Financial Analysis Homework: Shareholder Value, Valuation, Takeovers

This homework assignment provides detailed solutions to a series of corporate finance problems. The solutions address the present value of shareholder investments under different capital structures (debt, equity, and mixed), calculating alpha and determining the best financial options. The assignment also analyzes the impact of share buybacks on equity ownership and expected earnings, explaining the benefits of trading on equity. Furthermore, the solutions cover company valuation, including the maximum amount payable in a takeover scenario and the effects of market perceptions on share prices. The assignment explores the dynamics of hostile takeovers, including the required shareholder consent and the potential impact on costs. Finally, it examines how a company can avoid hostile takeovers given its current market capitalization.

Answer to Question 4
PART A
Based on data presented, the present value of initial shareholder shall be $6.25 Million. Further, the
alpha shall be 94.12%
PART B
Based on data presented, the present value of initial shareholder shall be $4.25 Million.
PART C
Based on data presented, the present value of initial shareholder shall be $13.75 Million. Further,
the alpha shall be 78.43%
Based on this, the best option shall be a mix of debt and equity under equal proportion.
PART D
For Equity
Based on data presented, the present value of initial shareholder shall be $6.25 Million. Further, the
alpha shall be 94.12%
For Debt
Based on data presented, the present value of initial shareholder shall be $21.25 Million.
For Mix of Debt and Equity in equal Proportion
Based on data presented, the present value of initial shareholder shall be $13.75 Million. Further,
the alpha shall be 78.43%
Based on this, the best option shall be a f debt.
Answer to Question 5
Answer A
The pay off under the present state has been as follows
(a) Good State : 1.5 million being 10% of 15 Million;
(b) Bad State : 1.0 million being 10% of 10 Million;
Answer B
Portion of Equity owned is 25% as 60% of the equity has been bought back.
The amount received under good state shall be $ 3.58 Million
The amount received under bad state shall be $ 2.33 Million.
Answer C
Expected Earnings before the change: 12.5% as computed by taking average of good and bad state;
Expected Earnings after the change: 30.0% as computed by taking average of good and bad state;

The said change has occurred on account of benefit of trading on equity which accrues on account of
leveraging the company with a lower rate of debt.
Answer D
To maintain similar return portfolio needs to be rearranged among debt and equity in terms of
Modigliani Miller Approach Proposition 1. Accordingly, company shall manage the portfolio by
shorting the equity by 87.5% and investing the proceeds under debt.
Answer to PART 4
Answer A
The current share price of Euro Importing is Euro 100.
Answer B
Valuation of the company if no pet project is carried out : Euro 130 Million
Maximum amount that can be paid shall be 51% of 130 Million= Euro 66.3 Million
If the cost is considered then the company can itself bear the cost or pass on. If the cost of Euro 1
million is passed on the maximum amount shall be Euro 65.3 Million and if not passed then cost shall
be Euro 67.3 Million.
Answer C
If Market believes Raid shall succeed, the prices of share shall increase reaching up till Euro 130.
The rational investor will short sale the share to earn profit as when the project fails the share price
shall return to original 100.
If the market believes (ii), then there shall be no profit as in herd no bargain can be made.
Price shall go above 100 and ultimately shall come down to 100
No movement of price expected
Answer D
For raid to succeed 51% holding is required and more than 50% of the shareholders should believe
it . Accordingly it shall fail.
Answer E
Atleast 51% of the shareholders shall be willing to sale at Euro 130 as that price shall be raid price.
None, of the shareholders shall be willing to sale at Euro 100.
If linear interpolation can be done than Euro 115 shall be the price
Yes.
It shall increase the cost to the buyer, if he is unable to pass on to seller.

Answer F
Similar price as they shall demand a premium
Answer G
The company has been performing well and the market capitalisation is good. Thus, it shall try to
avoid a hostile takeover.