NAME:SID :GSI :University of CaliforniaWalter A. Haas School of BusinessUGBA 103Introduction to FinanceProf. Dmitry Livdan 12 December 2016FINALQuestion BookletINSTRUCTIONS1. 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 con-duct.3. You have 3 hours4. The exam consists of 1 long question5. Use the white spaces (and backs of pages) in this question booklet as scratch paper for themultiple 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 sheetbooklet. Also indicate your LECTURE section.8. This is an open-book exam!9. Laptops, PCs, PDAs, IPhones, IPads, and any other WiFi-enabled communication enablingdevices are prohibitedUGBA 103 FINAL 2(35 points total) Rednow Co. pays 40% in corporate taxes and is financed entirely by commonstock with a 1,000 shares outstanding trading at $105 per share. Rednow has only assets-in-placeand, thus, does not grow.(1) The CAPM beta of Rednow’s equity, βRE, is the same as the CAPM asset beta, βLUA, ofLillyUpick, a company with a zero tax rate, market risk of 37.5%, and financed by equity andrisk-free debt, yielding 5%. LillyUpick’s debt-to-equity ratio is23. You should treat LillyUpick’sassets as a portfolio of equity and risk-free debt with portfolio weights equal toEE+DandDE+D,respectively.(i) (2 points) (3 points) If the excess return (i.e. r − rf) on the efficient portfolio with the samerisk as the LillyUpick’s market risk is 1.5 times the market risk premium, calculate LillyUpick’sequity beta, βLUE;(ii) (2 points) Calculate the expected market return, rm, if the market’s Sharpe’s ratio is equalto 0.4;(iii) (2 points) beta of LillyUpick’s assets, βLUA;(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, paying30% in corporate taxes, and financed by $25,000 of risk-free debt and $50,000 of equity. Just likeRednow, BigDeal has only assets-in-place and, thus, does not grow. The deal is as follows - Rednowwill buy BigDeal for $110,000 using exclusively risk-free debt. The combined company’s effectivecorporate 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 ofthe 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 IFYOU DID NOT SOLVE FOR IT IN THE FIRST QUESTION! The rest of the exam is on thenext 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, P0, 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 usefulto solve this part. A third firm, BSF, is all-equity, has a unique risk of 20% and the same beta asthe efficient portfolio with the portfolio weight of -0.7 on the risk-free asset. What is BSF’s