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CFIN 401 Midterm Fall 2010 Instructor A.docx

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Ryerson University
FIN 401

Midterm 2010 1. You have invested $4,500 in an account that earns 8% compounded semi-annually. You plan on making additional payments of $75 per month into this account for the next five years. How much will your investment be worth in 5 years? a. $11,344 b. $12,153 c. $12,654 d. $13,321 e.$13,538 2. You plan on buying a bottling machine for $2 million, which can be salvaged for $400,000 in 8 years. Your tax rate is 43% and the CCA rate is 30%. Your cost of capital is 13%. What is present value of the CCA tax sheild? a. $338,447 b. $378,521 c. $422,781 d.$458, 402 e. $520,348 3. You have the following two bonds that are identical except for coupon rate and price. What is the price of bond B?. Bond A Bond B Price $937.69 ? Years to maturity 10 10 Coupon rate (semi-annual) 9% 8% Face Value $1000 $1000 a. $811.21 b. $857.38 c. $891.52 d.$909.20 e. $955.72 1 4. You have the following information on the following stock. P0= $10.72. g =3.5% r = 12% EPS 0 $2.2 What is the dividend payout ratio? a. 0.3 b. 0.4 c. 0.5 d. 0.6 e. 0.7 5. Your firm is financed by 40% equity and 60% debt. The cost of equity is16% and the cost of debt is 7%. Your corporate tax rate is 37%. What is your weighted average cost of capital (WACC)? a. 7.77% b. 8.09% c. 8.78% d. 9.05% e. 9.58% 6. You need to finance a project that will cost $17 million. The floatation costs on raising the funds are 6%. How much money do you need to rise to be able to afford the project? a. $15,980,000 b. $16,827,203 c. $17,000,000 d. $17,308,221 e. $18,085,106 7. Duff Beer’s WACC is 10.8504%. Duff’s cost of equity is 17%, and their cost of debt is 9%. If Duff’s debt to equity ratio is 1.3, what is Duff’s tax rate? a.28% b.30% c. 32% d. 34% e. 36% 2 Use the following information for questions 8-11. Megalo-Mart is financed by 2 classes of equity and one class of debt. Class A equity just paid a dividend of $1.45 which is expected to grow at 2.75% perpetually, and is priced at $13.24. Class B equity returns have a covariance with the market returns of 0.04125. The risk free rate is 4%, the expected return on the market is 12% and the variance of market returns is 3.75%. The debt has 20 years to maturity, with a coupon rate of 8% paid annually, a face value of $1000 and is selling at 95% of par. The debt to equity ratio is 0.8 and the class B equity has twice the value of the class A equity. The tax rate is 37%. The floatation costs of debt equal 3% and the floatation costs of both classes of equity is 5.5%. Megalo-Mart is planning to purchase a propane pump that costs $2 million 8. What is the cost of the class A equity? a. 12.5% b. 13% c.13.5% d. 14% e. 14.5% 9. What is the cost of the class B equity? a.12.2% b. 12.8% c. 13.2% d.13.8% e. 14.2% 10. What is the WACC? a. 7.2651% b. 8.5438% c. 9.7216% d. 10.7014% e. 11.3315% 11. How much does Megalo-Mart need to raise to purchase the propane pump? a. $2,091,808.06 b. $2, 220.381.55 c. $2,520,421.32 d. $2,787,642.78 e. $2,987,622.03 3 12. Mr. Van Driesen is trying to decide whether or not to buy or lease a computerized grading system for his class. He can buy it for $12,000 or lease it for $1800 per year for the next five years. He can get the funds for the lease, by borrowing at 8% from the schools line of credit. The grader has no salvage value and fits into the 25% CCA bracket. The tax rate is 33%. What is the NAL? a. $2,898.4 b. $3,164.5 c. $3,152.29 d. $3,554.3 e. $3,841.2 Use the following information for questions 13-16. You are looking at purchasing a widget producing machine that will cost $11 million which will be salvageable in 9 years for $3 million. The machine will increase revenues by $7.5 million per year and will fall into the 30% CCA bracket. You can lease the machine for $2.75 million per year. Your pre-tax cost of debt is 8.5%. Your corporate tax rate is 35%. 13. What is the present value of the CCA tax shield? a. $1,725,455 b. $1,989,546 c. $2,102,366 d. $2,442,394 e. $2,619,634 14. What is the NPV of the purchase? a. $25, 421,228 b. $27,323,257 c. $28,541,725 d. $28,652,337 e. $28,987,251 15. What is the net advantage to leasing (NAL)? a. -$7,241,582.43 b. -$6,975,354.39 c.-$6,567,796 d. -$6,254,308.20 e. -$6,105,882.09 4 16. What would the pre-tax lease payment have to be for you to be indifferent between leasing or buying? a. $842,665.04 b. $891,268.83 c. $927,
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