CORPORATE FINANCE

UNIT 7. LONG-TERM FINANCIAL PLANNING

ACTIVITY 7. CASE ANALYSIS

Identification data

Student name(s)
Teacher's name
Date

Instructions:

1. From the materials reviewed, solve the following cases. Perform all calculations and
operations in an Excel sheet and integrate the results in this document; you can integrate the
calculations from the Excel sheet at the end of this document, or send both files (Excel and
Word) in the Blackboard platform.

Case 1

Vista Oil & Gas, S.A.B. de C.V. owns assets that have an 80% chance of having a market value of $100
million a year from now and a 20% chance of being worth only $70 million. The current risk-free
interest rate is 5% and the assets of this company have a cost of capital of 10%. Two scenarios are
assumed:

a) Without debt, what is the current market value of your equity?

b) You have a debt with a face value of $70 million maturing in one year, what is the value of
equity? Argue, rely on the MM Theory
c) What is the expected return without leverage?
d) What is the lowest possible return on equity with or without leverage? Argue based on the
MM Theory.
Case 2

Proteak, S.A.B. de C.V., needs to raise 109 million Mexican pesos for a new investment project. If the
company issues one-year debt, it may have to pay an interest rate of 10%, although Proteak's
managers believe that 8% would be a fair rate given the level of risk. However, if the company issues
shares, the directors believe that the shares could be undervalued by 5%.

a) What is the cost to current shareholders of financing the project with retained earnings, debt
and equity?
b) Determine financial preferences for shareholders and provide conclusions, based on the
preference hierarchy theory.

Case 3

You are an entrepreneur of a new epidemiology business. If the research is successful, the vaccine
patent could be sold for $80 million, and if not, it will be worth nothing. To finance the research, $20
million is required as seed capital in exchange for 50% of the company's debt-free equity.

a) What is the total market value of the company without leverage, if you can borrow $10
million.
b) According to MM Theory, how much of the company's equity will you need to sell to get the
additional $10 million you need?
c) what is the value of your share of the company's equity with and without leverage?

Case 4

Success Corporation has $140 million in equity and $60 million in debt and expects $28 million in net
income this year. Today, it pays a dividend of 25% of its net income. The company is analyzing a
possible change in its profit distribution policy: an increase in dividends to 35% of net income.

a) Determine how this change will affect the company's internal and sustainable growth rates?
b) What is the difference between the internal growth rate and the sustainable growth rate?
c) If the company grows faster than its sustainable growth rate, does this growth reduce the
value of the company?