NAME SID GSI University of California Walter A Haas School of Business UGBA 103 Introduction to Finance Prof Dmitry Livdan 10 December 2018 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 Sirap Co pays 40 in corporate taxes and is financed entirely by common stock with a 1 000 shares outstanding trading at 75 per share Sirap has only assets in place and thus does not grow The risk free debt yields 5 and the market risk premium is equal to 8 Let EPS stand for earnings per share E for equity and D for debt 1 The CAPM beta of Sirap s equity E is twice the portfolio weight on the risk free asset of the efficient portfolio with a return equal to 6 6 Calculate i 3 points Sirap s beta E ii 1 point the required return on the Sirap s stock iii 1 point Sirap s P EPS ratio keep 3 digits after the decimal point iv 1 point Sirap s EPS keep 2 digits after the decimal point Exam continues on the next page UGBA 103 FINAL 3 2 For this part of the solution all the primed variables like E 0 denote after refinancing variables Sirap now decides to switch to ED0 2 by using debt to repurchase common stock If the debt is risk free calculate i 3 points The amount of debt issued keep 2 digits after the decimal point ii 1 point The new price per share keep 2 digits after the decimal point iii 2 points The number of repurchased shares please round the number to make it integer iv 2 points The new earnings per share EPS0 keep 2 digits after the decimal point v 1 point The new price earnings ratio keep 2 digits after the decimal point vi 3 points Beta of the common stock after the refinancing Exam continues on the next page UGBA 103 FINAL 4 3 Sirap has decided not to go with the recapitalization i e it is still all equity firm Instead Sirap considers the following 5 year growth plan it will reinvest 10 out of its earnings per share for 5 years starting from year 1 It will stop the reinvestment in year 6 and will continue on the no growth path paying all EPS as dividends The after tax return on equity ROE is 30 in year 1 25 in year 2 and 20 forever starting from year 3 Each investment pays forever Keep 2 digits after the decimal point for your answers throughout this question i 1 point What is the Sirap s EPS and dividend in year 2 ii 1 point What is the Sirap s EPS and dividend in year 3 iii 1 point What is the Sirap s EPS and dividend in year 4 iv 1 point What is the Sirap s EPS and dividend in year 5 v 3 points What is Sirap s EPS in year 6 and price P 0 with this reinvestment policy vi 1 point What is Sirap s PVGO from such investment policy Exam continues on the next page UGBA 103 FINAL 5 4 Sirap decides to use debt instead of earnings to finance the investments from part 3 Specifically it will get a 5 year risk free loan with a face value per share equal to the PV All Investments and then will repay it in five equal installments of 10 per share Each installment consists of the principal and interest payments Keep 2 digits after the decimal point for your answers throughout this question i 1 point What is the face value of the loan total not per share You need to figure out the interest payment on the debt each year Table below will navigate you through this task The top raw of the Table shows the amount of principal that needs to be repaid and on which the interest is charged i e InterestPaid t rD PrincipalOutstanding t The total annual repayment of 10 000 consists of the InterestPaid t and PrincipalPaid t Fill in the table by answering questions below 1 Principal outstanding Payments on the debt Interest paid Principal paid Interest tax shield 10 000 00 End of Year 2 3 10 000 00 10 000 00 4 5 10 000 00 10 000 00 ii 1 point What are the InterestPaid t PrincipalPaid t and interest tax shield in year 1 iii 1 point What are the InterestPaid t PrincipalPaid t and interest tax shield in year 2 iv 1 point What are the InterestPaid t PrincipalPaid t and interest tax shield in year 3 Exam continues on the next page UGBA 103 FINAL 6 v 1 point What are the InterestPaid t PrincipalPaid t and interest tax shield in year 4 vi 1 point What are the InterestPaid t PrincipalPaid t and interest tax shield in year 5 vii 1 point What is the present value of the tax shields per share viii 2 points What is the new stock price P 0 with this debt financed project