RSM333final10 - UNIVERSITY OF TORONTO Faculty of Arts and...

Info icon This preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
UNIVERSITY OF TORONTO Faculty of Arts and Science and Rotman School of Management Final Examinations, April 2010 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 (Fri. 10a.m.–12p.m.) Farooqi (Fri. 12p.m.–2p.m.) Ganguly (Mon. 1p.m.–3p.m.) Ganguly (Tue. 1p.m.–3p.m.) 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
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
1. Firm XYZ is considering to enter a new line of business, where firm ABC is the market leader operating only in that field. The new project requires an initial investment of $30 million today and a further outlay of $75 million after one year. One of two possible states will occur after one year. If demand for the plant’s output is high, the present value of the future cashflows of the project at year 1 will be $160 million; if it is low, it will be $70 million. The probability that demand turns out to be high is 0.4. Firm XYZ has a debt-to-equity ratio equal to 2, and the beta of its equity is 1.3. Firm ABC has a debt-to-equity ratio equal to 1, and the beta of its equity is 1.1. Assume also that the risk-free rate is 8%/year and the market premium is 7%/year. The cost of debt for both firms is 9%/year and there are no taxes or other market imperfections. (a) For firm XYZ, what is the appropriate discount rate for the project? (4 marks) (b) Should XYZ start this project? (4 marks) (c) Suppose now that the management has the option to abandon the project after one year. If that is the case, the required outlay of $75 million in year one will be saved.
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern