ACT349H1F F07 Test 2 with solns v04 Privacy Code A

ACT349H1F F07 Test 2 with solns v04 Privacy Code A - Your...

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ACT349H1F F07 Test 2 with solns v04 Privacy Code A Your name in format Family Name, Personal Names:__________________________ Your student ID:_______________________________________________________ UNIVERSITY OF TORONTO ACT349H1F TERM TEST 2 4:00 pm Oct 31, 2007 Instructor: Keith Sharp PhD FSA CFA NOTES: 1. Calculators allowed 2. Scrap paper is to be handed in with this book. It’s OK to write on book. 3. This is a closed book exam. 4. Multiple choice: only your letter answer on the Scantron sheet will be graded. 5. OK to write in book. 6. 10 points correct, two if blank, zero points if wrong 7. So expectation if you guess is the same as leaving a blank. 8. Timing: 50 minutes 9. Make sure you’ve indicated your letter answers in answer sheet before time is called 10. Name and ID on this book, on answer sheet and on any scrap paper please. 11. Please stay in your seats and don’t talk till all papers have been collected. 12. Photo ID on desk during exam please. 13. Good luck 14. Please code your privacy code as the answer to question 11 on your answer sheet. Your privacy code is shown in the page footer at the foot of each page of this test. The privacy code is needed so that the correct order of correct answers can be used in grading your answers.
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UNIVERSITY OF TORONTO ACT349H1F FALL 2007 TERM TEST 2 ACT349H1F F07 Test 2 with solns v04 Privacy Code A 1. (Question of class October 17, 2007) You are given the following information for a corporation: Debt ratio D/(D+E) 0.7 Interest rate on debt rd: 5.50% Corporate tax rate T: 33.00% Market risk premium: 6.00% Risk-free interest rate: 5.00% Beta: 0.40 Calculate the after-tax WACC. (A) Less than 5.00% (B) 5.00% but less than 5.10% (C) 5.10% but less than 5.20% (D) 5.20% but less than 5.30% (E) 5.30% or more (A) Solution Debt ratio D/(D+E) 0.7 Interest rate on debt rd: 5.50% Corporate tax rate T: 33.00% Market risk premium: 6.00% Risk-free interest rate: 5.00% Beta: 0.40 Expected equity return: 7.40% WACC 4.80% E(R E ) = 5% + 0.40*6.00% = 7.400% WACC = = r D (1-T c ) D/V + r E E/V = 0.7 × (1-0.33) × 5.50% + 0.3 × 7.400% = 4.80%
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UNIVERSITY OF TORONTO ACT349H1F FALL 2007 TERM TEST 2 ACT349H1F F07 Test 2 with solns v04 Privacy Code A 2. A cafe (just the business, not the building) will generate after-tax cash flows of $225,000*(1.03) t for t=1, 2, 3, 4, 5. Then nothing. You use an after-tax rate of 10.21% per annum effective. What’s the maximum that you will pay for this business at time 0, just after any cash flow? (A)
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ACT349H1F F07 Test 2 with solns v04 Privacy Code A - Your...

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