A growing company with positive net profit

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1. Comment the following statement: ”Direct bankruptcy costs such as lawyer fees are substantial. Therefore, a corporation should take as little debt as possible to avoid potential direct costs of bankruptcy.

2. Comment the following statement: ”A growing company with positive net profit does not need external financing.

3. Consider a medium-sized manufacturing company in Finland with 20 million in sales and 2 million in net profit with tangible assets (e.g., machinery) worth of 5 million and accounts receivable and inventories totaling 5 million.

a. What are realistically the potential sources of financing for such a company? 

b. What if the company grows into having sales of 3 billion, what are the potential additional sources of financing?

4. Consider an all equity-financed company with 10,000 shares trading at 5€. The company announces a rights issue in which one new share can be subscribed at 3€ for every four shares held. Assume no transaction costs, no taxes, and no asymmetries of information.

a. What is the price of one share after rights issue?

b. What is the value of one subscription right attached to one share?

c. How does shareholder wealth change in the rights issue?

d. Consider a shareholder who owns 10% of the company. Assume that this shareholder wants to keep her euro-value of the investment into the company constant. Outline a trading plan that achieves this goal.

5. An all equity-financed company A has 5000 shares outstanding at 1€ per share. It wants to acquire another company B with 400 shares trading at 2€ share. Synergies are estimated at NPV value of 200€. Assume no transaction costs, no taxes, and no asymmetries of information.

a. What is the maximum price in cash A could offer for shares in B? Assume that shareholders and managers are rational and do not want to accept a losing deal

b. What is the maximum number of shares A could offer for every share in B? 

c. Suppose A announces acquisition of B at cash price of 2.3€ per share. What happens to share price of B?

d. At the announcement of acquisition at 2.3€, what happens to the share price of A?

Reference no: EM131055583

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