This study source was downloaded by 100000793868386 from CourseHero com on 04 07 2023 10 41 56 GMT 05 00 https www coursehero com file 52948710 UGBA103B FIN F2018 Spdf UniversityofCaliforniaWalterA HaasSchoolofBusinessUGBA103IntroductiontoFinanceProf DmitryLivdan10December2018SolutionstotheFINAL 35pointstotal SirapCo pays40 incorporatetaxesandis nancedentirelybycommonstockwitha1 000sharesoutstandingtradingat 75pershare Siraphasonlyassets in placeand thus doesnotgrow Therisk freedebtyields5 andthemarketriskpremiumisequalto8 LetEPSstandforearningspershare Eforequity andDfordebt 1 TheCAPMbetaofSirap sequity E istwicetheportfolioweightontherisk freeassetofthee cientportfoliowithareturnequalto6 6 Calculate i 3points Sirap sbeta E Thereturnofthee cientportfolioisequalto 6 6 5 w 8 w 0 2 fromwherewecan ndthattheportfolioweightontherisk freeassetisequalto1 0 2 0 8whichimplies E 2 0 8 1 6 ii 1point therequiredreturnontheSirap sstock UsingCAPMweobtain rE 5 1 6 8 17 8 rA iii 1point Sirap s P EPS ratio keep3digitsafterthedecimalpoint Wehave P EPS 1rE 10 178 5 618 iv 1point Sirap sEPS keep2digitsafterthedecimalpoint Wehave 75EPS 5 618 EPS 13 35 2 Forthispartofthesolution allthe primed variables likeE cid 48 denote after re nancing variables SirapnowdecidestoswitchtoDE cid 48 2byusingdebttorepurchasecommonstock Ifthedebtisrisk free calculate i 3points Theamountofdebtissued keep2digitsafterthedecimalpoint This study source was downloaded by 100000793868386 from CourseHero com on 04 07 2023 10 41 56 GMT 05 00 https www coursehero com file 52948710 UGBA103B FIN F2018 Spdf UGBA103FINAL Solutions2Afterdebtisissuedwehavethat VL D E cid 48 1 5D VU D 1 000 75 D whichwecansolveforD 75 000 1 1 68 181 82 ii 1point Thenewpricepershare keep2digitsafterthedecimalpoint Thenewpriceistheoldpriceplustheinteresttaxshieldpershare P cid 48 75 0 4 68 18 102 27 iii 2points Thenumberofrepurchasedshares pleaseroundthenumbertomakeitinteger Wecancalculatethenumberofrepurchasedsharesbydividingthedebtbytheshareprice 68 181 82 102 27toget667or2 3ofallshares iv 2points Thenewearningspershare EPS cid 48 keep2digitsafterthedecimalpoint Afterthere nancing weneedtopayaftertaxinteresttothedebtholdersleadingtothefollowingvalueofthetotalearnings ERN ERN cid 48 13 350 1 rDD 13 350 0 6 0 05 68 181 82 11 310 Sincewehaveonly1 3ofthesharesremainingEPS cid 48 11 310 333 33 95 v 1point Thenewprice earningsratio keep2digitsafterthedecimalpoint WehavethenewpriceandnewEPS P EPS cid 48 102 27 33 95 3 01 vi 3points Betaofthecommonstockafterthere nancing Afterthere nancing wehaveusingMMTII withtaxes andDE cid 48 1 rE cid 48 rA 1 DE cid 48 rA rD 17 8 0 6 2 17 8 5 33 16 whichimpliesfromtheCAPM E cid 48 33 16 5 8 3 52 Itisalsocorrecttouse rE cid 48 33 95 102 27 100 33 2 to ndrE cid 48 This study source was downloaded by 100000793868386 from CourseHero com on 04 07 2023 10 41 56 GMT 05 00 https www coursehero com file 52948710 UGBA103B FIN F2018 Spdf UGBA103FINAL Solutions3 3 Siraphasdecidednottogowiththerecapitalization i e itisstillall equity rm Instead Sirapconsidersthefollowing5 yeargrowthplan itwillreinvest 10outofitsearningspersharefor5yearsstartingfromyear1 Itwillstopthereinvestmentinyear6andwillcontinueontheno growthpathpayingallEPSasdividends Theafter