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Fall 2008 Final Exam - UNIVERSITY OF TORONTO at Scarborough...

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UNIVERSITY OF TORONTO at Scarborough MANAGEMENT MGTC09H (Intermediate Finance) Final Exam Date: December 11, 2008 Location: GYM Time: 9-11 a.m. Prof. Syed W. Ahmed TA: Derrick Fung & Vera Lam Number of pages including title page: 9 Items allowed: Calculator and one 8.5”*11” double sided crib sheet. Only handwritten (no photocopies) crib sheets are 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 Tues 9-11 Tues 11-1 Thurs 9-11 Please circle your section QUESTION NO. MAX. MARKS MARKS OBTAINED 1 25 __________________ 2 20 __________________ 3 30 __________________ 4 25 __________________ TOTAL MARKS 100 __________________ GOOD LUCK
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-2- QUESTION 1: ABC Inc, an all equity firm, pays no corporate taxes. It has 1,500,000 shares outstanding, trading at $30 each. Ms. RiskTaker (RT) and Mr. RiskAverse (RA) are shareholders of ABC Inc. ABC, RT and RA can borrow and lend money at 8%. RT has a personal tax rate of 40% and RA of 30% on both equity income and debt income. The value of their holdings and their overall borrowing and lending positions are given below: Value of Total Total ABC shares Borrowing Lending RiskTaker $1,350,000 $600,000 0 RsikAverse $2,250,000 0 $400,000 ABC desires a debt/equity ratio of 0.5. To meet this desire the firm issued debt and used the proceeds to repurchase the shares.
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