Finance

The Enterprise value is obtained:

• subtracting the net debt from the fixed assets

• dividing the FCF by the opportunity cost of capital

• adding the working capital to the value of equity

• adding the working capital to the net debt

According to the Modigliani and Miller's first proposition (with no taxes):

• the firm value is equal to the market value of the total cash flows generated by its assets

• the firm value is determined by the proportions of debt and equity securities issued to buy the assets

• as leverage increases, the value of the firm decreases proportionally

• as leverage increases, the value of the firm always grows proportionally

Which of the following sentences is wrong:

• a convertible bond is like a traditional bond except that it also gives the holder the right to exchange it for one or more shares of the issuing company during a conversion period set in advance

• warrants can be separated into distinct securities while a convertible cannot

• the exercise of warrants does not guarantee an additional cash inflows to the company

• in a convertible bond the band value provides a floor to the price of the security

According to the Pecking order theory:

• internal funds don't require private information release

• profitable firms use more debt

• there is a target debt/equity ratio

• companies don't like financial slack

Alfa is a company operating in the food industry, and at the end of 2019 was financed only with debt and equity. In 2020, Alfa issued a convertible bond. Supposing that the cost of debt and cost of equity remain equal after the convertible bond emission, the WACC will be:

• higher than the WACC pre convertible bond emission

• lower than the WACC pre convertible bond emission

• the same

• equal to the cost of equity

Compute the enterprise value for company Alfa considering the following data:  EV = Free cash flow / rA

- working capital: 500,

- fixed assets: 800;

- net debt: 350;

- equity: 950,

• 1300

• 1750

• the calculation is not possible with the provided data

• 850

Compute the conversion price of a convertible bond using the following data:

- 7 year callable convertible bond;

- coupon: 4%;

- par value: 2,000;

- straight debt issue would require a 5% coupon;

- call protection: 4 years;

- call price: 2,155;

- Pe: 30;

- De: 1.5;

- g: 5%;

- conversion ratio: 52 shares;

- tax rate: 28%.

• about 41.35

• about 38.46

• about 31.50

• about 155

Answer explanation

Conversion Price = Par Value / Conversion Ratio

As seen in the Diageo case, the weighted average volatility of the company ROA is lower than the volatility of the ROA of each of the sectors in which the company operates, because:

• the company operates in emerging markets only

• the company has a lower working capital respect to the competitors

• the sectors in which the company operates are not correlated and this difference is due to the diversification effect

• none of the above

Compute the beta unlevered of a company using the following data:

- beta equity: 1.14;

- debt: 32,340,000;

- market capitalization: 190,800,000;

- fixed costs: 11,989,000;

- variable costs: 14,340,000.

• about 0.17

• about 0.97

• about 1.14

• about 1.10

Answer explanation

Levered Beta = Unlevered Beta x [1 + (1 - Tax Rate) x (Debt / Equity)]

Unlevered Beta = Levered Beta / [1 + (1 - Tax Rate) x (Debt / Equity)]

According to the Modigliani and Miller's second proposition with no taxes leverage increases the expected stream of earnings per share but not the share price:

• Modigliani and Miller's second proposition states that leverage increases the expected revenues not the expected earnings per share

• because the change in the expected earnings stream is exactly offset by a change in the rate at which the earnings are discounted

• because increasing debt decrease the magnitude of depreciation

• because increasing debt increase the magnitude of EBITDA