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BCO222 BUSINESS FINANCE II COURSE 13337 TIMED EXERCISE, 15.02.2021

Question 1 (20 points):

Electrical, Ltd. plans to undertake the following investment in a new production facility. Initial investment: €980 M. Expected positive cashflows will be as follows: €131 M, €298 M, €322 M; €278 M; €126 M for years 1 to 5 respectively. What is the payback of the investment plan?

Question 2 (20 points):

United Spirits, Ltd. plans to issue shares to deploy its business plan. National Bank, Inc. advises US, Ltd. on that and suggests that shares should sell for €22,0 each. In exchange for its services, the bank will charge an upfront €1,5 commission per share. If the required return on US Ltd. shares is 18%, compute the actual cost per share of the equity issuance.

Question 3 (20 points):

International Devices, Inc. has got a capital structure that consists of €502,36 M of bonds and €214,64 of equity. The average cost of the debt before taxes is 7,8% whereas the required return by the market on ID shares is 17%. The company pays 34% taxes on income. Compute the after-tax weighted average cost of capital of ID.

Question 4 (20 points):

Project A entailed an initial investment of €21 M and its NPV was equal to €3,9 M. Project B, €19 M and €5,2, respectively. And, Project C, €28M and €6,4 respectively. Compute the three profitability indices and rank the projects, from more profitable to less profitable according with their respective indices.

Question 5 (20 points):

DRW Motorcycles plans to launch a new bike model and for that purpose the company will issue bonds to finance the project. Taggart Brothers Inc., a prestigious investment bank, is the advisor and underwriter of DRW in that financial operation. Taggart’s analysts suggest a bond issuance whose entire nominal will be €172,0 M (million) and a 4,8% annual coupon. Taggart will charge DRW with a 1,8% on the operation, only for the first year.
1. What will the actual cost of the debt issuance be for the first year?
2. If DRW must pay 32% taxes on income, compute the after-tax cost of the debt issuance (bank fees included).

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