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Unformatted text preview: UNIVERSITY OF TORONTO Faculty of Arts and Science and Rotman School of Management Final Examinations, April 2009 RSM 333H1S – Introduction to Corporate Finance Duration: 2 hours Aids Allowed: Silent electronic calculator and one 1-sided 8 1 2 ” × 11” crib sheet Name: Student Number: Circle the section that you are registered in: Buti (Tue. 9a.m.–11a.m.) Buti (Tue. 11a.m.–1p.m.) Buti (Tue. 7p.m.–9p.m.) Farooqi (Mon. 11a.m.–1p.m.) Farooqi (Mon. 1p.m.–3p.m.) Farooqi (Wed. 5p.m.–7p.m.) Florence (Fri. 10a.m.–12p.m.) Florence (Fri. 12p.m.–2p.m.) Konukoglu Instructions 1. Write your answers on this examination paper. 2. Answer five out of six questions. Each question is worth 20 points. 3. Do not answer all six questions! In the table below, cross out the question that you choose not to answer. Question Marks 1 2 3 4 5 6 Total 1 1. Company XYZ is an unlevered firm with 32,000 shares outstanding. The firm has a marginal corporate tax rate of zero and it is currently valued at $640,000. The firm’s equity beta is 0.8, the market risk premium is 10% per year and the risk-free rate is 4% per year. XYZ is considering raising $300,000 in perpetual debt with 8% interest rate. The proceeds will be used to repurchase $300,000 of current stocks. (a) Suppose there is no financing costs and cost of financial distress. What is the value of the firm after the change in the capital structure? (5 marks) (b) What is the cost of equity of XYZ before and after the debt issue? (5 marks) (c) How will your answer to part (a) change if the marginal corporate tax rate is 34% for XYZ? (5 marks) (d) Suppose there is a $25,000 in floatation cost for issuing the new debt. What is the minimum corporate tax rate for XYZ to be willing to issue the debt? (5 marks) 2. Firm ABC has attracted a lot of attention in the market because of its high potential....
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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.
- Spring '11