NAME SID GSI University of California Walter A Haas School of Business UGBA 103 Introduction to Finance Prof Dmitry Livdan 12 December 2016 FINAL Question Booklet INSTRUCTIONS 1 Please don t open the exam until you are told to do so 2 This exam is being administered under the University s rules for academic conduct 3 You have 3 hours 4 The exam consists of 1 long question 5 Use the white spaces and backs of pages in this question booklet as scratch paper for the multiple choice questions Your final answers should be indicated with a pen 6 Write your answers on the empty pages or on the back 7 Important PRINT YOUR NAME AND SIS ID on the first page of your answer sheet booklet Also indicate your LECTURE section 8 This is an open book exam 9 Laptops PCs PDAs IPhones IPads and any other WiFi enabled communication enabling devices are prohibited UGBA 103 FINAL 2 35 points total Rednow Co pays 40 in corporate taxes and is financed entirely by common stock with a 1 000 shares outstanding trading at 105 per share Rednow has only assets in place and thus does not grow R is the same as the CAPM asset beta LU of 1 The CAPM beta of Rednow s equity E A LillyUpick a company with a zero tax rate market risk of 37 5 and financed by equity and risk free debt yielding 5 LillyUpick s debt to equity ratio is 23 You should treat LillyUpick s E D assets as a portfolio of equity and risk free debt with portfolio weights equal to E D and E D respectively i 2 points 3 points If the excess return i e r rf on the efficient portfolio with the same risk as the LillyUpick s market risk is 1 5 times the market risk premium calculate LillyUpick s LU equity beta E ii 2 points Calculate the expected market return rm if the market s Sharpe s ratio is equal to 0 4 LU iii 2 points beta of LillyUpick s assets A iv Rednow s equity return 1 point P E ratio 1 point and EBIT per share 1 point UGBA 103 FINAL 3 2 Rednow Co has an opportunity to acquire BigDeal Co a company with 2000 shares paying 30 in corporate taxes and financed by 25 000 of risk free debt and 50 000 of equity Just like Rednow BigDeal has only assets in place and thus does not grow The deal is as follows Rednow will buy BigDeal for 110 000 using exclusively risk free debt The combined company s effective corporate tax rate will be 35 i 2 points If the deal goes through what price per share will BigDeal s shareholders get ii 5 points Should Rednow proceed with this acquisition HINT Calculate equity value of the combined firm iii 4 points Calculate the P E ratio for the combined company if BigDeal has a P E ratio equal to 10 UGBA 103 FINAL 4 3 Rednow has decided not to go with the acquisition i e it is still all equity firm Instead Repus embarks on a growth plan it reinvests all of its today s earnings per share found in the part 1 of this exam 2 3 of its year 1 earnings and then plans to reinvest 50 of its earnings forever The return on equity ROE specific to this investment opportunity is 60 today 50 next year and 20 for all remaining years Each investment pays forever USE 15 DISCOUNT RATE IF YOU DID NOT SOLVE FOR IT IN THE FIRST QUESTION The rest of the exam is on the next page i 1 point What is the Rednow s EPS investment and dividend in year 1 ii 2 points What is the Rednow s EPS investment and dividend in year 2 iii 2 points What is the Rednow s EPS investment and dividend in year 3 iv 1 point What is the Rednow s EPS and dividend in year 4 v 5 points What is Rednow s price P 0 with this reinvestment policy UGBA 103 FINAL 5 4 3 points Make use of any information from previous parts of this exam you may find useful to solve this part A third firm BSF is all equity has a unique risk of 20 and the same beta as the efficient portfolio with the portfolio weight of 0 7 on the risk free asset What is BSF s Sharpe ratio