taxreturnonequity ROE is30 inyear1 25 inyear2 and20 foreverstartingfromyear3 Eachinvestmentpaysforever Keep2digitsafterthedecimalpointforyouranswersthroughoutthisquestion i 1point WhatistheSirap sEPSanddividendinyear2 EPS2 13 35 0 30 10 16 35 I2 10andD2 6 35 ii 1point WhatistheSirap sEPSanddividendinyear3 EPS3 13 35 0 25 10 10 18 35 I3 10andD3 8 35 iii 1point WhatistheSirap sEPSanddividendinyear4 EPS4 13 35 0 2 10 10 10 19 35 I4 10andD3 9 35 iv 1point WhatistheSirap sEPSanddividendinyear5 EPS5 13 35 0 2 10 10 10 10 21 35 I5 10andD5 11 35 v 3points WhatisSirap sEPSinyear6andprice P cid 48 withthisreinvestmentpolicy EPS6 13 35 0 2 10 10 10 10 10 23 35 Wecannowcalculatethepriceusingthediscountrateof16 fromthe rstpart P cid 48 3 351 178 6 351 1782 8 351 1783 9 351 1784 11 351 1785 11 1785 23 350 178 80 22 vi 1point WhatisPVGOfromsuchinvestmentpolicy PVGO P cid 48 75 80 22 75 5 22 This study source was downloaded by 100000793868386 from CourseHero com on 04 07 2023 10 41 56 GMT 05 00 https www coursehero com file 52948710 UGBA103B FIN F2018 Spdf UGBA103FINAL Solutions4 4 Sirapdecidestousedebtinsteadofearningsto nancetheinvestmentsfrompart 3 Speci cally itwillgeta5 yearrisk freeloanwithafacevaluepershareequaltothePV AllInvestments andthenwillrepayitin veequalinstallmentsof 10pershare Eachinstallmentconsistsoftheprincipalandinterestpayments Keep2digitsafterthedecimalpointforyouranswersthroughoutthisquestion i 1point Whatisthefacevalueoftheloan total notpershare D 10 0000 05 1 11 055 43 294 77 Youneedto gureouttheinterestpaymentonthedebteachyear Tablebelowwillnavigateyouthroughthistask ThetoprawoftheTableshowstheamountofprincipalthatneedstoberepaidandonwhichtheinterestischarged i e InterestPaid t rD PrincipalOutstanding t Thetotalannualrepaymentof10 000consistsoftheInterestPaid t andPrincipalPaid t Fillinthetablebyansweringquestionsbelow EndofYear12345Principaloutstanding43 294 7735 459 5127 232 4918 594 119 523 82Paymentsonthedebt10 000 0010 000 0010 000 0010 000 0010 000 00Interestpaid2 164 741 772 981 361 62929 71477 18Principalpaid7 835 268 227 028 638 389 070 299 523 82Interesttaxshield865 90709 19544 65371 88190 87 ii 1point WhataretheInterestPaid t PrincipalPaid t andinteresttaxshieldinyear1 InterestPaid 1 2 164 74 PrincipalPaid 1 7 835 26 andinteresttaxshield 865 90 iii 1point WhataretheInterestPaid t PrincipalPaid t andinteresttaxshieldinyear2 InterestPaid 2 1 772 98 PrincipalPaid 2 8 227 02 andinteresttaxshield 709 19 iv 1point WhataretheInterestPaid t PrincipalPaid t andinteresttaxshieldinyear3 InterestPaid 3 1 361 62 PrincipalPaid 3 8 638 38 andinteresttaxshield 544 65 v 1point WhataretheInterestPaid t PrincipalPaid t andinteresttaxshieldinyear4 InterestPaid 4 929 71 PrincipalPaid 4 9 070 29 andinteresttaxshield 371 88 vi 1point WhataretheInterestPaid t PrincipalPaid t andinteresttaxshieldinyear5 InterestPaid 5 477 18 PrincipalPaid 5 9 523 82 andinteresttaxshield 190 87 This study source was downloaded by 100000793868386 from CourseHero com on 04 07 2023 10 41 56 GMT 05 00 https www coursehero com file 52948710 UGBA103B FIN F2018 Spdf Powered by TCPDF www tcpdf org UGBA103FINAL Solutions5 vii 1point Whatisthepresentvalueofthetaxshieldspershare PV taxshieldspershare cid 20 865 901 05 709