mba exam - MBA CORPORATE FINANCE GIA 885 EXAMINATION...

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MBA – CORPORATE FINANCE – GIA 885 EXAMINATION Examiner: Professor Rocky Higgins Date: 10 December 2000 This examination is open-book and open-note. You may use calculators and computers if you wish. Please show all your work in the exam book so that partial credit can be given. You may insert previously prepared answers, but please understand that I am seeking direct answers to the questions asked. Irrelevant material and unnecessary verbiage will reduce your score. The total time allowed for this examination is 180 minutes (three hours). Points will be assigned in proportion to the suggested time for each question. Remember: Neatness is a virtue. Good Luck! 1. What characteristics of JM Case Company and its business operations make it an especially attractive or unattractive leveraged buyout candidate? (Your answer should not exceed half a page) The idea in a LBO is to have a whole lot of cash available to service debt. JM Case is thus a very attractive leveraged buyout candidate for the following reasons: no debt now, so we can load on a lot of new debt, healthy profit margins, very stable, predictable cash flows so we can operate with low coverage ratios,
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modest growth so we will not need to pay for new assets to support expansion, modern equipment so we will not have to pay for maintenance and replacement, substantial barriers to entry, and reasonable geographic diversification. [10 minutes] 2. If the JM Case management team is able to purchase the company’s equity for $20 million, at what price-to-earnings ratio will the transaction take place? Base your answer on Case’s 1984 net profit. [5 minutes] $20 million/$1.966 million = 10.2 times (Yes, it’s that easy!) 3. If the management team is able to purchase JM Case’s equity for $20 million, what will be the interest-bearing debt to total capital ratio of the company immediately after the purchase? (Total capital = all long-term sources of financing to the firm.) [5 minutes] ($20 million - $500,000)/$20 million = 97.5%. Alternatively, if you want to use $3.5 million in excess cash in lieu of long- term debt, ($16.5 million -$500,000)/$16.5 million = 97.0%. 4. Assume the management team purchases 51 percent of JM Case’s equity for $500,000 as planned, and that at the end of 1990, the company’s equity is worth 10 times 1990 profit after tax. (a) Draw a cash flow diagram for the management team’s investment from 1985 through 1990. (For simplicity, assume the investment occurs on January 1, 1985 and base your answer on the projections in Exhibit 7.) (Yes, it’s that simple!) $500,000 .51 X 10 X $2,462 = $12.6 million 6
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(b) Referring to this cash flow diagram, what is the management team’s internal rate of return on their investment? NPV = -$0.5 + $12.6 (PVF, r%, 6
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mba exam - MBA CORPORATE FINANCE GIA 885 EXAMINATION...

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