Prof. Dr.iur. Dr.rer.pol. Joachim Häcker
Exam in Corporate Finance
Name ...................................................................................................
Signature ..............................................................................................
Max. points: ........................................................................ 100 points
General comments:
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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.
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All the best!
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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
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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
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1.1 Profit & Loss account figures (7 points)
Please derive the following 2010 financial figures for Adidas:
a) P/B ratio __________________________________
b) P/E ratio __________________________________
c) Result of ordinary activities ____________________
d) Tax rate
____________________________________________
e) Return on equity (based on balance sheet and p&l) ____________
1.2 Defining 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)?
1.3 Letter 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?
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1.4 MBO/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)?
1.5 Advisers (7 points)
a) Please name four top ten legal advisers (based on M&A transaction
volume) (3 points)!
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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)
1.6 Due 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.
1.7 Signing 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?
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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).
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Investment 1) 1020%
Investment 2) 103%
Investment 3) 0.2%
Investment 4) – 37%
Investment 5) – 112%
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3. Free cash flows, risk and rates of return and cost of
capital (35 points)
3.1 Free 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)
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3.2 Equity risk premium (4 points)
The equity risk premium is defined as: “return on the market” (Rm) minus
“risk free rate” (Rf).
a) Estimate the current equity risk premium for Germany
b) Can there be a negative equity risk premium in theory or in
business practice?
3.3 Beta (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).
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3.4 WACC (13 points)
a) Describe the usage of the tax-shield in the WACC formula.
b) How is the weighting in the WACC formula derived?
c) Derive Adidas’ cost of debt and compare it to the current 10 year
government bond in Germany.
d) Derive the Adidas WACC for December 31, 2010 based on the
following additional assumptions:
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the Adidas Beta = 1
the risk free rate = 3%
the return on the market = 8.5%
e) Please explain the difference between the Adidas cost of equity
and cost of debt.
f) 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).
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4. Managing for shareholder value (27 points)
4.1 Trading 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
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Adidas’ equity value based on EV / EBIT _____________________
Adidas’ equity value based on Price / Book ____________________
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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?
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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.
a) Please define the term of technique “IRR (=Internal Rate of Return)”.
b) 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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