Problems (10 points each)
1.- The company Noland Inc has 2.5 million common shares outstanding, and they have a new project in mind, the investment needed is €11 million.
The current Corp.'s stock price is 45.
Noland is debating between two scenarios:
1. Three shares of outstanding stock are entitled to purchase one additional share of the new issue.
2. Seven shares of outstanding stock are entitled to purchase one additional share of the new issue.
What are the ex-rights stock price, the value of a right, and the appropriate subscription prices under scenarios 1 and 2?
2.- Derby is willing to invest in a new electric car automated production channel with a cost of €60 Million, the expected life of 7 years.
The tax rate is 25%, and Derby is considering whether to buy or lease the production Channel, assuming that they could borrow a loan from the bank at the interest of 6 percent.
The request an offer from La Caixa leasing services that requests an annual lease price of €10,7 Million.
What would you advise them to do, explain all the calculation steps and what is the process?
3.- Valencia Industrial Orange corporation. has a target capital structure of 40 percent common stock.
Its cost of equity is 13 percent, and the cost of debt is 5 percent.
You are requested to prepare a DCF calculation considering that the investment takes place in Spain, where the applicable tax rate is 25%, find the required discount rate.
4.- Rojo y Negro restaurants, Inc., has a target debt–equity ratio of 50%. Its WACC is 12 percent, and the tax rate is 25 percent.
If the cost of equity is 22 %, what is its pretax cost of debt?
5.- Coca-Cola Corporation has acquired Pepsi-Cola in a merger transaction.
The fixed Assets of Coca-Cola have a market value of 10 Billions, the market values for the other assets are the same as book values.
The market value for Pepsi-Cola fixed assets is 400 Billions, the market values for the other assets are the same as book values.
Assume that Coca-Cola issues 800 Billions in new long-term debt to finance the acquisition.
The following balance sheets represent the premerger book values.
Coca-Cola
Current assets 100 € Current liabilities 95 €
Other assets 50 € Long-term debt 15 €
Net fixed assets 200 € Equity 240 €
Total 350 € 350 €
Pepsi-Cola
Current assets 95 € Current liabilities 80 €
Other assets 60 € Long-term debt 300 €
Net fixed assets 250 € Equity 25 €
Total 405 € 405 €
Prepare the balance sheet for the new corporation if the merger is treated as a purchase for accounting purposes.
6.- You are told that company MM has total earnings for the year 2020 of €6 Millions, a price per share of €30 and 0,5 Million shares outstanding.
Company MM would like to acquire company MC, that has total earnings for year 2020 of €1 Millions, a price per share of €50 and 0.3 Million
shares outstanding. The proposal for acquisition is done via an exchange of stock at a price of €60 per share for the stocks of company MC.
None of the companies has outstanding debt.
a)What are the EPS of company MM after the merger?
b)What will be the new price per share for company MM if the price–earnings ratio does not change?
If there are no synergy gains, what will the share price of MM be after the merger? What will the price–earnings ratio be?
7.- The company Tabaco Inc. with the shareholders equity shown below declares a stock dividend of 16 percent.
The market value of its common stock is €110 per share, while the par value is 3.
Common stock 100.000 €
Capital surplus 2.450.000 €
Retained earnings 1.000.000 €
Total owners' equity 3.550.000 €
How many shares are they going to issue?
What is the new statement of shareholders Equity?
8.- Mistery Inc. has 3 million shares of stock outstanding that sell for €99 per share.
Imagine there are no taxes, what will be the price per share and the new number of shares outstanding after:
A five-for-three stock split?
A 20 percent stock dividend?
A three-for-seven reverse stock split?
9.-If you want to invest in a project, and you can borrow money from a bank at 7%, which is the discount rate that you will use to find the NPV of the project?
10.-Explain what is the meaning of Synergy, and give an example.
We know that when a company suffers financial distress, there is a higher probability that they declare “Chapter 11” or “Chapter 7” What is the difference? Explain.