Capital Structure and Financial Planning (EBB060A05)

The monopolist fruit supplier FruitFul faces two groups of consumers, group A: High and B: Low. The monopolist cannot see which consumer belongs to which group. It offers a high quality fruit (peaches) and a low quality fruit (lemons). Each consumer only wants to buy 1 unit of fruit.

Group A is willing to pay at most 4 for a lemon, and 11 for a peach. Group B is willing to pay at most 3 for a lemon, and 4 for a peach. Marginal cost are 0 for a lemon and 1 for a peach. Both groups have the same size.

Suppose that the monopolist sets prices such that group A buys a peach and group B buys a lemon. Show which prices then maximize profits. Also show that the monopolist is indifferent between using second-degree price discrimination and only selling the high quality product to group A.

The 53 million shares of a company are initially trading at EUR 62.91 per share. The management of the company announces i) to increase the company's permanent debt with EUR 311 million and ii) to use the proceeds of the debt issue to repurchase shares. The interest rate of the new debt is 5.9%. Any interest expenses are tax deductible at the corporate tax rate of 23%. The share price of the company will

The 64 million shares of a company are initially trading at GBP 55.46 per share and the permanent debt of the company is GBP 614 million. The management of the company announces i) to increase the company's permanent debt with GBP 260 million and ii) to use the proceeds of the debt issue to repurchase shares. The interest rate of the new debt is 4.3%. Interest expenses are tax deductible at the corporate tax rate of 27%. The share price of the company just after the announcement is [GBP, 2 decimals]

A company has a cost of debt of 5.8% and an unlevered cost of equity of 7.9%. The management of the company maintains a constant debt-to-equity ratio of 0.15. The corporate tax rate is 32%. The weighted average cost of capital of the company is [percentage, 2 decimals]

XYZ has 89 million shares outstanding; the price per share is GBP 48 and the earnings per share are GBP 3. ABC has 25 million shares outstanding; the price per share is GBP 44 and the earnings per share are GBP 3. XYZ acquires ABC in a cash deal, the cash is raised by issuing new shares. XYZ pays no premium and the expected value of the synergies is zero. The price-to-earnings ratio after the merger is [, 2 decimals]

Answer

Your bank offers a loan with an effective annual interest rate of 7.5%. The loan has a compensating balance requirement of 5% with an effective annual interest of rate of 1.2%The effective annual interest rate of this loan is [percentage, 2 decimals]