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Midterm

# CFIN 401 Midterm Fall 2010 Instructor A.docx

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Ryerson University

Finance

FIN 401

mr.anon

Summer

Description

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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