Scribd
Upload
9 views2 pages

CF Ib9y7 CT - 1

The document outlines the examination instructions for the MSc Finance Corporate Finance course at the University of Warwick, held in November 2021. It presents a case study involving a UK company, All Weather Plc., with two business assets and various financial calculations required to assess the company's value and the implications of potential asset divestiture. The examination consists of one main question with multiple sub-parts focusing on valuation, cost of capital, agency conflicts, and debt holder protections.

Uploaded by

Janani Jayaprakash
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
9 views2 pages

CF Ib9y7 CT - 1

The document outlines the examination instructions for the MSc Finance Corporate Finance course at the University of Warwick, held in November 2021. It presents a case study involving a UK company, All Weather Plc., with two business assets and various financial calculations required to assess the company's value and the implications of potential asset divestiture. The examination consists of one main question with multiple sub-parts focusing on valuation, cost of capital, agency conflicts, and debt holder protections.

Uploaded by

Janani Jayaprakash
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 2

IB9Y70 Page 1 of 2

UNIVERSITY OF WARWICK

MSc Finance

Examination: November 2021

CORPORATE FINANCE (code IB9Y70)

Instructions

This is an OPEN book examination.

You have 1 hour to complete the assessment.

You have one question with several sub-parts to answer. The weight of the individual
sub-parts is indicated in the parentheses.

PLEASE TURN OVER


IB9Y70 Page 2 of 2

A UK company, All Weather Plc., has two assets in place at t = 0. The first is a sunglasses
business, the second asset is an umbrella business. Thereafter, sums are in £ million. The
company has debt maturing in one year (t = 1) with face value of £1200 and coupon rate
equal to the risk-free rate. During the year, two states of nature may prevail: sunny (S)
and rainy (R), and because this is how Britain is, the probability of S is only 0.4. The
current risk-free rate is 0% and the market risk premium is 10%. At t = 1, the sunglasses
business generates cash flows of £1000 in S and £500 in R, and the umbrella business
generates cash flows of £500 in S and £1000 in R. At t = 0, the asset betas for sunglasses
and umbrella businesses are 0.7692 and −0.5882, respectively.
a) Calculate the current unlevered value of All Weather Plc. [10 marks]
b) Calculate the current value of equity and debt and their cost of capital. What is the
WACC for All Weather Plc.? [15 marks]
c) Determine the risk-neutral probability of the two states of nature.
[10 marks]
The CEO of All Weather Inc. can divest the company of one of its two businesses at
its fair value and use the proceeds to pay a dividend at t = 0. She considers selling only
one business, to keep the firm ongoing and maintain her employment.
d) To maximize shareholders’ value, should the CEO sell one of the two businesses? If
so, which one? What would be the related incremental value of equity? What type
of agency conflict is this? Would this agency issue create a violation of Modigliani-
Miller’s Proposition I?
[20 marks]
e) Considering the agency conflict in (d), the debt holders decide to add a covenant to
the debt indenture at t = 0. This covenant allows the CEO to sell assets, but forbids
her to disbourse the proceeds from the sale to the shareholders at t = 0, i.e., the
proceeds have to be kept as cash within the firm until t = 1. What action would the
CEO take to maximize the equity value with this covenant? Would such a covenant
protect the debt holders’ value?
[15 marks]
f) Alternatively to the covenant from (e), assume that the debt holders can specify
that one of the two assets is pledged as collateral, and therefore cannot be sold.
Which asset should they choose for this purpose? Would such a collateral protect
their value from the actions taken by the CEO to maximize the shareholders’ value?
[15 marks]
g) Finally, assume that the debt holders use both the covenant from (e) and the collat-
eral arrangement from (f) to secure their debt. Which asset should they choose as
collateral? Would this combination protect the debt value from the actions taken
by the CEO to maximize the shareholders’ value? [15 marks]

END OF PAPER

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy