FINANCE-EXAM

Solvay Brussels School-EM

MBA Part-Time Finance Pr. Mathias Schmit

17August 2013

Write your ID number, first name, last name, and the form identification on all sheets now.
This document contains 3 pages. Please check now !!
NO ELECTRONIC DEVICES (smartphones, computers, tablets, etc…) ,
ONLY A CALCULATOR (with only that function) is ALLOWED
Time allowed for this exam is 3 hours.

PART 1: Financial asset valuation (4 pts)

NoKey company produces chips to insert into keys in order to find them everywhere. It has
decided to buy new machines. The total investment is equal to 200 millions euros. Suppose
that the effective annual interest rate is 7%. Several solutions to finance this investment are
considered.

1. Consider that NoKey issues a zero-coupon bond that will pay 150 millions euros in 12
years. What would be the market value of such a bond?

2. Another possibility would be for NoKey to borrow 100 millions euros for 15 years.
They would have to pay each year for the next 15 years a fixed amount for both
interest and repayment of the principal. What amount would they have to pay?

3. A final possibility is to issue a 10-year coupon bond with a face value of 100 millions
euros and a coupon a 4% for the first 5 years and a higher coupon for the next 5 years.
NoKey wants to issue the bond at par. What will be the coupon for the last 5 years?

4. Which solution is the best to finance the investment?

PART 2: Company valuation (4 pts)

Electracom (an all-equity firm) currently has after-tax earnings of $ 10 per share and pays
60% of its earnings in dividends. Its balance sheet is given below. It is expected to keep the
same payout ratio, and to earn 20% on future investments forever. Assume that the cost of
capital is 15%. The depreciation rate is 10%. It is assumed that depreciated assets are replaced
by new investments. The variation of working capital requirement is zero.

Balance sheet (book value per share) at time 0:

Assets Liabilities
Fixed assets 100 Equity 100
Total assets 100 Total liabilities 100

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 5. What is the current price per share?
6. What is the present value of growth opportunities?

Suppose now that returns on future investments will drop to 15%.

7. What is the present value of growth opportunities? Explain and interpret your result.

PART 3: Financial assessment (6 pts)

You have started working for the Beau Tie Company. Your first mission is to prepare next
year’s pro forma statement of cash flows and balance sheet. Revenues are projected to
increase from €160,000 in 2012 to €250,000 in 2013. Changes in working capital requirement
are 25% of changes in revenues. As an investment is scheduled for 2013, net fixed assets will
increase by €40,000. A partial reimbursement of €5,000 of the long-term debt will be due.
Cash should not decrease. External funds (if required) will come from short term bank loans.

Projected Income Statement, 2013

Revenues 250,000
EBITDA 110,000
Depreciation 25,000
EBIT 85,000
Interest expenses 8,000
Taxes 30,800
Net income 46,200
Dividends 8,000

Balance sheet December 31,2012

Assets Liabilities
Cash 20,000 Notes payable (banks) 20,000
Working Capital Requirement 40,000 Long term debt 40,000
Net fixed assets 150,000 Stockholder's equity 150,000
Total assets 210,000 Total liabilities 210,000

8. Calculate the free cash flow for the year 2013.

9. What financing problem will the Beau Tie Company experience in 2013? What would
you recommend?
10. Based on your recommendations, construct the projected balance sheet at the end of
year 2013.
11. Under what conditions will the use of debt in 2013 have a positive impact on Beau
Tie’s shareholders value? Explain.

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PART 4: Conceptual Questions (6 pts)

12. An individual wants to borrow $ 30,000 from a bank and repay it in 2 equal annual
end-of-year payments, including interests. If the bank wants to earn a 10% rate of
return on the loan per year, what should the interests to be paid by the individual the
next two years? Ignore taxes and default risk. Describe the calculation.

13. What does it mean when cash flow from financing activities on a company’s cash flow
statement is positive? Is this good news? Is it dangerous? Explain.

14. Top management measures your division’s performance by calculating the division’s
return on asset (ROA). Your division has done quite well lately; its ROA is 10%. You
believe the division should invest in a new production process, but a colleague
disagrees, pointing out that because the new investment’s first-year ROA is only 7%,
it will hurt performance. How would you respond?

15. An accountant explains to the executive committee of a company that the ideal ratio to
measure the liquidity of a company is the current ratio. As a new CFO, you have been
asked to comment on this.

16. Comment the following statement: “ Investing in a bond that offers a coupon of 10%
yearly for the next 5 years is not a good investment given the fact that the NPV of the
transaction when you buy the bond is 0”.

17. A firm is considering the purchase of an asset whose risk is greater than the current
risk of the firm, based on any method for assessing risk. In evaluating this asset, the
decision maker should:
a. Increase the IRR of the asset to reflect the greater risk.
b. Increase the NPV of the asset to reflect the greater risk..
c. Reject the asset, since its acceptance would increase the risk of the firm.
d. Ignore the risk differential if the asset to be accepted would comprise only a
small fraction of the total assets of the firm.
e. Increase the cost of capital used to evaluate the project to reflect the higher risk
of the project.
Explain your choice of the answer.

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