FINANCIAL MANAGEMENT

Prof. Anna Toldrà

Exercises to practice – Chapters 3 and 4

1. A company generates an EBIT of $700,000; expected to remain constant at this level in the
future. It is financed with perpetual debt and equity. The face value of debt is $1M with a coupon
of 8%. The company wants to issue new debt that will be junior to the previous debt, for $1.5M
and a coupon of 6%. What is the interest coverage ratio of the new (junior) debt?
a) 8.33
b) 7
c) 6.89
d) None of the above.

2. A company is financed with 50% debt (D/V). However, the long-term ratio of debt to equity
(D/E) of this company is 40%, the risk free rate is 4%, the spread is 3%, and the market risk
premium is 8%. Currently, the beta equity levered is 1.25, and the beta asset is 0.725. What is
the WACC that you should use to determine the valuation of this company? Assume no tax and
a beta debt of 0.2.
a) 9.075%
b) 10.425%
c) 10,2%
d) None of the above

3. What is the market value of 5-year bonds with a nominal value of $200M, an annual coupon
of 5% and a required return of 8%?
a) 136.12M
b) 39.93M
c) 176.04M
d) None of the above

4. Company Randolf SA has the following characteristics: it is financed only with equity, its
shareholders require a return on the equity of 12%, the EBIT is 1.3 million euro, amortization is
equal to 400,000 euro, the corporate tax rate is 40%, and the capital expenditures for
investments amount to 390,000 euro. Determine the company’s price per share if the company
has 1 million shares and that it is expected that the cash flows increase at a growth rate of 5%.
Assume also that the net working capital remains constant over time.
a) 9.875 euro per share
b) 10.27 euro per share
c) 7.2 euro per share
d) None of the above
5. Company Isla is financed with equity and debt in the form of one year bonds. The nominal
value of the one year bonds is 600,000 euros with an annual coupon rate of 7%. If the company
generated an EBIT of 400,000 euros and the risk free rate is 3%, what is the market value of the
issued debt? Assume that the credit spread of the company depends on its interest coverage
ratio as follows:
ICR Spread
>6 2%
4.1 – 6 3.5%
2–4 6%
a) 840,000
b) 514,285.7
c) 611,428.6
d) None of the above

6. BMW had net earnings for 450 million dollars in 2022 and Revenues equal to 800. The
Price/Earnings multiple of Mercedes-Benz in 2022 was 15 and its Revenue multiple was 8.
Suppose we can assume that Mercedes-Benz is a comparable company to BMW since both are
in the automobile sector for mid-to-expensive cars. What was the market value of BMW in 2022?
a) 6,400 million dollars
b) 6,750 million dollars
c) 9,000 million dollars
d) None of the above

7. A company financed only with equity distributes a dividend this year equal to 5 euro
per share. The price per share is 25 euros and the growth rate of dividends is 3%. If the
risk free rate is 4% and the market risk premium is 6%, what is the equity beta
(unlevered) of this company?
a) 2.00
b) 3.16
c) 3.27
d) None of the above

8. A company plans to issue a dividend next year (t=1) for $3 per share, another dividend
the year after (t=2) for $4 per share, and another dividend after that (t=3) for $2 per
share. The dividends are expected to increase at the constant growth rate of 5% after
the third year. If shareholders require a return of 8%, what is this company’s price per
share today (t=0)?

a) $63.36
b) $59.25
c) $55.57
d) None of the above