corperatefinance.doc

Corporate Finance
University of International Business and Economics
SPRING, 2010
SITE
CORPORATE FINANCE
Take Home Midterm Exam
(Time allowed: THREE hours)
NOTE: Answer any FIVE of ALL of SEVEN questions. All questions carry equal marks. Each
Question is worthy of 20 marks. Partial marks will be given so please try your best
to be very clear in explaining your derivations in every step. The exam will not be
curved. But I highly suggest to try every question for practice.

1. Eureka Space Technology Group (an all-equity firm) is announcing a $100 million R&D project, which is expected to drastically improve its satellite launching technology by reducing its annual launching costs from $500 million to $475 million. The firm can finance the project through either retained earnings or a new bond issue. The firms cost of equity capital is 12.5 percent. The prevailing market rate of interest for comparable corporate bonds is 8 percent. Currently, the firm has 15 million shares of stock outstanding at $32.5 a share. The firm has sufficient earnings to fully utilize the corporate tax shield if the project is debt financed. Assume the relevant marginal corporate tax rate is 35 percent.
• a. Which financing method, retained earnings or external debt financing, would you recommend to the management and why?

应该采用外部债务融资的方式，因为由于有税收的存在，利息的抵税效应可以增加公司价值。
全部采用权益融资项目现金流为：（500-475）（1-35%）=16.25
项目的现值为：130
项目的净现值为：130-100=30

若公司全部采取债务融资，APV=NPV+B则调整净现值为：30+100=65
因此公司的价值会增加。

• b. What is the resulting PV of the firm from each of these two financing methods?

全部采用权益融资PV=30+32.5=517.5

全部采用外部债务融资PV=65+32.5=552.5

• c. What do you expect will be the stock market stock price response to the two different methods?

全部采用权益融P=517.5=34.5美元
全部采用外部债务融资P=552.5=36.8美元

• d. Explain the intuition behind the results in part (c).

杠杆企业的公司价值更高说明，在不考虑破产成本等由于增加债务而带来的成本和风险等因素时，债务的节税效应增加了公司的市场价值，企业应该尽可能多的利用债务进行融资。

2. The Gulf Power Company is an electric utility planning to build a new power-generating plant of conventional design. The company has traditionally paid out all earnings to the stockholders as dividends and financed capital expenditures with new issues of common stock. There is no debt or preferred stock presently outstanding. Data on the company and the new power plant follow. Assume all earnings streams are perpetuities that are constant.
Company Data
Current annual earnings: $27 million
Number of outstanding shares: 10 million
New Power Plant Initial outlay: $20 million
Added annual earnings: $3 million
Management estimates the rate of return currently required by stockholders to be 10 percent per year and considers the power plant to have the same risk as existing assets. Assume there are no taxes, no costs of bankruptcy, and perfect capital markets.
• a. What will be the total market value of Gulf Power if common stock is issued to finance the plant?

旧资产的价值：270
新工厂的净现值：=10
新股发行的收益：20

公司的价值为：270+10+20=300

• b. What will be the total value (stocks plus bonds) of the firm if $20 million in bonds at an interest rate of 8 percent is issued to finance the plant, assuming the bonds are perpetuities?

旧资产的价值=
新工厂的净现值：=10
新增的债务的价值：
公司的价值为：270+10+20=300

• c. Given that bonds will be issued as in (b), calculate the rate of return required by stockholders after the financing has occurred and the plant has been built.

=10%+=10.15%

3. Kinedyne, Inc., has decided to divest one of its divisions. The assets of the group have the same operating risk characteristics as those of the parent firm. The capital structure for the parent has been stable at 40-percent debt/60-percent equity (in market-value terms), the level determined to be optimal given the firms assets. The required return on Kinedynes assets is 16 percent, and the firm (and the division) borrows at a rate of 10 percent. Sales revenue for the division is expected to remain stable indefinitely at last years level of $19,740,000. Variable costs amount to 60 percent of sales. Annual depreciation of $1.8 million is exactly matched each year by new investment in the divisions equipment. The division would be taxed at the parents current rate of 40 percent.
• a. How much is the division worth in unleveraged form?
无杠杆公司的自由现金流为：UCF=19740000+1800000=5457600
=10% 解得=22.67%
解得
无杠杆公司的价值为：

• b. If the division had the same capital structure as the parent firm, how much would it be worth?

