NAME:SID :GSI :University of CaliforniaWalter A. Haas School of BusinessUGBA 103Introduction to FinanceProf. Dmitry Livdan 10 December 2018FINALQuestion 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) Sirap Co. pays 40% in corporate taxes and is financed entirely by commonstock 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%. LetEPS stand for earnings per share, E for equity, and D for debt.(1) The CAPM beta of Sirap’s equity, βE, is twice the portfolio weight on the risk-free asset ofthe efficient portfolio with a return equal to 6.6%. Calculate:(i) (3 points) Sirap’s beta, βE;(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 thenext page!UGBA 103 FINAL 3(2) (For this part of the solution, all the “primed” variables, like E0, denote “after-refinancing”variables.) Sirap now decides to switch toDE0= 2 by using debt to repurchase common stock. Ifthe 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 nextpage!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 sharefor 5 years starting from year 1. It will stop the reinvestment in year 6 and will continue on theno-growth path paying all EPS as dividends. The after-tax return on equity (ROE) is 30% in year1, 25% in year 2, and 20% forever starting from year 3. Each investment pays forever. Keep 2digits 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, P0, with this reinvestment policy?(vi) (1 point) What is Sirap’s PVGO from such investment policy? Exam continues on thenext 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(AllInvestments) and then will repay it in five equal installments of $10 per share. Each installmentconsists of the principal and interest payments. Keep 2 digits after the decimal point for youranswers 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 navigateyou through this task. The top raw of the Table shows the amount of principal that needs to berepaid 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 inthe table by answering questions below.End of Year1 2 3 4 5Principal outstandingPayments on the debt 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00Interest paidPrincipal paidInterest tax shield(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, P0with this debt financed