1-Problem 1 (20 points)

A the end of period 0, EUSTRO Industries has the following characteristics: Enterprise value

estimated at $100 million; Cost of debt (rD) = 10%; Cost of equity (rE) = 15%; Leverage ratio

(D/E) = 1. The risk free rate (rF) within the economy is 5%, the expected return on the market

portfolio (rM) is 12% and the tax rate is 35%.

a) Compute the WACC of the company (2 points).

b) What is the unlevered beta (U) of the firm? (5 points)

c) The firm is considering a new investment project which has the same operating risk (asset

risk) as the company. The financing of the project will not alter the leverage of the firm (its

D/E ratio). The new project has the following expected free cash flow:

Could you help the CFO in estimating the Enterprise Value of EUSTRO Industries after the

implementation of this new investment project

A young assistant, who has followed an Investment Banking course recently, brings to the

attention of the CFO that the economic (asset) risk of the project might be slightly different

from the economic (asset) risk of the firm. After doing some estimation using a sample of

monosegment industry firms, she comes up with an unlevered Beta in the range of 0.95

and 1.15 for this project. What is the Enterprise Value range implied by this min and max

unlevered Beta?

2-MarienBurger SE is a firm with a target leverage ratio of 0.5 (i.e., D/E ratio = 0.5), and its

current cost of debt is 4%. The firm expects to have earnings before interest and taxes (EBIT)

this coming year of 100 million. The corporate tax rate is 25%. MarienBurger plans to retain

and reinvest 50% of its earnings for the next 3 years. Afterwards, the firm expect to be in the

steady growth phase, and therefore will retain and reinvest 30% of its earnings every year.

Each year retained earnings will be invested in new projects with an expected return on capital

employed of 11% per year. Assume that all earnings growth comes from the investment of

retained earnings.

a) If the firm's cost of equity is 15%, what enterprise value would you estimate for

MarienBurger? (10 points)

b) What will be the effect on the enterprise value, if the firm does not change its retention

policy after period 3 (i.e., keep retaining and investing 50% of its earnings till the infinity