FIN 516 (Advanced Managerial Finance) Entire Course

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FIN 516 Week 4 Homework Problem 23-3 on Implied Price of Funding Based on Chapter 23 Starware Software was founded last year to develop software for gaming applications. Initially, the founder invested $800,000 and received 8 million shares of stock. Starware now needs to raise a second round of capital, and it has identified an interested venture capitalist. This venture capitalist will invest $1 million and wants to own 20% of the company after the investment is completed. a) How many shares must the venture capitalist receive to end up with 20% of the company? What is the implied price per share of this funding round? b) What will the value of the whole firm be after this investment (the post-money valuation)? Problem 23-4 on IRR of Venture Capital Based on Chapter 23 (Excel file included) Suppose venture capital firm GSB partners raised $100 million of committed capital. Each year over the 10-year life of the fund, 2% of this committed capital will be used to pay GSB’s management fee. As is typical in the venture capital industry, GSB will only invest $80 million (committed capital less lifetime management fees). At the end of 10 years, the investments made by the fund are worth $400 million. GSB also charges 20% carried interest on the profits of the fund (net of management fees). a) Assuming the $80 million in invested capital is invested immediately and all proceeds were received at the end of 10 years, what is the IRR of the investments GSB partners made? That is, compute IRR ignoring all management fees. b) Of course, as an investor or limited partner, you are more interested in your own IRR (that is, the IRR including all fees paid). Assuming that investors gave GSB partners the full $100 million up front, what is the IRR for GSB’s limited partners (that is, the IRR net of all fees paid)? Problem 23-13 on IPO Based on Chapter 23 Your firm has 10 million shares outstanding, and you are about to issue 5 million new shares in an IPO. The IPO price has been set at $20 per share, and the underwriting spread is 7%. The IPO is a big success with investors, and the share price rises to $50 on the first day of trading. a) How much did your firm raise from the IPO? b) What is the market value of the firm after the IPO? c) Assume that the post-IPO value of your firm is its fair market value. Suppose your firm could have issued shares directly to investors at their fair market values in a perfect market with no underwriting spread and no underpricing. What would the share price have been in this case, if you raise the same amount as in part a)? d) Comparing part b) and part c), what is the total cost to the firm’s original investors due to market imperfections from the IPO? FIN 516 Week 5 IPO Paper IPO Analysis of Gevo Inc. Advanced Managerial Finance FIN 516 Week 5 Homework Problem 25-6 on Purchase Versus Lease Based on Chapter 25 Craxton Engineering will either purchase or lease a new $756,000 fabricator. If purchased, the fabricator will be depreciated on a straight-line basis over 7 years. Craxton can lease the fabricator for $130,000 per year for 7 years. Craxton’s tax rate is 35%. (Assume the fabricator has no residual value at the end of the 7 years.) a) What are the free cash flow consequences of buying the fabricator if the lease is a true tax lease? b) What are the free cash flow consequences of leasing the fabricator if the lease is a true tax lease? c) What are the incremental free cash flows of leasing versus buying? Problem 25-7 on Purchase Versus Lease Based on Chapter 25 Riverton Mining plans to purchase or lease $220,000 worth of excavation equipment. If purchased, the
equipment will be depreciated on a straight-line basis over 5 years, after which it will be worthless. If leased, the annual lease payments will be $55,000 per year for 5 years. Assume Riverton’s borrowing cost is 8%, its tax rate is 35%, and the lease qualifies as a true tax lease. a) If Riverton purchases the equipment, what is the amount of the lease-equivalent loan? b) Is Riverton better off leasing the equipment or financing the purchase using the lease equivalent loan? c) What is the effective after-tax lease borrowing rate? How does this compare to Riverton’s actual aftertax borrowing rate? FIN 516 Week 6 Homework Problem 28-9 on Acquisition Analysis Based on Chapter 28 Mergers and Acquisitions (Excel file included) Your company has earnings per share of $4. It has 1 million shares outstanding, each of which has a price of $40. You are thinking of buying TargetCo, which has earnings per share of $2, 1 million shares outstanding, and a price per share of $25. You will pay for TargetCo by issuing new shares. There are no expected synergies from the transaction. a) If you pay no premium to buy TargetCo, what will your earnings per share be after the merger? b) Suppose you offer an exchange ratio such that, at current preannouncement share prices for both firms, the offer represents a 20% premium to buy TargetCo. What will your earnings per share be after the merger? c) What explains the change in earnings per share in part a)? Are your shareholders any better or worse off? d) What will your price-earnings ratio be after the merger (if you pay no premium)? How does this compare to your P/E ratio before the merger? How does this compare to TargetCo’s premerger P/E ratio? Problem 16-8 on Managerial Decision Based on Chapter 16 Financial Distress, Managerial Incentives, and Information (Excel file included) As in Problem 1, Gladstone Corporation is about to launch a new product. Depending on the success of the new product, Gladstone may have one of four values next year: $150 million, $135 million, $95 million, or $80 million. These outcomes are all equally likely, and this risk is diversifiable. Suppose the risk-free interest rate is 5% and that, in the event of default, 25% of the value of Gladstone’s assets will be lost to bankruptcy costs. (Ignore all other market imperfections, such as taxes.) a) What is the initial value of Gladstone’s equity without leverage? Now suppose Gladstone has zero-coupon debt with a $100 million face value due next year. b) What is the initial value of Gladstone’s debt? c) What is the yield-to-maturity of the debt? What is its expected return? d) What is the initial value of Gladstone’s equity? What is Gladstone’s total value with leverage? Suppose Gladstone has 10 million shares outstanding and no debt at the start of the year. e) If Gladstone does not issue debt, what is its share price? f) If Gladstone issues debt of $100 million due next year and uses the proceeds to repurchase shares, what will its share price be? Why does your answer differ from that in part e)? Problem 16-9 on Financial Distress Based on Chapter 16 Financial Distress, Managerial Incentives, and Information Kohwe Corporation plans to issue equity to raise $50 million to finance a new investment. After making the investment, Kohwe expects to earn free cash flows of $10 million each year. Kohwe currently has 5 million shares outstanding, and it has no other assets or opportunities. Suppose the appropriate discount rate for Kohwe’s future free cash flows is 8%, and the only capital market imperfections are corporate taxes and financial distress costs. a) What is the NPV of Kohwe’s investment? b) What is Kohwe’s share price today? Suppose Kohwe borrows the $50 million instead. The firm will pay interest only on this loan each year, and it will maintain an outstanding balance of $50 million on the loan. Suppose that Kohwe’s corporate tax rate is 40%, and expected free cash flows are still $10 million each year.
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