University of California Walter A Haas School of Business UGBA 103 Introduction to Finance Prof Dmitry Livdan 17 December 2015 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 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 Deiter Yolen D Y is an all equity perpetual company with 10 million shares outstanding trading at the current P E ratio of 5 Its assets have just produced EBIT per share of 20 and it pays all of its earnings as dividends Its effective tax rate is equal to 40 D Y has only assets in place and thus does not grow 1 2 points What is D Y s cost of capital i e rA and what is its price per share P0 2 D Y is considering issuing 100 million in perpetual debt at a cost of rD 5 to buy back some equity If D Y decides to do the buy back i 1 point What is the value of the levered firm ii 1 point What is the value of equity after the recapitalization iii 2 points What is the price at which equity is repurchased iv 2 points How many shares have to be repurchased v 2 points What is the equity return of the recapitalized levered company vi 2 point What is D Y s WACC UGBA 103 FINAL 3 3 D Y has decided not to go with the recapitalization i e it is still all equity firm Instead D Y has a new investment opportunity reinvest 12 per share during first 2 years and then 10 per share during last 3 years out of its earnings into developing a new drug After 5 years the drug will be developed The return before taxes on the project is 60 r 60 for the first 2 years i e in years when you invest 12 and 40 also before taxes for the last 3 years i e in years when you invest 10 and each 1 of investment pays forever starting one year after the investment has been made The first investment will be made 1 year from now and the last one will be made in year 5 a 8 points What is the D Y s price per share with the project b 2 points What is D Y s PVGO per share with this project UGBA 103 FINAL 4 c After some deliberation D Y decides to finance its new project with debt rather than earnings Specifically it will borrow today the PV All Investment at 3 use it to finance all five investments and will repay it as a perpetual bond i 7 points Calculate the new price per share with project and debt financing HINT Now company is levered ii 3 points What is D Y s WACC with this financing ONE MORE QUESTION ON NEXT PAGE UGBA 103 FINAL 5 iii 2 points Show that you can get the answer in part a by discounting D Y s dividends with WACC