Scribd
Upload
5 views5 pages

Corporate Finance II Risk Analysis

The document outlines financial calculations related to a corporate finance module, including present value calculations for cash flows, terminal value, and the overall value of a firm. It also discusses the degree of operating leverage (DOL) and degree of financial leverage (DFL), indicating how changes in sales affect EBIT and net income. Additionally, it covers option payoffs based on different stock prices and the total acquisition cost for a company, including enterprise value calculations.

Uploaded by

trish200382
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
5 views5 pages

Corporate Finance II Risk Analysis

The document outlines financial calculations related to a corporate finance module, including present value calculations for cash flows, terminal value, and the overall value of a firm. It also discusses the degree of operating leverage (DOL) and degree of financial leverage (DFL), indicating how changes in sales affect EBIT and net income. Additionally, it covers option payoffs based on different stock prices and the total acquisition cost for a company, including enterprise value calculations.

Uploaded by

trish200382
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

NAME : Tanaka E Chatambarara

STUDENT NUMBER :N0230596M

PROGRAMME :RISK MANAGEMENT AND INSURANCE

PART :2.2

MODULE :CORPORATE FINANCE II


Question 1a)

Year 1 150000

2 200000

3 250000

4 300000

5 350000

g=4%

discount rate =10%

Calculation of PVs

1)150000(1+0,1)-1=136363,6363

2)200000(1+0,1)-2=165289,2562

3)250000(1+0,1)-3=137328,7002

4)300000(1+0,1)-4=204904,0306

5)350000(1+0,1)-5=217322,4361

Terminal Value

CF(1+ g)
¿
r−g
350000(1+0 , 4)
¿
0 , 1−0,004
TV=$60 66666,67

Discount Terminal Value

=TV(1+r)-n

=60 66666,67(1+0,1)-5
=$3 766 922,28

Value of a firm

=TV+∑CFpv

=3 766922,28+911 708,10

=$4 678 630,8037

Part b

Total Contribution
i) DOL=
EBIT

1000000−600000
=
1000000−600000−200000
400000
=
200000
=2

EBIT
ii) DFL=
EBT
contribution−FC
=
EBIT−INTEREST
400000−200000
=
200000−50000
=1,3

iii)Effect on EBIT

The above results clearly indicates that EBIT will increase or decrease in proportion to the
change in sales.1% increase in sales follows a 2% increase in EBIT.2% decrease in sales results in a 4%
decrease.

Effect on Net Income

For every 1% change in EBIT,net income will change by 1,[Link] EBIT increases by 20% due to a
10%sales increase ,net income will increase by 26,6%
PART C

K=$50

Premium=$5

a)Payoff=-Ct +max(0;St-k)

=-5+max(0;40-50)

=-5+(-10)

Payoff=-15

.Since St<k, 40<50,the option is out of the money

b)Payoff=-5+max(0;50-50)

=-5-max(0;0)

=0

Since St=k,50=50,option is at the money

c)Payoff =-5+max(0;60-50)

=-5+max(0;10)

=-5+10

=5

Since St>K;60>50;option is in the money


Part d

Total Acquisition cost

Premium=30%×200m=60m

Acquisition cost=market capital + premium

=200m + 60m

=$260million

Enterprise value is calculated as

EV=Equity value + Debt-Cash

=260million + 50million -20million

=$290million

The equity value paid by company A is $290 after the acquisition.

You might also like