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UNIVERSITY OF TORONTO at Scarborough
Division of Management
MGTB09H3 S (Principles of Finance)
Final exam – Tuesday April 21, 2009
from 9:00am to 12:00pm
Location: GYM
Professors: Esther Eiling and Syed Ahmed
TAs: Jenny Lu & Tina Ma
Question book
****IMPORTANT INFORMATION: READ THIS BEFORE YOU START!****
Answer all questions in the space provided in the
answer
book.
DO NOT write answers on the
question book
.
Reminder
: You must return the question book, together with your answer book.
Answer book without the question book will not be marked
.

Students are allowed to bring a (financial) calculator and a crib sheet (8.5"x11"). The crib
sheet can be double sided. Only hand written crib sheets are allowed. Photocopies are not
allowed.

Total number of pages of the question book (including this page): 4

Always clearly show all steps in your calculations.

Always leave at least 2 decimals in the ($) numbers in your calculations (e.g. PMT =
$10.89) and 4 decimals for interest rates (e.g. k = 0.0786).

Good luck!
Student Name:
Student Number:
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Section:
L01
L02
L03
L30
TH 911am
TH 24pm
FR 911am
TU57pm
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Question 1 (17%)
Gazelle is considering starting a new factory to produce bicycles. The factory would cost
$1,500,000. The expected number of bikes produced and sold is 4000 for the first year, 5000 for
the second year and 5500 for the third year. The sales price is $250 per bike in the first year in
nominal terms. This price is expected to grow at 3% per year in real terms. The variable costs per
bike are $120 in the first year, again in nominal terms. These costs are expected to increase at
2.5% per year in real terms. The factory requires temporary additional personnel, which will
result in additional labor costs of $50,000 per year (in nominal terms), which remains constant in
real terms.
All costs and sales are incurred at the end of each year. Additional net working
capital requirements at the beginning of each year are 15% of expected sales for that same year.
The market value of the factory after three years is $1,300,000 in real terms. The asset class is
closed upon selling the factory. The CCA rate is 4%, the tax rate is 35%, the expected inflation
rate is 2.5% and the opportunity cost of capital is 10% in real terms. Calculate the project’s NPV.
Question 2 (10%)
Returns for the next period for the stocks of Low Risk Limited (X) and High Risk Inc. (Y) and
the TSX Composite Index are given by the following probability distributions:
State of the
Probability of
Rate of Return
Economy
State Occurring
X
Y
Boom
0.30
5%
15%
Normal
0.40
10
10
Recession
0.30
20
50
a.
Calculate the expected rate of return for stock X, stock Y, and a portfolio consisting of 60%
X and 40% Y.
b.
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 Fall '10
 Elaine
 Management, Capital Asset Pricing Model, CCA Tax Shield

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