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Final

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Ryerson University

Finance

FIN 401

Scott Anderson

Fall

Description

CF0 = -12,000 CF1=3000 CF2=4800 years and pays an annual coupon of WACC = weRE + wdRD(1 – Tc)
CF3=1700 CF4=1700 CF5=6000 8%. The corporate tax rate is 40%.
I = 7% Compute NPV = $1,958.79 What is the after-tax cost of debt for = (300/727.5)(20) +
Solution: N = 5, I = 10% x (1 – 0.4) = (427.5/727.5)(10)(1-0.4) =
Loonie Bank?
6%, PMT = 1.5M x (1 – 0.4) = 900,000 N=30, PV = -1,100, FV = 1,000, 11.77%
PMT = 80, compute I/Y = 7.1796%
Solution: NAL = Cost - PV(ATLP) – After tax cost of debt = 7.1796% x
PV(Salvage) – PV(CCATS) (1 – 0.4) = 4.31% Cost of project = Amount of equity
Cost = 6,000,000 to be raised = Project cost/(1 –
When evaluating two mutually- flotation cost) = 950,000/(1 – 0.05)
PV(ATLP) = 4,018,595 exclusive projects each having non-
conventional cash flows, what is the = $1,000,000
PV(Salvage) = 200,000/1.06^5 = most appropriate criterion to use in PV(CFs) = PVA(200,000; 10 years,
149,452 deciding which project to accept, if
PV(CCATS) = any? \NPV 15%) = $1,003,754 .NPV = PV(CFs) –
(6m)(0.35)(0.4)/(0.35+0.06) x 1.03/1.06 Cost = $1,003,754 – 1,000,000 =
– (200,000)(0.35)(0.4)/(0.35+0.06) x Which of the following is NOT
an alternative for paying a $3,754
1/(1.06)^5 = 1,990,796 – 51,032 = dividend?
1,939,764 25.
Which of the following components of A) Selecting additional capital Tom & Jones (T&J) has earnings
the NAL formula would be affected? budgeting projects
B) Repurchasing shares before interest and taxes of
I. The present value of the lease $1,549,000. Both the book and the
payments C) Acquiring other companies market value of debt is $3,065,000.
D) Issuing shares The unlevered cost of equity is
II. The present value of CCATS E) All of the above are 15.5% while the pre-tax cost of debt
III. The present value of the salvage alternatives for paying a is 8.5%. The tax rate is 35%. What
value
A financial lease increases the dividend. is the value of the equity in the
PV = $15, N = 2, I = 20%, compute levered firm?
total debt of a firm. PMT = $9.82 VU = [$1,549,000(1 - .35)] / .155 =
Suppose that an investor in PVMT At date 1, you want 200 x 9.82 = $6,495,806
wanted to smooth out these $1,964. VL = $6,459,806 + (.35 x
dividends and would like to $3,065,000) = $7,568,556
generate equal dividends in each At date 1, you will receive 200 x
period. How large would each 1.20 = $240. VE = VL - VD = $7,568,556 -
You need $1,964 – 240 = $1,724 $3,065,000 = $4,503,556
dividend be in this case? Price at date 1 = 20.16/1.2 = The proposition that a firm borrows
Solution: N = 2, I = 12%, PV = - $16.80
28.38, compute PMT = $16.7924 up to the point where the marginal
To get the additional $1,724, you benefit of the interest tax shield
Solution: The investor wants equal will have to sell 1724/16.80 =
payments each year of $16.7924 102.62 shares. derived from increased debt is just
per share (see answer to previous You own 100 shares of The Quilt equal to the marginal expense of
Shoppe. If the firm does go through
question), for a total of $839.62 on the capital restructuring, and you the resulting increase in financial
the 50 shares. The investor receives distress costs is called the: a. static
prefer the cash flows from the theory of capital structure.
$250 (50 shares * $5 dividend) at current operation, what should you
the end of the first year, leaving a do? According to M&M Proposition II
You will want to achieve a 10/90 under no corporate taxes, the
shortfall of $589.62. P1 = 30/1.12 = d/e ratio, and that will require you to
$26.7857 WACC of the firm is unchanged by
sell 10% of your 100 shares (i.e., 10 changing capital structure, so it
$/$26.7857 = 22.01 shares shares) and invest the money in a
A lease is considered to be a capital should remain at 18%.
lease if which of the following criteria bond. According to Proposition I under
hold: What is Hulk’s cost of equity corporate taxes, the value of the
capital? firm will increase by the amount of
I. The lease term is for 75% or more of RE = RF + BETA(MRP) = 6 + the debt tax shield. The debt tax
the life of the asset.
II. The lessee can purchase asset at (1.5)(7) = 16.5% shield would add ($4m)(0.4) =
below market price. Value of equity = 15,000,000 x $1.6m to the value of the firm.
III. The present value of lease payments
is more than 90% of the fair market $20 = $300m Value of firm = VU + DTc = EBIT(1 –
value at the start Value of debt = 0.95 x 450m = Tc)/RU + DTc = 9m(0.6)/0.18 +
The long-term debt of Loonie Bank
is currently selling for 110% of its 427.5m Value of firm = 300m + 4m(0.4) = $31.6m

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