Corporate Finance Assignment 1

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Assigment 1 Problem 1 a) “The fact that firms so heavily rely on their internal capital market as a source of financing is strong evidence that internal markets are more efficient than external markets.” Firms use internal capital because it is much easier for managers to use profits from previous years to finance their investments, management don´t have to prove their investment decisions to investors. If management would need to finance investment with external capital, the cost of the capital would much higher than using internal capital. Issues would cause direct costs for (järjestämisestä) and take time and effort from the management. Indirect costs could also (accure) when management would need to underprice the issue to…show more content…
b) Problem 3 – IPO Underpricing a) average initial return on IPO`s = (40% + 20% + 0% + (-12%))/4 = 12% b) 10 000 * 0,1 + 10 000 * 0,2 + 10 000 + 10 000 = 23 000 c) 1 000 * 1,4 + 2 000 * 1,2 + 10 000 * 1 + 10 000 * (0,88) = 22 600 i) 100% * ((22 600 – 23 000) / 23 000) = -1,74 % ii) 22 600 – 23 000 = - 400euros. d) Winner´s curse Uninformed investors, such as Ms.Smith, will get relatively more overprised than underprised shares. Problem 4 – Share Repurchases 100 000 000 shares 150 000 000 free cash 65 000 000 expected cash flow (annual) cost of capital 10 % increased future cash flow 10 000 000 earnings per share (10 000 000 + 65 000 000)/100 000 000 = 0,75 / share Share price (EPS / rate of return) 0,75/0,1 = 7,5€ b) Share price without 10 million increase in cash flow: 0,65/0,10 = 6,5€ Shares repurchased: 150 000 000 / 6,5 = 23 076 923 Shares outstanding after the repurchase: 100 000 000 – 23 076 923 = 76 923 076. Share price after the repurchase: (650 000 000 – 150 000 000) / 76 923 076 = 6,5€. Problem 5 - Rights Offer (TARKISTA e/d) a) New money raised: 10 000 000 / 4 * 5€ = 12 500 000 € b) Value of a right: (6 – 5) / (1 + 4) = 0,2€ c) (10 000 000 * 6 + 12 500 000) / (10 000 000 + 2 500 000) =