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# Question 1:

## Giannetti&C is an Italian chain selling top-quality Italian coffee. Francesca Giannetti,

the CEO, is investigating the option of doing an IPO on the Milan Stock Exchange.
She claims her company will yield a dividend of 500,000 euros to equity holders
next year and it is expected to grow in the future. Francesca is trying to convince
investment bankers to propose an IPO price of 30 euros and to issue 150,000
shares. Graces Coffee, a similar chain selling even superior coffee, is already
trading at Piazza Affari1 and has a return on equity of 15% and a similar leverage
(Debt/Assets) to Giannetti&C.
(a) What dividend growth does Francesca Giannetti have in mind for Giannetti&C
when proposing the IPO price?
(b) As it turns out, the dividend growth rate assumed by Francesca Giannetti is
unrealistic; a more realistic estimate is set at 1.5%. What dividend must
Giannetti&C guarantee next year to justify the same IPO price?
D1 = 500,000
P0 = 30
No of shares = 1,50,000
Equity value = 30 * 1,50,000 = 4,50,000
Re = 15%
P0 = D1 / (Re g)
G = Re (P0 / D1)
G = 15% - (1/9)
G = 3.9%
G = 1.5%
D1 = P0 * (Re g)
D1 = 450000 * (15% - 1.5%)
D1 = 60,750
----------------------------------------------------------------------------------------------------------------------------------------Question 2:
TerminalV plc is a company producing computer terminals (e.g. printers). Its
operating free cash flows for the next five years are expected to be as follows:

From year 5 onwards the company is expected to growth at the GDP rate. The
company has debt of \$500M and the market value of the equity is \$2,000M.
(a) If the opportunity cost of capital for the assets (ie WACC) is 8% what is the
implied GDP growth rate?

TV6 = 3053
TV6 = 180* (1+g)/(8% - g)
3053 = 180 * (1+g) / (8% - g)
G = 1.99%

(b) If the cost of equity is 9%, what is the interest rate TerminalV is paying on its
debt?
=>
8% = 9% (2000/2500) + Rd (500/2500)
=>
Rd = 4%
----------------------------------------------------------------------------------------------------------------------------------------Question 3:
Below are some financial data related to a group of companies operating in the
cosmetics industry:

J. Tyler Inc., a nail polish manufacturer, is expected to report earnings for \$1.25M
(one year from now) and is trading at \$120/share with 110,000 shares outstanding.
(a) Based exclusively on the information available, is J. Tyler Inc. likely to be trading
at a premium or a discount?

(b) The equity cost of capital for J. Tylers peer group is 15%. The company has
decided to pay dividends of 30% of total earnings for the foreseeable future. At
what percentage must J. Tyler Inc earnings grow in order to justify a share price of
\$120/share?
Re = 15%
Dividends = 30% * 1.25M = 375,000
P0 = 120/Share
Market cap = 13,200,000

13200000 = 375000*(1+g)/(15% - g)
(1+g)/(15% - g) = 35.2
g = 11.8%
----------------------------------------------------------------------------------------------------------------------------------------Question 4:
Consider the stock of Kraner Inc., ticker symbol KRNR. The dividends of KRNR are
growing at 6% a year. The current risk-free rate is 5%. The price-dividend ratio is
P0/D0 = 20.
(a) What is KRNR's expected return?
20 = (1+6%) / (Re 6%)
(Re 6%) = 5.3%
Re = 11.3%
(b) If the CAPM holds and the market risk premium is 7% per year, what is the
market beta of KRNR?
11.3% = 5% + (B*7%)
B = 0.9
(c) If the risk-free rate were 4%, how would the answer to part (a) change?
Re = 4% + (0.9*7%) = 10.3%
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