FINANCIAL MANAGEMENT

FIN310 – Financial Management

Responsable du module : Johan WIENBELT

Semestre 6 - Année 2020-2021

Consignes / Spécifications:

Final Exam Subject – 5 May 2021

Exam Instructions:

1. Please put your name/surname on your exam sheet;

2. You have 120 minutes to complete the exam;
3. The formulas are listed below;
4. Points are indicated per question. There is no penalty;
5. There are only open questions, 1.1-1.10, 2.1 and 2.2, 3.1-3.4;
6. Write your formulas and calculations clearly, each step. Correct formulas /
calculations with wrong answers still receive points.
Answers without calculations receive less points;
7. You can reply by writing in a Word document (show your formulas and
calculations!) or in Excel;
8. Write compact, factual answers. Save time, no stories!
9. Total maximum points = 54 points.
A compléter par l’étudiant (si les étudiants doivent répondre sur le sujet) :

Nom : ……………………………………………………………………………………..

Prénom : ...……………………………………………………………………………….

Numéro : …………………………………………
 Formulas

MAIN FORMULAS PROVIDED FOR THE FINAL EXAM

Annuity formula

F Future value of annuity

Variance of returns

Financial Management - session 1 153

MAIN FORMULAS PROVIDED FOR THE FINAL EXAM

Correlation
and
covariance
of returns

The standard deviation of a portfolio with two stocks

Var(

Financial Management - session 1 154

 MAIN FORMULAS PROVIDED FOR THE FINAL EXAM

Beta definitions.

Financial Management - session 1 155

 Final Exam

Questions
Part 1. Risk and Return (25 points: 2 + 2 + 2 + 2 + 3 + 2 + 4 + 3 + 3 + 2)
1. Question 1.1 (2 points)
Pharmaceutical company Corovacc is investing in a vaccine against a nasty virus. This requires a
lot of money. Corovacc considers financing itself on the financial markets.
Which are the two different financial securities Corovacc can sell on the markets?

2. Question 1.2 (2 points)

Investors can buy Corovacc’s financial securities on the financial markets. Who is the issuer? Who
is the borrower of funds? Who is the lender?

3. Question 1.3 (2 points)

Stocks and bonds have different risk profiles. Why is investing in stocks generally considered
riskier?

4. Question 1.4 (2 points)

Following your reasoning in question 3, should the return for an equity investor in general be
higher, lower, or equal to the required return for investing in corporate bonds?

5. Question 1.5 (3 points)

Corovacc needs €1bn to develop the vaccine. It wishes to keep its capital structure unchanged,
measured by its Debt to Equity ratio. Corovacc’s D / E currently stands at 2.0. If Corovacc sells
bonds for a price of €100 each, how many bonds should it sell?

6. Question 1.6 (2 points)

Corovacc’s 5-year corporate bond is paying an annual coupon of 1.75% and redeems 100% Par
value at maturity date. The yield-to-maturity is 3%.
Is this a discount or a premium bond? Explain.

7. Question 1.7 (4 points)

What is the fair price of Corovacc’s bond assuming a 3% yield to maturity (in 2 decimals)?

8. Question 1.8 (3 points)

Corovacc’s stocks are listed on Euronext. Corovacc has just paid a cash dividend of €6 per share.
Investors require a 12% return from investments such as this. If the dividend is expected to grow
at a steady 1.25% per year, what is the current value of the stock (in 2 decimals)?

9. Question 1.9 (3 points)

Given the Cost of Equity of 12%, a risk-free rate of 2% and a market return of 8%, what is
Corovacc’s beta (in 2 decimals)?

10. Question 1.10 (2 points)

Using the outcome question 10, is Corovacc’s share riskier ort less risky than market average?
Explain why.
Part 2. Bank loan financing (15 points: 10 + 5)
1. Question 2.1 (2*5 points)
Corovacc consults its bankers to finance their investment with a bank loan. It receives
two different offers.
Calculate the amortization tables?

Offer 1 for a bank loan:

- Amount of the loan: €1bn;
- Stated interest rate: 5% per year;
- Method of payment: Equal Total payment;
- Length of the loan: 6 years;
- Frequency of payments: annually;
- Bank fees: €2.5m (one-off, to be paid when receiving the loan at t0);
- Insurance cost: €1.2m per year;
- Corporate tax rate: 22%.

Offer 2 for a bank loan:

- Amount of the loan: €1bn;
- Stated interest rate: 4.5%;
- Method of payment: Equal Principal payment;
- Length of the loan: 5 years;
- Frequency of payments: annually;
- Bank fees: €2.75m (one-off, to be paid when receiving the loan at t0);
- Insurance cost: €1.8m per year;
- Corporate tax rate: 22%.

2. Question 2.2 (5 points)

Corovacc compares the total Interest paid of both offers during the length of the loan.

Show the total Interest of both loans (2 + 2 points). Which offer should Corovacc
choose? (1 point)
Part 3 Capital budgeting (14 points: 7 + 1 + 1 + 5)

Corovacc is considering developing 2 vaccines.

The first one called, vector vaccine, is based on the existing technique of a weak, active virus. A
common flu-virus is the carrier or “vector”, with an add-on, small piece of the Corona virus. The
idea is that the vector enters the human body, like a common flu and then activates the human
immune system against Corona.

The second vaccine is a new, revolutionary one, based on the mRNA technique. The synthetic
mRNA contains the code for producing a protein. Once injected, the protein is produced by the
human body, which then attacks it as “foreign”.

These are the cash-flows for both investment projects:

Project 1 "Vector" (in million €)

Years 0 1 2 3 4 5
Cash-flows -600 -280 40 270 375 600

Project 2 "mRNA" (in million €)

Years 0 1 2 3 4 5
Cash-flows -1,000 -680 -220 200 700 1,150

We suppose that Corovacc’s WACC is 7%.

• Question 3.1 (7 points) Compute the NPV for both projects?

• Question 3.2 (1 point)

Using the NPV as decision criterion on both projects, if Corovacc would have sufficient cash to
execute both projects, which one(s) would you advise Corovacc to proceed with?

• Question 3.3 (1 point)

Imagine that Corovacc could ask the government for an innovation grant, a cash contribution in
year 0. The government grant would be bestowed for a negative NPV-project, it would cover part
of the initial investment and its purpose is to reach a positive NPV.

What should be the minimum amount of a government innovation grant?

• Question 3.4 (5 points: 3 + 2 points)

Corovacc can sub-contract the mRNA vaccine from another producer: project 3 “Sub-
contact”. The Profitability Index (PI) of project “Sub-contract” is 1.25.

Corovacc is subject to capital rationing and can execute only 1 project. Calculate the
Profitability Index of project 1 “Vector”? (3 points)
Comparing the PIs of projects “Vector” and “Sub-contract” which project do you advise
Corovacc to execute? (2 points)