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IB9E4 Advanced Corporate Finance
Questions:
• Questions should be answered directly and to the point. The marks assigned to a question are generally a good indicator of how much you need to write. Lengthy answers could indicate lack of understanding of the question and an attempt to include more detail than required with the hope that the correct answer is somewhere buried in the essay. Marks may be deducted for such responses.
• Where calculations are involved, ALL steps must be shown in a sequential manner. As a rule, more is better than less. You will lose marks if there is any doubt as to how a number has been obtained. Calculations copied and pasted from Excel (or any other spreadsheet program) are not acceptable and you will not get any marks for such responses.
• Citations and References: You should cite sources though this is not to be considered as coursework, and as such it is not expected for you to include lengthy quotes, and no formal referencing is required Plagiarism: All submissions will be put through Turnitin and tested for plagiarism. Therefore, please do not copy contents from web and/or any other source.
Diagrams, Figures or Tables
If you are including any diagrams, figures or tables in your answer, these must not be copied from the internet or any other source. Please include your own figures/diagrams, i.e. drawn using a suitable editor or drawn and inserted by you. Figures should be cited in the main text and appropriately explained.
1: a) Based on information in the following table, comment on the free cash flow for the five years below and determine if the firm can meet its financial commitments, if applicable.
b) In the light of the current pandemic and given the situation as of the date of your exam, discuss what a firm in the hospitality industry can do to preserve cash flow.
2: a) LMN Corp is expected to have free cash flow in the coming year of $8 million. This free cash flow is expected to grow at a rate of 3% per year thereafter. LMN has an equity cost of capital of 13%, a debt cost of capital of 7%, and it has a 21% corporate tax rate. If LMN currently maintains a debt-to-equity ratio of 0.5, then what is the value of LMN’s interest tax shield?
b) ABC Inc has no debt on its balance sheet in 2019. The firm paid $1.6 billion in taxes. Assume that ABC’s marginal tax rate is 35% and its borrowing cost is 7%. Also, ABC’s investors pay a 15% tax rate on income from equity and a 35% tax rate on interest income. If ABC had to issue sufficient debt to reduce its corporate taxes by $1 billion per year permanently, then what value would be created?
c) Governments around the world have borrowed a significant amount of money to pay for the pandemic. Ultimately, this money must be paid back and there are only two ways to do it; cut spending and/or increase taxes. Pick a country that has taken on a significant amount of debt to pay for the pandemic and make the case for how it should be paid back.
3: DEF Inc has 8 million shares outstanding and is about to issue 10 million new shares in an initial public offering (IPO). The IPO price has been set at $15 per share, and the underwriting spread is 6%. At the end of the first day of trading, the share price is $14.50.
a) Using the information above and after performing the necessary calculations, present the details of this IPO along with your opinion to a prospective investor who is considering buying shares of DEF Inc in the after-market.
b) How likely is it that the above IPO is a Special Purpose Acquisition Company (SPAC) IPO and why? Discuss the method that SPAC IPOs are likely to use to go public and why it may be preferred to other methods.
4: a) Jane works for a leveraged buyout firm. She is evaluating a potential buyout of ZYX Inc. ZYX’s stock price is $18 and it has 3 million shares outstanding. Jane believes that if the company is bought and the management team replaced, its value will increase by 50%. Jane plans on doing a levered buyout of ZYX and will offer $25 per share for control of the company. Assuming Jane gets 50% control, what will her gain from the transaction be?
b) With proper justification, predict the state of corporate finance at the end of next year (i.e. 2022).
Note:
You should obviously keep the current pandemic in mind and your answer should relate to topics covered in the module. You are welcome to focus on a particular country or countries, or you can provide a more general answer. All assumptions must be clearly stated.
IB9E4 Advanced Corporate Finance
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