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C. What is the company's weighted average cost of capital (WACC) after the restructuring of the capital structure? D. Based on the above, do you estimate that the debt burden increases or decreases the value of a business? Does your decision change if you consider the concept of financial hardship? SUBJECT 4 The company ABC is considering the case of investing in a new mechanical equipment which has an acquisition cost of 240,000 euros and a useful life of 5 years. The company is considering two forms of financing. One concerns obtaining a bank loan with an interest rate of 10% and a duration of 5 years. You will repay the loan in equal installments. Alternatively, the business can finance the acquisition of the equipment through a finance lease. In this case, the company will pay 5 annual equal rents, which will be paid at the beginning of the year. In order to calculate the leases, the leasing company requires a return of 15%. The company is taxed at 22% and uses the straight-line depreciation method to calculate depreciation. The calculation of the net benefit of the lease is requested. What advice would you give ABC based on the results of your analysis? SUBJECT 2 A. If a firm sells 100,000 units of a product at 15 euros each, has fixed costs of 200,000 euros and variable costs of 11 euros per unit, and increases its sales by 10%, by what percentage will its net operating profit increase : B. If the above company succeeds in reducing the variable cost per unit of product to 9 euros (with the rest of the assumptions remaining the same as in 2A), at what product level (in units sold) and at what sales value will the company's profits before from interest and taxes zero? C. Based on the fixed costs (200,000 euros) and sales of 2A(100,000 units of product at 15 euros per unit), the variable costs of 2B (9 euros per unit of product) and assuming that the company has an invested capital of 4,000,000 of which 2/3 is debt capital at a borrowing rate of 5%, what is the firm's degree of financial leverage? D. Briefly describe (maximum 200 words) the importance of breakeven analysis and its limitations, and suggest ways to overcome the limitations. SUBJECT 2 The company AVG SA. is financed entirely with equity, has a market value of 200 mil., while it expects to present 40 mil. profits before taxes in perpetuity. The company's tax rate is 25% and the CFO has proposed issuing dobt to take advantage of the tax savings offered by the interest payments. Specifically, it plans to use the proceeds from the debt issue for a share buyback program. The proposal he presented to the company's Board of Directors is the loan of e100m. with an interest rate of 5%. A. Calculate the value of the firm after the capital structure restructuring, using the ModiglianiMiller approach with taxes, assuming that the proposed debt issuance carries no risk of bankruptcy. B. Calculate the equity cost of capital before and after the restructuring. A. Consider, based on the criterion of Expected Net Present Value, which of the two investments would you choose, given that the weighted average cost of capital in the case of Investment A is estimated at 10%, Investment B at 8%, while the risk-free rate is 3%. BV. Let's say at the end of the first year a prospective buyer comes along and makes an offer to buy the investment you chose to implement in question a/. According to his offer, he intends to buy it instead of the amount of 400,000 euros. Given his offer, justify whether or not it is profitable to sell the investment at the end of the first year. 2 . A. Outline the similarities and differences between the certainty equivalence method and the discount rate adjustment method. B/. Assume that an investment with an initial cost of 1,000 currency units and a life of one year yields a cash flow equal to 1,500 currency units. The risk-adjusted discount rate of this investment is estimated at 14%, while the risk-free rate is 2%. What should the certainty equivalence factor be for the discount rate adjustment method and the certainty equivalence method to give us the same NPV? 1/. The company ABC is considering two mutualiy exclusive investment programs which have a lifetime of two years. The cash flows of the two programs (in thousands of euros), as well as the corresponding probabilities of their realization are presented in the following tables: C. What is the company's weighted average cost of capital (WACC) after the restructuring of the capital structure? D. Based on the above, do you estimate that the debt burden increases or decreases the value of a business? Does your decision change if you consider the concept of financial hardship? SUBJECT 4 The company ABC is considering the case of investing in a new mechanical equipment which has an acquisition cost of 240,000 euros and a useful life of 5 years. The company is considering two forms of financing. One concerns obtaining a bank loan with an interest rate of 10% and a duration of 5 years. You will repay the loan in equal installments. Alternatively, the business can finance the acquisition of the equipment through a finance lease. In this case, the company will pay 5 annual equal rents, which will be paid at the beginning of the year. In order to calculate the leases, the leasing company requires a return of 15%. The company is taxed at 22% and uses the straight-line depreciation method to calculate depreciation. The calculation of the net benefit of the lease is requested. What advice would you give ABC based on the results of your analysis? SUBJECT 2 A. If a firm sells 100,000 units of a product at 15 euros each, has fixed costs of 200,000 euros and variable costs of 11 euros per unit, and increases its sales by 10%, by what percentage will its net operating profit increase : B. If the above company succeeds in reducing the variable cost per unit of product to 9 euros (with the rest of the assumptions remaining the same as in 2A), at what product level (in units sold) and at what sales value will the company's profits before from interest and taxes zero? C. Based on the fixed costs (200,000 euros) and sales of 2A(100,000 units of product at 15 euros per unit), the variable costs of 2B (9 euros per unit of product) and assuming that the company has an invested capital of 4,000,000 of which 2/3 is debt capital at a borrowing rate of 5%, what is the firm's degree of financial leverage? D. Briefly describe (maximum 200 words) the importance of breakeven analysis and its limitations, and suggest ways to overcome the limitations. SUBJECT 2 The company AVG SA. is financed entirely with equity, has a market value of 200 mil., while it expects to present 40 mil. profits before taxes in perpetuity. The company's tax rate is 25% and the CFO has proposed issuing dobt to take advantage of the tax savings offered by the interest payments. Specifically, it plans to use the proceeds from the debt issue for a share buyback program. The proposal he presented to the company's Board of Directors is the loan of e100m. with an interest rate of 5%. A. Calculate the value of the firm after the capital structure restructuring, using the ModiglianiMiller approach with taxes, assuming that the proposed debt issuance carries no risk of bankruptcy. B. Calculate the equity cost of capital before and after the restructuring. A. Consider, based on the criterion of Expected Net Present Value, which of the two investments would you choose, given that the weighted average cost of capital in the case of Investment A is estimated at 10%, Investment B at 8%, while the risk-free rate is 3%. BV. Let's say at the end of the first year a prospective buyer comes along and makes an offer to buy the investment you chose to implement in question a/. According to his offer, he intends to buy it instead of the amount of 400,000 euros. Given his offer, justify whether or not it is profitable to sell the investment at the end of the first year. 2 . A. Outline the similarities and differences between the certainty equivalence method and the discount rate adjustment method. B/. Assume that an investment with an initial cost of 1,000 currency units and a life of one year yields a cash flow equal to 1,500 currency units. The risk-adjusted discount rate of this investment is estimated at 14%, while the risk-free rate is 2%. What should the certainty equivalence factor be for the discount rate adjustment method and the certainty equivalence method to give us the same NPV? 1/. The company ABC is considering two mutualiy exclusive investment programs which have a lifetime of two years. The cash flows of the two programs (in thousands of euros), as well as the corresponding probabilities of their realization are presented in the following tables