Mid-Term Exam Corporate Finance

Mid-Term ExamCorporate FinanceAcademic Year 2012/2013 November 5, 2012Answer each question in a different sheet. Justify all your answers.Duration of the exam: 90 min.Name:1. (12 points) The company Face Look wants to analyse the economic viability of a project tomodernise its social network. The characteristics of the project are the following:• The initial capital investment is e 450,000 and its useful life is 3 years, with constant linearamortisation schedule;• The residual value of fixed assets at the end of year 3 is 20% of the initial acquisition cost;• For a technical consultancy report e 50,000 has already been paid;• The company expects a constant annual EBITDA of e 300,000 and an EBITDA/Sales ratioof 30%;• The annual net working capital amounts to 5% of annual sales;It is also known that (i) the beta of the firm’s equity is 1.5; (ii) the company’s debt/equity ratiois 0.2; (iii) the long-term Treasury yield is 8%; (iv) the expected return of the stock market is12%; and (v) the expected annual inflation rate over the next years is 2.5%. The corporate taxrate is 30%.(a) (6 points) Calculate the net present value of the project, assuming real prices.(b) (2 points) Determine the discounted payback period of the project.(c) (4 points) As an alternative, the company considers a project with an initial investmentof e 150,000 that generates a constant annual cash flow of e 50,000 for 20 years, startingin year 1. The asset beta associated with this investment is 0.8. Which project should thecompany choose?1

Corporate Finance Mid-Term Exam November 5, 20122. (8 points) To finance its projects, the company Face Look studies two alternative financingopportunities with the following characteristics (the corporate tax rate is still 30%):• Bond issuance– Nominal value: e 500,000;– Issuance value: 90% of nominal value;– Maturity: 1 year;– Coupon rate: 5% (fixed rate);– Coupon payments: semi-annual;– Redemption value: 95% of nominal value;– Issuance costs: 1% of nominal value.• Bank loan in euros– Amount: e 450,000;– Maturity: 1 year;– Annual interest rate: 10% (fixed rate);– Repayment: semi-annual interest payments, the face value is repaid in the followingway: 40% at the end of the first semester and the remaining 60% at the end of thesecond semester;– Tax on interest rate payments: 4%;– Tax on opening the credit line: 0.5%.(a) (4 points) Calculate the annual all-in cost of bond issuance.(b) (4 points) Which financing opportunity should the company choose? (If you have notanswered the previous part, assume that the annual all-in cost of bond issuance is 8.5%.)Question: 1 2 TotalPoints: 12 8 20Score:2