• c. At this optimal capital structure, what return will the equityholders of the division require?
每年的利息为：
有杠杆公司权益的现金流为：LCF=UCF- =5457600=4638960

• d. Show that the market value of the equity of the division would be justified by the earnings to shareholders and the required return on equity.
=10% 解得=22.67%

由第三题和第一题的结果可知，权益的市场价值可以由权益的现金流和权益要求的回报率的比值得出。

4. National Business Machine Co. (NBM) has $2 million of extra cash. NBM has two choices to make use of this cash. One alternative is to invest the cash in financial assets. The resulted investment income will be paid out as a special dividend at the end of three years. In this case, the firm can invest in Treasury bills yielding 7 percent, or an 11 percent preferred stock. Only 30 percent of the dividends from investing in preferred stock would be subject to corporate taxes. Another alternative is to pay out the cash as dividends and let the shareholders invest on their own in Treasury bills with the same yield. The corporate tax rate is 35 percent, and the individual tax rate is 31 percent.
Should the cash be paid today or in three years? Which of the two options generates the highest after-tax income for the shareholders?
l
若三年后支付，公司应将现金投资于优先股，取国库券的利率为折现率，股东得到的红利的现值为：
若现在发放股利，股东得到的股利为：1.38
所以应该三年后发放，这时股东得到的税后收入最大

5. In 1980 a certain assistant professor of finance bought 12 initial public offerings of common stock. He held each of these for approximately one month and then sold them. The investment rule he followed was to submit a purchase order for every firm-commitment initial public offering of oil- and gas-exploration companies. There were 22 such offerings, and he submitted a purchase order for approximately $1,000 of stock for each one. With 10 of these, no shares were allocated to this assistant professor. With five of the 12 offerings that were purchased, fewer than the requested number of shares were allocated. The year 1980 was very good for oil- and gas-exploration company owners. For the 22 stocks that went public, the stock was selling on average for 80 percent above the offering price within a month. Yet, this assistant professor looked at his performance record and found the $8,400 invested in 12 companies had grown to only $10,100, a return of only about 20 percent. (Commissions were negligible.) Did he have bad luck, or should he have expected to do worse than the average initial-public-offering investor? Explain.
这是赢者诅咒现象，22加进行IPO的企业股票第一个月的平均上涨率为80%，但是有些企业上涨率高于80%有些企业则会远远低于80%，也就是说每只股票的折价程度不一。但是助理教授作为一个普通投资者没有信息优势，他不了解哪些股票折价的程度高，哪些低，因此每次发行新股他都进行申购，而且申购的量相同。由于有人拥有信心优势，他们了解哪些股票的折价程度更高，哪些低，因此对于折价程度高的股票购买的人数会远远多于折价程度低的股票。所以对于助理教授这样的普通投资者而言，折价程度高的股票很难中签，或者只能买到少部分，而折价程度低的股票反而容易中签，因此助理教授买到的股票往往是折价程度较低的股票，上涨空间不大，这样他的收益率远低于行业的平均收益率也就不足为奇了。

6. Margret Kimberly, CFO of Charles River Associates, is considering whether or not to refinance the two currently outstanding corporate bonds of the firm. The first one is an 8-percent perpetual bond with a $1,000 face value with $75 million outstanding. The second one is a 9-percent perpetual bond with the same face value with $87.5 million outstanding. The call premiums for the two bonds are 8.5 percent and
9.5 percent of the face value, respectively. The transaction costs of the refundings are $10 million and $12 million, respectively. The current interest rates for the two bonds are 7 percent and 7.25 percent, respectively.
Which bond should Ms. Kimberly recommend be refinanced? What is the NPV of the refunding?

债券回购行为的净现值应该等于债券回购的收益减去成本，其收益为债券现值与回购价格之差，因此有
-5.66 million dollars

0.808 million dollars

因此，应该回购第二种债券，其净现值为$0.808million

7. Redwood Timberland Corporation is a furniture manufacturer that is considering installing a milling machine for $420,000. The machine will be straight-line depreciated over seven years and will be worthless after its economic life. Redwood has been financially distressed and thus the company does not appear to get tax shields over the next seven years. American Leasing Company has offered to lease the machine over seven years. The corporate tax rate for Redwood is 35 percent. The appropriate before-tax interest rate is 6 percent for both firms. Lease payments occur at the beginning of the year. What is Redwoods reservation price? What is Americans reservation price? What is the negotiating range of the lease?

⑴Redwood公司最高租金设为
1-7年现金流（免税）：
0期收入为：420000
年金现值系数=5.5824

解得 =75236.5
⑵ 美国公司的最低租金设为
1-7年每年折旧抵税：
1-7年的现金流为：
0期投入为：420000

税后收益率为：
年金现值系数=6.0243
0
解得=74950.2

综上，租金的谈判区间为（74950.2，75236.5）

学号：200702079
姓名：王竞霄
学院：经贸
专业：金融