MID-TERM TEST- No 03

SUBJECT: CORPORATE PRICING

SEMESTER 1, 2020-2021
Duration: 70 minutes

E1 (1 mark) A company has the following capital structure:

Target weightings: 30% debt, 20% preferred stock, 50% common equity. Tax Rate: 35%. The firm can issue
$1,000 face value, before-tax cost of debt is 6.5%. A preferred stock issue that pays a dividend of $2.80 has a
value of $35 per share. The company's growth rate is estimated at 6%. The company's common shares have a
value of $40 and a dividend in year 0 of D0 = $3.00. What is the company's weighted average cost of capital?
E2 (1 mark) An annuity will pay eight annual payments of $100, with the first payment to be received one
year from now. If the interest rate is 12% per year, what is the present value of this annuity?
E3 (3 marks): Company X has a summarized balance sheet at 31/12/N Currency unit: mVND
Assets Book value Sources of financing Book value

Current Assets 1700 Liabilities 1900

Non-current Assets 2800 Owner’s Equity 2600

Total Assets 4500 Liabilities + Owner’s Equity 4500

According to the revaluation of all assets and liabilities, there has been some changes taking place:
1. The original and accumulated depreciation of the fixed assets at 31/12/N
Kinds of fixed assets The original price Accumulated depreciation

1. Real estate property 500 150

2. Machines 800 300
3. Transportations 300 200
4. Management tools 180 90
5. Others 200 110

Total fixed assets 1,980 850

According to the revaluation of all assets and liabilities, there has been some changes taking place
The revaluation ratio of the fixed assets by the book value.
- Real estate property: 0.8; Machines: 0.8; Transportations: 0.9; Management tools: 0.75; Others: 0.9
2. Some receivables that are not be able to collect have a book value of 50 million VND while some doubtful
receivables with the book value of 80 million VND have been acquired by a debt trading company with the
price being equal to 40% of its recorded value.
3. Obsolete and unserviceable raw materials inventory has a book value of 70 million VND
4. X still has to pay the fixed assets rental payments during the next 10 years, 50 million VND per year. In
order to rent an equivalent asset at this moment, a company has to pay the amount of 58 mVND each year.
5. Investing in securities of company B: (2000 stocks) book value is 200 million VND. At the time of
revaluing, the price of a B’s stock in the Stock Exchange is 95000 VND.
6. Company’s capital in partnership business is recorded as 400 milVND, after being revalued, it goes up by
55 milVND
7. After collecting the profiles, X has already obtained all the documents proving that some liabilities at the
time of valuation will no longer be accounted for and those liabilities have a book value of 120 million VND
Determining the value of company X knowing that:
- Net income at the time of valuation is recalculated as an average of net income in the last 3 years and ends
up with an amount of 850 million VND. Net income is expected to increase 10% per year in the next 3 years.
- Net asset value is expected to annually increase 6% per year
- An average returns on equity ratio of comparable companies in the industry is 13%.
- Yield on Treasury bond is 12%, equity risk premium on the securities market is 3%.

E4 (2.5 marks): Company ABC that majors in manufacturing consumer good has been in good condition
with the following financial data:
• Net income in Year N is XXXXXXX USD; Dividend payout ratio is 65%
• ROE in Year N is 25%, which is assumed to be constant in the significantly growing period.
• ABC has a beta of 1,2; risk-free rate is 7%, market risk premium is 5%.
• Assume that ABC keeps growing strongly in the next 4 years, then enters into a more stable period
with a growth rate being equal to the growth rate of the economy at 8%.
• In the second period, it is expected that: ß = 1, 𝑅𝑂𝐸$ = 20%;
a, Determine the value of ABC at present;
b, Determine the value of ABC at the end of the year N+2.
*** XXXXXXX is your ID student
E5(2.5 marks): Company ABC has the following data:
• Net income: YYYY million USD
• Fixed capital investment: 70 million USD
• Depreciation: 80 million USD
• Working capital investment: 50 million USD
• Net borrowing (the difference between new principal (debt) issuing and old principal (debt) paid out):
30 million USD
• According to the 5-year plan, net income, fixed capital investment, working capital investment,
depreciation and net borrowing are expected to grow at 8% per year and required rate of returns on equity is
12% per year.
Determine the value of ABC:
a, based on FCFE discount model? After the first 5 years, ABC grows constantly at the rate of 4% per year
and required rate of returns on equity is 14% per year.
b, based on FCFF discount model? Current borrowing an amount of 1500 million from bank with the rate
of 12% per year. In the first 5 years, FCFF is expected to grow at 8% per year. After that, ABC plans to grow
constantly at the rate of 3% per year and required rate of returns on equity is 16% per year. Optimal debt ratio
of X is 30% (Debt/total assets). Corporate income tax is 20%.
*** YYYY is your date of birthday (dd/mm)