# Module 6 practice exercise

Module 6 Practice Exercise Question One The loan committed is 4. 35 US dollars. The upfront fee is 0. 70%. The back-end fee is 0. 35%. The take down value on the loan is 60 percent. One basis point is equivalent to 0. 01%.
0. 7/100*4. 35= 0. 03
0. 35/100*4. 35= 0. 02
0. 6*4. 35= 2. 61
The total fee incurred is 2. 61+0. 02+0. 03= 2. 66 million US dollars
Question Two
The fitness studio inc. issued a new debt of 43. 225 million US dollars. The price of the offer was 1. 00 dollars per bond. The underwriter’s spread was 8 percent of the gross proceeds. The total gross proceeds assuming all bonds were bought are 43. 2258*1= 43. 225 million dollars. The underwriter’s spread is 0. 08*43. 225= 3. 458 dollars. The total capital funding that the studio raised is 43. 225-3. 458= 39. 767 million dollars.
Question Three
DiPitro’s Paint and wallpaper Inc issue 70, 000 shares priced at 44 dollars per share. The total funds remaining after deducting the net proceeds of the sale of the stocks amount to 2. 870 million dollars. The gross proceed from the stock sale is 3. 080 million dollars.
The net proceed is 3. 08-2. 87 = 0. 210 million dollars
0. 21/7= 3 dollars per share of the stock. The underwriter’s spread is 3 dollars per share.
Part b of question three requires a percentage
0. 21/3. 08*100= 6%. The underwriter’s spread is 6% of the stock issued.
Part Two
Question One
Lil John Industries’ equity includes 1. 6 million outstanding shares selling at a price of 33 dollars per share. The total funds raised from equity are 52. 8 million dollars. There are 26, 000 bonds outstanding selling at 104 percent. The total debt is 26000*1. 04*1000= 27. 04 million dollars. The debt equity ratio is 27. 04/52. 8= 0. 5= 1: 2. assuming the par value to be 1000 dollars.
The total capital funding is 52. 8+27. 04= 79. 84 million dollars.
The weight of equity is 52. 8/79. 84*100= 66. 13%. The weight of debt is 100-66. 13= 33. 87%
Question Two
Recession Average Boom
EBIT (Net Operating Income)
\$5. 97
\$11. 638
\$18. 6208
– Interest Expense (@8%)
0. 4776
0. 93104
1. 489664
Earnings Before Taxes
5. 4924
10. 70696
17. 131136
– Taxes (@25%)
1. 3731
2. 67674
4. 282784
EAT (Net Income)
4. 1193
8. 03022
12. 848352
Earnings Available to Common (EATC)
4. 1193
8. 03022
12. 848352
No. of Common Shares
10. 12
10. 12
10. 12
Earnings Per Share (EATC/# of shares).)
0. 41
0. 79
1. 27
Question Three
In scenario one where there is no debt, the EPS is obtained through dividing the outstanding shares with the EBIT. In the recession, the EPS is 4. 8/9. 44= 0. 51. In the average condition, the EPS is 9. 8/9. 44= 1. 04 million. In the boom condition, the EPS is 16. 8/9. 44= 1. 78 million.
In scenario two, where the debt is introduced, the EBIT is adjusted for the interest and tax.
In recession 4. 08*0. 92= 3. 7536*0. 75= 2. 8152 the outstanding shares are 7. 552
Dividing the 2. 8152 by 7. 552= 0. 37
In Average condition, 9. 8*0. 92= 9. 016*0. 75= 6. 762 6. 762/7. 552= 0. 90
In the booming condition, 16. 8*0. 92= 15. 456*0. 75= 11. 60 11. 60/7. 552= 1. 54
The breakeven of the EBIT in BOOM=(X-0)*(1-0. 25) = (X-15. 456) (1-0. 25) = 77. 27 million
9. 44 7. 552
Part Three
Question One
The retention ratio refers to that proportion of the net income paid out through other means and not paid as dividend. It is calculated by subtracting one from the dividend payout ratio (Springer, 2011).
1-0. 27= 0. 73 0. 73*4. 2= 3. 066. The amount paid in dividends is 3. 066 million dollars.
Question Two
Last dividend paid = 1. 60, Dividends growth rate= 0. 05, required rate of return is 0. 12.
D1 = 1. 60*(1+0. 05) = 1. 68
Stock price = 16. 10/ (0. 12-0. 05) = 230 dollars.
References
Springer L. (2011). How to Find a Stocks Value Using the Dividend Discount Model. Retrieved from http://www. investinganswers. com/education/stock-valuation/how-find-stocks-value-using-dividend-discount-model-2386