Question 1

Assume that Lothbrok Industries exists in a "Modigliani and Miller" (MM) world with corporate taxes, but all other MM assumptions hold. Lothbrok forecasts that its EBIT will not grow in future years, that is, its most recent EBIT will become a perpetuity. Lothbrok has an unlevered cost of equity (rsU) of 10.2%, its cost of debt is 7.1% and its stock price is at $6.40. Assume the book value of short and long-term debt equals its market value. Using the above information and the financials provided on Lothbrok, calculate Lothbrok's cost of equity?

Question 2

Using information provided before (Question 1 and in Lothbroks financial statements), calculate the Value (VL) of Lothbrok Industries Ltd.

Lothbrok Industries Ltd. Income Statement (millions Canadian Dollars) Revenue Cost Of Goods Sold Gross Profit Selling General & Admin Expense Depreciation Operating Income Interest Expense Earnings Before Tax Income Tax Expense Net Income 2018 259 150 109 68 8 33 3 30 8 22 2019 270 153 117 74 11 32 6 26 8 18 Per Share Items EPS Common Shares Outstanding (millions) Dividends per Share 0.51 43.5 SO.14 $0.41 44.1 $0.15 2018 2019 Lothbrok Industries Ltd. Balance Sheet, (millions Canadian Dollars) ASSETS Cash And Equivalents Accounts Receivable Inventory Prepaid Expense Total Current Assets Gross Property, Plant & Equipment Accumulated Depreciation Net Property, Plant & Equipment Other Non-operating Assets Total Assets 21 116 3 140 230 (88.3) 142 50 332 21 120 4 145 244 (86) 158 52 355 25 26 LIABILITIES Accounts Payable Accrued Expense Short-term Debt Other Current Liabilities Total Current Liabilities Long-Term Debt Other Non-Current Liabilities Total Liabilities 8 27 10 70 76 19 165 37 14 77 70 26 173 Total Equity Total Liabilities And Equity 167 332 182 355