MGFC10FS12_Assig2_Fall2015.pdf - MGFC10H3F(Intermediate Finance L01 Assignment 2 Due Date Tuesday Dec 1 2015 at the beginning of class Prof Syed W Ahmed

MGFC10FS12_Assig2_Fall2015.pdf - MGFC10H3F(Intermediate...

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MGFC10H3F (Intermediate Finance) L01 Assignment 2 Due Date: Tuesday Dec 1, 2015 at the beginning of class Prof. Syed W. Ahmed STUDENT’S NAME:________________________________________________ Last First Middle STUDENT’S I.D. NO.:_______________________________________________ QUESTION NO. MAX. MARKS MARK OBTAINED 1 20 __________________ 2 20 __________________ 3 20 __________________ 4 20 __________________ 5 20 __________________ TOTAL MARKS 100 __________________
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-2- QUESTION 1: Toronto Office Furniture Manufacturer Limited (TOFM) an all equity firm with a market value of $10,000,000 is considering the following two sanding machines for manufacturing office furniture. Because of the overseas competition TOFM will close down its furniture manufacturing business in 10 years. It is considering the following two sanding machines. Deluxe Model Superior Model Expected annual cost savings $8,000 $7,500 Economic Life 10 years 5 years Price of Machine $30,000 $18,000 Machines will be depreciated straight line. At the end of their economic lives both machines will have 0 salvage value. TOFM’s corporate tax rate is 40%. Following is some additional information to assist you in assessing the machines. Expected Standard Covariance with Asset Return Deviation Market Returns Risk free asset 0.03 Market Portfolio 0.08 0.2 TOFM Common Stock 0.06 a. What is TOFM’s cost of capital? b. Which of the two machines should TOFM purchase?
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