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Berkeley UGBA 103 - UGBA103A_FIN_F2015

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University of CaliforniaWalter A. Haas School of BusinessUGBA 103Introduction to FinanceProf. Dmitry Livdan 17 December 2015FINALQuestion 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 on the first page of your answer sheet booklet. Alsoindicate 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) Deiter Yolen (D&Y) is an all-equity perpetual company with 10 million sharesoutstanding trading at the current P/E ratio of 5. Its assets have just produced EBIT per shareof $20 and it pays all of its earnings as dividends. Its effective tax rate is equal to 40%. D&Y hasonly 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 backsome 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 $10per share during last 3 years out of its earnings into developing a new drug. After 5 years the drugwill 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 yearswhen you invest $10, and each $1 of investment pays forever starting one year after the investmenthas been made. The first investment will be made 1 year from now and the last one will be madein 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 thanearnings. Specifically, it will borrow today the PV(All Investment) at 3%, use it to finance all fiveinvestments, and will repay it as a perpetual bond.(i) (7 points) Calculate the new price per share with project and debt financing. (HINT: Nowcompany 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 dividendswith


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