Financial Management
Exercises Chapter 3
Valuing Debt and Equity
(Part II)
HOMEWORK
1. On December 2020, the company Psi SA is financed with debt and equity. This company has a
cost of capital (WACC) equal to 12%. Also on December 2020, the company presented an EBIT
equal to 1,500€, 350€ of amortization and 150€ of depreciation, and 300€ of corporate taxes.
The company invested in fixed assets for 500€, and its working capital increased in 50€. After
a decade of rapid growth, the cash flows in the last two years increased only at a constant rate
of 2%, and it is expected that the cash flows will remain growing at this level in the future.
Determine the value of the firm on December 2020.
2. Wharton Semiconductor offers the following data: Debt value equals 100M$, annual sales are
180M$, EBIT is 70M$, and the company has Net Earnings of 40M$ and BVE of $80M. There are
4 similar companies to Wharton Semiconductor in the market, from which we have the
following information:
Enterprise Market BVE
Empresa Sales EBIT Net Earnings
value capitalization
Chicago Semiconductor 900 500 220 115 65 102
Harvard Semiconductor 700 500 190 90 60 87
Kellogg Semiconductor 650 600 280 68 35 82
Standford Semiconductor 320 250 150 45 26 56
a) Determine the value of the equity and the firm value of Wharton Semiconductor using the
different multiples (EV/Sales, EV/EBIT, Market cap./Net Earnings, Market cap. / BVE) from
all the comparable firms.
b) What is to you a reasonable estimate of the value of Wharton Semiconductors, and the
value of its equity? Is this consistent with Wharton’s given amount of debt?
3. The entrepreneur of a new Start-Up company is studying the way to obtain 6 million € of capital.
Its Financing advisor suggested the following alternative capital structures:
Alternative A Alternative B
2,000,000 € debt at 9% 4,000,000 € debt at 11%
4,000,000 € Equity 2,000,000 € Equity
With alternative A the company would sell 200,000 common shares to obtain a net revenue of
20€ per share. Shareholders would expect an initial dividend of 1€ per share and a growth rate
of dividends equal to 7%.
With alternative B the company would sell 100,000 common shares to obtain a net revenue of
20€ per share. The expected dividend would be 0,8€ per share and the growth rate of dividends
is forecasted at 12%.
Assume that the company will generate positive profits with both capital structures, and that the
corporate tax rate is 50%.
a) What is the cost of capital of the company with each of the two alternative capital structures?
b) Explain why the interest rate on debt is higher in alternative B.
c) Also explain why the cost of equity is higher in alternative B.
