Prof. Dr iur. Dr rer pol. Joachim Häcker Exam in Corporate Finance




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Prof. Dr.iur. Dr.rer.pol. Joachim Häcker

Exam in Corporate Finance



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Max. points: 100 points

General comments:




  • Please write down the solution on the space indicated (marked with a straight line). Solutions written down somewhere else can not be taken into consideration.

  • You are asked several little questions. The solution is either right or wrong. Therefore, you will be given either all points or zero points => Take your time for the calculation.

All the best!

1.Adidas is for sale (34 points)


    Attached is a data set comprising data on Adidas Group (following: Adidas) and Puma Group (following: Puma). Both companies are listed in Germany. Please base your analysis on the following assumptions:

    Adidas


  • The Adidas market cap at the end of 2010 was € 10.1bn.

  • CAPEX of Adidas at Dec. 31, 2010 = €290m

  • Depreciation and amortisation of Adidas at Dec. 31, 2010 = €270m

  • Interest bearing liabilities: Short-term:

    “Short-term borrowings”, “other current financial liabilities”, “other current provisions”.

  • Interest bearing liabilities: Non-current:

    “Long-term borrowings”, “other non-current financial liabilities”, pensions and similar obligations”.

    Puma


  • Puma’s market cap at the end of 2010 was € 3.7bn.

  • CAPEX of Puma at Dec. 31, 2010 = €80m

  • Depreciation and amortisation of Puma at Dec. 31, 2010 = €71,4m

  • Interest bearing liabilities:

    “Current bank liabilities”, “other current financial liabilities”, “pension provisions” and “other non-current financial liabilities”

  • € 1 = $ 1,40


1.1Profit & Loss account figures (7 points)


    Please derive the following 2010 financial figures for Adidas:



  1. P/B ratio __________________________________



  1. P/E ratio __________________________________



  1. Result of ordinary activities ____________________



  1. Tax rate ____________________________________________






  1. Return on equity (based on balance sheet and p&l) ____________


1.2Defining M&A (2 points)


Can the purchase of a minor ownership stake be characterised as M&A (please explain your answer and base your analyses on the business view)?


1.3Letter of Intent (4 points)


    Assume LVMH Group were interested in buying Adidas and submits a letter of intent. What would be the core aspects of such a letter of intent?

1.4MBO/MBI and financial investors (8 points)


    Adidas is advised by Morgan Stanley. Morgan Stanley suggests that the Adidas transaction should be an MBO or an MBI.

    a) What does the abbreviation MBO or MBI stand for (2 points)?





b) Can you give examples for disadvantages or threats of an MBO/MBI transaction in the Adidas case (4 points)?

    c) Can you name two financial investors that are active in the German market (2 points)?


1.5Advisers (7 points)


    a) Please name four top ten legal advisers (based on M&A transaction

    volume) (3 points)!

    b) Please tick the box: Who gets a success fee in an M&A transaction (2 points)?

    Success fee

    - Lawyers

    - Investment bankers

    - Auditors

    - Tax advisors

    c) What is the name of the Wall Street investment bank which has been bought by Citigroup / Citibank? (2 points)


1.6Due Diligence (3 points)


    In the due diligence phase the business plan is challenged by the investment bank. The aim is to quantify strategic, legal, financial and tax risk factors. Please come up with one example per risk category.


1.7Signing versus closing (3 points)


    Assume the signing of the Adidas / LVMH deal was done. What would be the next steps in order to close the transaction?

2.Five investments (4 points)


    The CFO of Adidas analyses his investment in the capital markets (purchase of stocks). He derives five different growth rates for five different investments in stocks he has made. There is one growth rate which is obviously wrong. Point out the growth rate and explain why this growth rate can not be true (4 points).



  • Investment 1) 1020%

  • Investment 2) 103%

  • Investment 3) 0.2%

  • Investment 4) – 37%

  • Investment 5) – 112%


3.Free cash flows, risk and rates of return and cost of capital (35 points)

3.1Free cash flow (12 points)

a) Derive Adidas’ Free Cash-Flow for 2010 based on the p&l and balance sheet mentioned in the paper attached (9 points):

The Adidas FCF at the end of 2010 ___________________________


b) Assume a portfolio manager invested €1m and his investment ended up with a

b.1) Beta of 0.5;
b.2) Beta of 1.5.

How would the portfolio manager invest the €1m in case b.1) and b.2) if his investment philosophy were based on the CAPM? (3 points)


3.2Equity risk premium (4 points)

The equity risk premium is defined as: “return on the market” (Rm) minus “risk free rate” (Rf).

  1. Estimate the current equity risk premium for Germany


  1. Can there be a negative equity risk premium in theory or in business practice?



3.3Beta (6 points)

a) Beta is a measurement for the systematic risk. If Beta is derived via a regression analysis: How can you determine how many per cent come from systematic risk components and how many per cent come from unsystematic risk components? (3 points)


b) Can you come up with an example of a company with a negative Beta? If yes: Please explain why you think this company has a negative Beta (3 points).




3.4WACC (13 points)


  1. Describe the usage of the tax-shield in the WACC formula.



  1. How is the weighting in the WACC formula derived?




  1. Derive Adidas’ cost of debt and compare it to the current 10 year government bond in Germany.



  1. Derive the Adidas WACC for December 31, 2010 based on the following additional assumptions:




  • the Adidas Beta = 1

  • the risk free rate = 3%

  • the return on the market = 8.5%



  1. Please explain the difference between the Adidas cost of equity and cost of debt.


  1. Please explain the difference between the Adidas cost of equity (as an element of the WACC) and the Adidas cost of equity (based on the balance sheet and p&l).

4.Managing for shareholder value (27 points)

4.1Trading Multiples (10 points)


a) Derive the equity value of Adidas based on a trading multiple analyses, Adidas’ and Puma’s p&l and balance sheet as well as the following assumptions:


  • Puma is Adidas’ peer (no entire peer group is used – only the company “Puma”).

  • All financial figures are 2010 year’s end figures

  • Use the EV/EBIT multiple and the Price/book multiple

Adidas’ equity value based on EV / EBIT _____________________

Adidas’ equity value based on Price / Book ____________________

b) Explain the difference between the numbers which were derived based on the EV / EBIT multiple and the Price / Book multiple.



4.2. DCF (9 points)

Assume the following Free-Cash-Flows are given for Adidas:

2011: $1,0 bn
2012: $1,2 bn
2013: $1,5 bn
2014: $1,7 bn
2015: $1,4 bn
2016: $1,6 bn

The WACC is 9.8% and the eternal growth rate (g) is 2%. Today is December 31, 2010.

a) Please derive Adidas’ current equity value.

b) Please compare Adidas’ equity value based on the DCF (see: 4.2.a)) to Adidas’ book value. What do you conclude?



4.3. IRR (5 points)

Assume that Adidas bought Gamma group at the end of 2010 for € 500m. Five years later Adidas sold Gamma group for $1.2bn.

  1. Please define the term of technique “IRR (=Internal Rate of Return)”.




  1. What was Adidas’ IRR related to the Gamma group investment?



4.4. IPO (3 points)


What criteria do companies have to meet if they go public (prime standard at Frankfurt Stock Exchange)?





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