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c09final-winter2008 - UNIVERSITY OF TORONTO at Scarborough...

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UNIVERSITY OF TORONTO at Scarborough MANAGEMENT MGTC09 (Intermediate Finance) L01, L02, L03, and L30 Final Exam Date: April 16, 2008 Location: Gym Time: 2-4 p.m. Prof. Syed W. Ahmed TAs: Simon Lee and Daniel Kwan Number of Pages including the title page: 10 Items Allowed: Calculator and one 8.5”*11” double sided crib sheet. Only handwritten (no photocopies) crib sheet is allowed. You can write on both sides of a page to answer the questions. STUDENT’S NAME:________________________________________________ Last First Middle STUDENT’S I.D. NO.:_______________________________________________ SECTION: L01 L02 L03 L30 Mon 11-1 Mon 3-5 Tue 1-3 Mon 7-9 Please circle your section QUESTION NO. MAX. MARKS MARKS OBTAINED 1 20 __________________ 2 25 __________________ 3 15 __________________ 4 20 __________________ 5 20 __________________ TOTAL MARKS 100 __________________ GOOD LUCK and Have a Very Pleasant Summer
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-2- QUESTION 1: Value Enhancers Limited (VEL) is considering issuing $100,000,000 worth of perpetual bonds yielding $9,000,000 interest per year. VEL currently has no debt outstanding and will use the bond proceeds to repurchase equity. VEL has 100% dividend payout ratio and EBIT is $25,000,000 per year. Corporate tax rate is 40%. a. If the personal tax rate is 30%, which plan (all equity or debt + equity) offers the investors the highest cash flows? Why?
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