MGFC10Final_W2013_Assg2_Sum2013docx.pdf - MGFC10H3(Intermediate Finance L01 L03 Final Exam Date ASSIGNMENT 2 Due Date Friday August 2 2013 By 12 noon in

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MGFC10H3 (Intermediate Finance) L01 & L03 Final Exam Date: April 18, 2013 ASSIGNMENT 2 Due Date: Friday August 2, 2013 By 12 noon in IC366 Prof. Syed W. Ahmed STUDENT’S NAME:_ _______________________________________________ Last First Middle STUDENT’S I.D. NO.:_______________________________________________ QUESTION NO. MAX. MARKS MARKS OBTAINED 1 20 __________________ 2 20 __________________ 3 15 __________________ 4 25 __________________ 5 20 __________________ TOTAL MARKS 100 __________________ GOOD LUCK Management, 1265 Military Trail, Toronto, ON, M1C 1A4, Canada
-2- QUESTION 1: PennyJC is considering issuing \$10,000,000 worth of perpetual bonds yielding \$600,000 interest per year. PennyJC currently has no debt outstanding and will use the bond proceeds to repurchase equity. PennyJC has 100% dividend payout ratio and EBIT is \$2,000,000 per year forever. Corporate tax rate is 40%. a. If the personal tax rate is 28%, which plan (all equity or debt + equity) offers the investors the highest cash flows? Why? b. If the shareholders require a 10% return before personal taxes, what is the value of the firm under each plan? (Do not ignore personal taxes). c. Suppose T s =20% and T b =32%. What are the investors' cash flows under each plan? Repeat part (b). QUESTION 2: PharmGen Limited has a target B/V ratio of 3/4 and is in the 30% tax bracket. The required rate of return on the

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