Fall 2008 Final Exam Solution

Fall 2008 Final Exam Solution - ANSWER 1: Tc = 0 Desired...

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ANSWER 1: Tc = 0 Desired B/S = 0.5 V u = $30(1,500,000) = $45,000,000 V L = B + S = 15,000,000 + $30(1,000,000) = $45,000,000 5 Net Income of V u = E Net Income of V L = E – 8%(15,000,000) = E – 1,200,000 RiskTaker T s = T B = 0.40 Before Rebalancing 5 She owns $1,350,000/45,000,000 = 0.03 = 3% of the firm $ Investment $ Return Stock -1,350,000 0.03E Borrowing 600,000 -0.08(600,000) -$750,000 0.03E-48,000 After tax $ return (0.03E-48,000)(1-0.4) = 0.018E-28,800 After Rebalancing 5 $ Investment $ Return 3% of levered equity -900,000 0.03(E-1,200,000) Borrowing 150,000 -0.08(150,000) -750,000 0.03E-48,000 After tax $ return (0.03E-48,000)(1-0.4) = 0.018E-28,800 RiskAverse T s = T B = 0.30 Before Rebalancing 5 He owns $2,250,000/45,000,000 = 0.05 = 5% of the firm $ Investment $ Return Stock -2,250,000 0.05E Lending -400,000 0.08(400,000) -2,650,000 0.05E+32,000 After tax $ return (0.05E+32,000)(1-0.3) = 0.035E+22,400 After Rebalancing 5 $ Investment $ Return 5% of levered equity -1,500,000 0.05(E-1,200,000) Lending -1,150,000 0.08(1,150,000) -2,650,000 0.05E+32,000 After tax $ return (0.05E+32,000)(1-0.3) = 0.035E+22,400
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ANSWER 2: a. 1. B/S = 2/3 Therefore B/V = 2/5 & S/V = 3/5 2 $7,500,000 of internally generated funds can support $7.5 + 5 = $12.5 million in new Projects Take all the projects which have IRR > 21% Project Investment IRR 4 A
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This note was uploaded on 04/19/2010 for the course MGT MGTC09 taught by Professor Syedahmed during the Spring '10 term at University of Toronto.

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Fall 2008 Final Exam Solution - ANSWER 1: Tc = 0 Desired...

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