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UNIVERSITY OF TORONTO Joseph L. Rotman School of Management RSM333 PROBLEM SET #1 1. Firm AAA that operates in Luxembourg is considering the purchase of a new machine. They plan to start deliberations with the manufacturer soon and they have asked you to arrive to a break-even price, so that the NPV of the entire operation would be equal to zero. The new machine is expected to produce the following e/ects: operating expenses will be reduced by $12,000 per year for 10 years; the existing machine is 5 years old and has 10 years of its scheduled life remaining. It was purchased for $45,000 and depreciated on a straight line basis over 15 years. Its salvage value was supposed to be zero at the end of its usage. It has a current market value of $35,000; the new machine will be depreciated straight-line over its 10 years of life. Salvage value is expected to be $8,000. all capital gains are taxable, while all capital losses are tax deductible. 2. Company A and B are two identical companies with equal asset values of $50 million. has perpetual risk-free debt in its capital structure with a market value of $20 million. Company B also has 100,000 shares outstanding. The risk-free rate is 1%. (a) Assume that there are no taxes. What is A±s share price? What is B±s share price? stock of Company A) and consists of the risk free asset and Company B±s stock? If yes, describe the portfolio.
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This note was uploaded on 04/23/2011 for the course RSM 333 taught by Professor Sabrinabutti during the Spring '11 term at University of Toronto.

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