Reference no: EM133285942

Task Assignment

Learning outcome 1: Demonstrate understanding of the effect of financial leverage and capital structure.
Learning outcome 2: Define dividend types and explain the issues surrounding dividend policy decisions.
Learning outcome 3: Perform a company valuation.

Problem 1. The company Netflyk is part of the S&P 500 index, most analysts have a goof feeling about investing in the company, and the prices have been rising in the last weeks.

There is no doubt that the company has a good performance, but you want to make sure you are not paying a price above it´s value.

The cost of Debt is 5%. The risk free rate is 3% and the market premium is 7%, the Beta is 1.5.
Which is the total value of the company, and how much is the maximum price per share that you should pay?
Please make your calculation by using DCF method and using the EBIDA Multiple, the applicable multiple for this company is 10.
Which method do you prefer and why?

Problem 2. Amadeus Corporation has 10.000 shares, and is trading today at 500.000€ per share per share. Assuming no market imperfections or tax effects exist, what will the share price be after:
a. Amadeus has a ten-for-one stock split?
b. Amadeus has a 25 percent stock dividend?
c. Amadeus has a 50 percent stock dividend?
What is the number of shares and trading price in each of the cases?

Problem 3.- Samsung corporation has too much cash, so they are thinking about two options:
a) An extra dividend
b) Shares repurchase

The total amount of spare cash that they have is 10.000€.
Current earnings are 5€ per share, and the stock currently sells for 100€ per share.
There are 2.000 shares outstanding. Ignore taxes and other imperfections.
What will be the price per share?
What will be the effect on EPS and PE?
What would you recommend Dividend or share repurchase?

Problem 4.
Company Carriots has no debt outstanding and a total market value of 245000.
If economic conditions are normal the projected EBIT is 19000, if there is expansion the EBIT will be 25% higher, if there is recession EBIT will be 40% lower.
The company is considering a 58800 debt issue with an interest of 8%.
The proceeds will be used to repurchase stock. There are 5000 shares outstanding, and no taxes. Assume stock price is constant in all scenarios.
Calculate EPS in all scenarios.

Problem 5.
Lenovo Computers has a debt to equity ratio of 3, and they are paying an interest rate of 6%. The tax rate is 15%.
The Weighted Average Cost of Capital is 10.8%
1. What is cost of equity capital for Lenovo computers?
2. What is Lenovo´s unlevered cost of equity capital?
3. Which would be the WACC if the Debt to Equity ratio changes to 2?