Final Exam Sem1 2020 PDF

Preview

Summary

FINM2001 Final Exam Sem1 2020...

Description

Student Number ___________________

Research School of Finance, Actuarial Studies and Statistics EXAMINATION Semester 1, 2020 – Final Examination

FINM 2001 Corporate Finance FINM 7007 Applied Corporate Finance Examination/Writing Time: Reading Time:

240 minutes 0 minutes

Exam Conditions: Centrally scheduled examination Student must scan the written answers and combine them into one single PDF file for uploading to the wattle site. The first page of the uploaded PDF file must be the signed and dated RSFAS exam cover sheet, which is attached with this exam paper. This examination paper is not to be made available to the ANU Library archives. Materials Permitted: Any Instructions to Students: 1. This exam paper consists of a total of 5 pages. Please ensure your paper has the correct number of pages. 2. This exam includes a total of 6 questions. The questions are of unequal value, with marks indicated for each question. You must attempt to answer all questions unless directed otherwise. 3. Please include all workings for each question, as marks will not be awarded for answers that do not include workings. 4. Do not round calculations until providing your final answer to each question. Final answers should be rounded to 2 decimal places. 5. Ensure you include your student number on your answer script book. Total Marks = 60 Please refer to the wattle announcement on titled “information from CBE” for the weight of this exam for your assessment. - 1 -  

Question 1. (8 marks) A former president was offered $15 million by a publisher to write a memoir. Suppose the book took three years to write. In the time she spent writing, the former president could have been paid to make speeches. Given her popularity, assume that she could earn $7.9 million per year (paid at the end of the year) speaking instead of writing. Assume the cost of capital is 9.4% per year. a. What is the NPV of agreeing to write the book (ignoring any royalty payments)? (4 marks). b. Assume that, once the book is finished, it is expected to generate a one-off royalties of $13.7 million in the first year (paid at the end of the year). What is the NPV of the book offer with the royalty payments? (2 marks) c. Provide at least two scenarios when the NPV decision rule might generate a different decision outcome than the IRR rule. General discussion will be sufficient and you do not have to show your calculations in answering this question. (2 marks)

Question 2. (10 marks) Your firm is an all-equity firm with two divisions. The first division has an asset beta of 0.60, expects to generate free cash flow of $50 million this year, and anticipates a 3% perpetual growth rate. The second division has an asset beta of 1.20, expects to generate free cash flow of $70 million this year, and anticipates a 2% perpetual growth rate. Suppose the risk-free rate is 4% and the market risk premium is 5%. a. Estimate the value of each division. (4 marks) b. Estimate you firm’s equity beta and cost of capital. (4 marks) c. Is the firm’s cost of capital useful for valuing your firm’s projects? Explain. (2 mark)

Question 3. (8 marks) You have an arrangement with your broker to request 1000 shares of all available IPOs. Suppose that 10% of the time, the IPO is “very successful” and appreciates by 100% on the first day, 80% of the time it is “successful” and appreciates by 10%, and 10% of the time it “fails” and falls by 15%. Suppose you expect to receive 50 shares when the IPO is very successful, 200 shares when it is successful, and 1000 shares when it fails. Assume the average IPO price is $15. - 2 -

 

a. Calculate the average IPO underpricing. (4 marks) b. Given the magnitude of underpricing in part (a), discuss if it is a good idea to invest in the IPO market. (4 marks) Hint: use the numbers provided in the question to justify your answer.

Question 4. (10 marks) A firm maintains a debt-equity ratio of 0.78, has an equity cost of capital of 12%, and a debt cost of capital of 7%. The corporate tax rate is 38%, and the firm’s market capitalization is $258 million. a. If the free cash flow is expected to be $11 million in one year, what constant expected future growth rate is implied in the firm’s current market value? (3 marks) b. Estimate the value of the firm’s interest tax shield. (4 marks) c. Explain the relationship between the firm’s interest tax shield and its firm value. (3 marks)

