FIN 620_Fall 2010_Final Exam and Answers_111910

# FIN 620_Fall 2010_Final Exam and Answers_111910 - Final...

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Final Exam FIN 620 Instructor: Dr. John M. Halstead DUE by 11:59pm ET on Tuesday, November 23, 2010, in your Assignment Folder under Final_Exam. Note: This exam contains 10 questions/problems. Please answer the questions/problems below and please show your work. Each question/problem is worth 10 points. Thank you. 1. The all equity cost of capital for a company is 15%, and the company has set a target  debt to value ratio of 50%. The current cost of debt for a firm of this risk is 10% and the  corporate tax rate is 34%. What’s the weighted average cost of capital (WACC) for the  company?  Cost of Equity = .15 + 1(.66)(.05) = .15 + .033 = .183 WACC = .183(.5) + .10(.66)(.5) = .0915 + .033 = .1245 or 12.45% 2. A loan of \$10,000 is issued at 15% interest. Interest on the loan is to be repaid  annually for 5 years, and the non-amortized principal is due at the end of the fifth year.  What’s the NPV of the loan if the company's tax rate is 34%.  After tax interest payments are (.15) (\$10,000) (1 - .34) = \$990 NPV = \$10,000 - \$990 PVIFA  5, 15  - \$10,000/(1.15) 5 = \$1,710 3. A firm has a market value equal to its book value. Currently, the firm has excess cash

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FIN 620_Fall 2010_Final Exam and Answers_111910 - Final...

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