) 37.25%
Post issue value 637.5 M€
Post issue share value 26.67 €
Price of one right 0.00
One shareholders bought 100% of the new share
Total cost 237.5 M€

9.2 You alert Global Incorporated that this capital increase may be subject to the Right Offering
mechanism. Explain briefly how it works (do not provide any computation). (1 point).

See lectures (Number of Rights to buy a share / Allocation of Rights to existing shareholders / Cost of
buying one share / Impact on the situation of existing shareholders depending whether or not they
decide to follow the new equity issue).