Question 5. (12 marks) Bidder Co. has 1 million shares outstanding, each of which has a price of $20. It has made a takeover offer of Target Co. which has 1 million shares outstanding and a price per share of $2.50. Assume that the takeover will occur with certainty and all market participants know this. Furthermore, there are no synergies to merging the two firms. a. Assume Bidder Co. made a cash offer to purchase Target Co. for $3 million. What happens to the price of each firm on the announcement? What premium over the current market price does this offer represent? (3 marks) b. Assume Bidder Co. makes a stock offer with an exchange ratio of 0.15. What happens to the price of each firm? What premium over the current market price does this offer represent? (3 marks) c. At current market prices, both offers are offers to purchase Target Co. for $3 million. Does that mean that your answers to parts (a) and (b) must be identical? Explain. (2 mark) d. Name and explain at least two anti-takeover provisions that the Target Co. could use. (4 marks) - 3 -

 

Question 6. (12 marks) On April 27 2020, Financial Times, one of the leading business newspapers, published an article titled “Australia’s NAB slashes dividend as coronavirus hits earnings”. Read the extract of the article in italics and answer questions below. a. From the signaling perspective, discuss the implication of NAB’s planned dividend cut. (3 marks) b. What form of capital raising NAB plan to use to get A$3.5bn ($2.3bn)? (2 marks) c. “But analysts questioned the decision by Australia’s second-largest bank by market capitalisation to maintain any form of payout as it turned to investors for fresh capital.” Why analysts questioned NAB’s decision? Discuss. (Hint: relate this to the pecking order hypnosis of capital structure). (4 marks) d. According to Modigliani-Miller (MM) theorem on capital structure/payout policy, capital structure or payout policy are irrelevant for firm value. List at least three capital market imperfections in the real world that could produce deviation from outcomes of the MM theorem. (3 marks) “National Australia Bank will raise A$3.5bn ($2.3bn) and slash its dividend by almost two-thirds as it braces for turmoil caused by coronavirus, including a surge in unemployment and a plunge in house prices. But analysts questioned the decision by Australia’s second-largest bank by market capitalisation to maintain any form of payout as it turned to investors for fresh capital. Like in the UK and Europe, lenders in Australia have been under pressure to halt shareholder payouts during the crisis. Ross McEwan, chief executive, told investors on Monday that the lender was taking steps to manage the “rapid and unprecedented upheaval” caused by the pandemic, which contributed to a 51 per cent year-on-year drop in first-half profit. “Measures to contain the spread of Covid-19 have had a sudden and materially negative impact on economic activity,” said Mr McEwan, making his first earnings - 4 -

 

announcement since joining NAB in December. The bank has forecast that the Covid-19 crisis will cause unemployment in Australia to rise to 11.7 per cent and property prices to fall 10 per cent this year. NAB expects that the Australian economy, which has not suffered a recession in three decades, will contract sharply this year and not return to its pre-coronavirus levels until 2022. The bank cut its interim dividend to 30 cents per share, from 83 cents per share a year earlier. The A$3.5bn capital raising will boost the bank’s tier one capital — a measure of balance sheet strength — to 11.2 per cent. NAB’s shares were untraded on Monday due to the capital raise.

…”

- 5 -

 

ResearchSchoolofFinanceActuarialStudies&Statistics  ANUCollegeofBusinessand Economics AustralianNationalUniversity CanberraACT2601 https://www.rsfas.anu.edu.au/ 

RSFASFINALASSESSMENTCOVERSHEET 

Submissionandassessmentisanonymouswhereappropriateand possible.Pleasedonotwrite yournameonthiscoversheet.  Thiscoversheetmustbeattachedtothefrontofyourassessmentwhensubmitted.  StudentID:



CourseCodeandName:



Lecturer:



 Ideclarethatthiswork: upholdstheprinciplesofacademicintegrity,asdefinedintheANUPolicy:CodeofPracticefor  StudentsUniversityAcademicMisconductRules;  isoriginal,exceptwherecollaboration(forexamplegroupwork)hasbeenauthorisedinwriting bythecourseconvenerinthecourseoutlineand/orWattlesite;  is produced for the purposes of this assessment task and has not been submitted for assessmentinanyothercontext,exceptwhereauthorisedinwritingbythecourseconvener; gives appropriate acknowledgement of the ideas, scholarship and intellectual property of  othersinsofarasthesehavebeenused;  innopartinvolvescopying,cheating,collusion,fabrication,plagiarismorrecycling.  Signed:



DatedSubmitted:

...