Second Mid-Term Exam Corporate Finance Part II
Second Mid-Term Exam Corporate Finance Part II
Second Mid-Term Exam Corporate Finance Part II
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<strong>Second</strong> <strong>Mid</strong>-<strong>Term</strong> <strong>Exam</strong> <strong>Part</strong> <strong>II</strong><strong>Corporate</strong> <strong>Finance</strong>Academic Year 2012/2013 December 17, 2012In <strong>Part</strong> <strong>II</strong> you have to solve an exercise an explain your results. Explain every step clearly andinterpret your findings. Use the empty boxes provided for the solution.Note that you can only ask for and start to work on <strong>Part</strong> <strong>II</strong> after delivering <strong>Part</strong> I.Duration of the exam: 105 minutes from which the indicated time for <strong>Part</strong> I is 60 minutes and for<strong>Part</strong> <strong>II</strong> is 45 minutes.Name:1. Lone Star Industries just issued £160,000 of perpetual 10% debt and used the proceeds to repurchaseequity. The company expects to generate £75,000 of earnings before interest and taxes inperpetuity. The company distributes all its earnings as dividends at the end of each year. Thefirm’s unlevered cost of capital is 18%, and the corporate tax rate is 28%.(a) What is the value of the company as an unlevered firm?1
<strong>Corporate</strong> <strong>Finance</strong> <strong>Second</strong> <strong>Mid</strong>-<strong>Term</strong> <strong>Exam</strong> December 17, 2012(b) Use the adjusted present value method to calculate the value of the company with leverage.(c) What is the required return on the firm’s levered equity?(d) Use the flow to equity method to calculate the value of the company’s equity.2
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