PART I: Cash-Cow Case Study We assume perfect capital markets and non-existent taxation. Cash-Cow's capital is made up of 20 million shares valued at 30 on the market. CashCow is indebted and pays 45 M of financial expenses each year on its debt considered as perpetual. Investors anticipate three main scenarios for the evolution of the economy with the following forecasts for the two companies and the market: (Nota Bene: the profitability of the market is the profitability for all the securities of the market generally noted Rm. There is no depreciation, no tax, no investment and the BFR is stable, therefore the FCFF and operating income are identical.). In addition to its operating assets generating the previous flows, the Cash-Cow business has 300 million in cash invested at the risk-free rate, generating 22.5 million in additional cash flow per year. The risk-free rate is 7.5%. Cash-Cow distributes all of its earnings and no change in dividend policy is anticipated. Q 1: Assessment Show that Cash-Cow stocks are correctly valued. Q 2: Redemption of shares The Cash-Cow company decides to use 200 million in cash to buy back its own shares on the market in order to reduce its capital by a third. The redemption of shares is done at the price. Calculate the value of the company and the value of the shares before and after the transaction. What is the cost of capital, the cost of equity before and after the transaction? What is the earnings per share before the transaction? After operation? Compare the evolution of the share price and the EPS, deduce the evolution of the PER and comment. (Recommendation :treat cash as an asset and do not deduct it from debt. You can distinguish the cost of capital of the asset from the cost of capital of the operating asset)