The University for business
and the professions
MSc Degree in Shipping, Trade and Finance
MSc Degree in Supply Chain, Trade and Finance
MSc Degree in Energy, Trade and Finance
Cass Business School
1st May 2013
Division of Marks:
Section A carries 36 marks, Section B carries 28
marks and Section C carries 36 marks.
Instructions to students:
Students should answer TWO questions from
Section A, ONE question from Section B, and ONE
questions from Section C
This paper contains SIX questions and comprises SIX pages including the title page Number of answer books to be provided: One
Calculators are permitted: YES: CASIO FX-83 GT+,
CASIO FX-85 GT+ , CASIO FX-83 MS,
CASIO FX-83 ES, CASIO FX-85 MS, AND CASIO FX-85 ES
Dictionaries are NOT permitted
Additional materials or tables to be provided: None
Exam paper can be removed from the exam room: No
Internal Examiner: Dr Giovanni Cespa
External Examiner: Dr Dong-Wook Song
Answer TWO of the following questions (20 lines maximum each): Question 1
Hotel Inc. is a diversiﬁed company whose core business is in the “Lodging” industry, which has an estimated industry asset beta of 0.53. Hotel Inc. also holds a division operating in the “Contract Services” industry, providing food to health-care and educational institutions. The divisional manager is pressing for an expansion of the Contract Services division through new investments, and claims that the WACC to be used in the valuation of these investments must be computed based on an industry asset beta of 0.53. You must advise the CFO of Hotel Inc. on whether the divisional manager’s proposal is sound. After unlevering equity betas in the “Contract Services” industry, you ﬁnd that the industry asset beta is 1.03. What is your advice to Hotel Inc.’s CFO? Should he follow the proposal of the Contract Services divisional manager? Motivate your answer.
The Kelly Solar case we considered in class is a clear example of the negative eﬀects of debt overhang. Indeed, the case shows that the possibility to generate a potentially positive payoﬀ (positive NPV) is hindered by the existence of maturing debt. That is, if Kelly was to inject equity to acquire the additional patents that would tilt upwards the probability of success, the terms of the outstanding debt would make such injection unproﬁtable, since the lion’s share of the ﬁnal payoﬀ would to towards repaying the debtholder. Answer the following questions: (a) The case states that the terms of the debt contract do not allow Kelly to issue senior debt. Explain why if Kelly could issue new senior debt, the debt overhang problem would not arise.
(b) In the case, Kelly obtains debt funding from a single investor. Suppose that instead Kelly obtained debt from several diﬀerent debtholders. Do you think that in this way the renegotiation would become easier? Motivate your answer. 18 marks
“It is a year since investors began a concerted campaign to secure a greater share of companies’ proﬁts, putting pressure on boards to cut pay and raise dividends. Nowhere was the call more vociferous than among shareholders of Europe’s banks. And it has worked. A look back at the full-year results of the region’s lenders, strung out over the past ﬁve weeks, shows a story of rising dividends across a number of big European names, underpinned by better than expected capital ratios rather than resurgent proﬁts[. . . ] Barclays paid out generously in spite of a lossmaking year and promised future payouts would be at a rate of 30 per cent of earnings. Deutsche Bank made a similar promise, while the likes of BNP Paribas and UBS edged up their payouts.” (“Investors win rewards in payout battle,” FT March 10, 2013) The article argues that most banks have stepped up their dividend payout ratios. We know that in perfect capital markets...
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