Exercise 1. FINSTRAL SL has identified 3 financing plans for a necessary investment of EUR 500,000:

Plan A raising 100 new shares at EUR 10 each,

Plan B contracting a loan of EUR 150,000 at a 6% interest rate, and

Plan C contracting a loan of EUR 300,000 at a 6% interest rate.

The companys common equity is of EUR 500,000 and its corporate tax rate is 24%.

What would be the change in percentage of the EPS for each plan with an EBIT of EUR 50,000 and of EUR 100,000, considering that the number of outstanding shares is currently 1,500?

Which plan presents the higher change in percentage in EPS?

FINSTRAL SLs chose plan B and generated positive earnings, hence its decision to distribute all earnings (net income) plus a cash dividend of EUR 2 to all shareholders.

Computing indifference points, what would be the break-even level of EBIT and EPS for both plan A and B?

From a shareholder point of view and according to the dividend payout ratios you have calculated, which plan would you have preferred the company to chose, and at which level of EBIT?

Calculate the tax shield for both plan B and C

Exercise 2. AXA is planning to pay EUR 2.7 nillion in dividend to its common shareholders this year. Enclosed the following earnings and market price information for AXA:

Net income EUR 3,200,000

Number of shares 350,000

Earning per share 1,50

Price/ earnings ratio 20

Expected market price per share after the dividend payment 26

As an alternative to paying dividends, AXA is considering 2 options:

Option A - repurchase share at a price of EUR 21, which is the current market price plus the value of the proposed dividend of EUR 1. Evaluate the companys share price after the repurchase by calculating the EPS and estimated share price.

Option B - announce a 2 for 1 share split for its shareholders.

Assuming that AXA chose option B, how many shares outstanding would the company have and what would be its EPS after the split?

If you own 100 shares before the split, what would be your total earnings for your share before and after the split?

Would you be better off financially before or after the split?

Exercise 3. FOOD plc is considering launching a new ready-made product line across Europe: soups (project A), salads (project B) and sandwiches (project C) which will imply the following initial investments and expected cash flows:

Project A Project B Project C

II (initial investment) 200,000 350,000 400,000

Cash Flow year 1 50,000 70,000 100,000

Cash Flow year 2 150,000 150,000 120,000

Cash Flow year 3 80,000 220,000 110,000

Calculate the payback period for each project and advice which product line the company should chose.

Considering that the discount rate is 3%, calculate the NPV for each project and compare the discounted pay back periods with the payback periods. Which product line should the company chose according to the discounted payback period?

Which project would you recommend from an IRR and BCR points of view?

FOOD plc chose the soup product line and generates revenues of GBP 3,000,000 the following year. Fixed costs are of GBP 250,000 and variable costs of GBP 150,000, whilst increasing depreciation is of GBP 50,000 per year.

Calculate the companys operating cash flow knowing that corporate tax rate in the UK is of 25%.

The company has to spend GBP 150,000 on manufacturing equipment maintenance and its difference between current assets and liabilities is of GBP 250,000. What is FOOD plc free cash flow?