Corporate Finance Exam Case Solution
Stock price = $9
Stock price in two years (up state) = $3
Stock price in two years (down state) = $2
Cost today = $10 – option price
Portfolio value (up state) = $10 + 3 = $13
Portfolio value (down state) = $10 – 2 = $8
Risk free rate = 5%
Option price = $10 – $8 x e ^ (-risk-free rate x T), where e is the mathematical constant 2.7183
Option price = $10 – $8 x 2.7183 ^ (-5% x 2)
Option price = $1.81
The new share price is calculated ad $20.40, by dividing the sum of total value of Vtech Metal and the total value of Nissin Steel at the premium price i.e. (200 + 72), with the number is shares after the merger i.e. 13.33 million. The total number of shares after the merger are calculated by adding up 10 million shares of Vtech Metal and the number of shares to be issued i.e. 3.33 million (calculated as 60/ 18), whereas the 20% premium price for Nissan of 418 is calculated as 15*(1+0.2).
- The price per share is calculated by dividing the present value of the company with the total number of shares outstanding i.e. 2500000/ 1000000 = $ 2.5 per share. However, the present value is calculated by the perpetuity formula i.e. FCFF/ R = 300000 / 12% = 2500000.
- The price after announcement is calculated by dividing the market value of the company before announcement with the total number of shares remaining after the announcement i.e. (1000000*2.5)/(1000000-560000) =$5.68. Per share. The number of shares to be repurchase are calculated by dividing the total debt amount with the per share price of $2.5.
- The cost capital after issuing debt will change the capital structure of the company. The total capital of company is market value i.e. $ 2500000. The weight of debt is calculated as 56% i.e. 1400000/ 2500000 and weight of equity is 44% i.e. 1- weight of debt. Afterwards the cost of capital is calculated by the WACC formula i.e. wd*rd(1-T) + ws*rs = 8.024%.
- Decision tree
- Value of the technology if Puddle Ltd invests today
Value of perpetuity = 50 / (8 / 50) = $312.5
- Value today = 50 / (8 / 50) = $312.5
Value of waiting one year = 50 / ((8 / 50) / (1 + 10%)) = $343.75
So, the Puddle Ltd should wait one year to invest……………….
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