ECO359. Practice Problems IIIA. Winter 2011-12. Professor Malinova.
Please do the following questions from your textbook (6th edition):
Calculating Cost of Equity
13.1 The Dybvig Corporation's common stock has a beta of 1.15.
If the risk-free rate is 4

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1. Calculate the accounting break-even point.
2. Calculate the base-case cash flow and NPV. What is the sensitivity of NPV to changes in the sales
figure? Explain what your answer tells you about a 500-unit decrease in proje

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much more money would you earn from your Second City Bank account at the end of 10 years?
Calculating Future Values
5.2. Compute the future value of $1,000 compounded annually for
1. 10 years at 6 percent.
2. 10 years at 9 p

ECO359H1S
Sample Problems I
ECO359 Hints and Answers for selected Practice Problems I.
1. In the corporate form of ownership, the shareholders are the owners of the rm. The
separation of ownership from control in the corporate form of organization is what

ECO359H1S
Example Problems
University of Toronto
Department of Economics
ECO359 Sample Problems I
1. (Based on Ross et al. 6th edition 1.2). Who owns a corporation? Describe the
potential agency problems that may arise in the corporate form of organizatio

Chapter 9: Risk Analysis, Real Options, and Capital Budgeting
9.4 If we purchase the machine today, the NPV is the cost plus the present value of the increased cash flows, so:
NPV0 = $1,800,000 + $340,000 10%
12
NPV0 = $121,075.83
We should not necessaril

Chapter 9: Risk Analysis, Real Options, and Capital Budgeting
9.1
Calculate the NPV of the expected payoff for the option of going directly to market.
NPV(Go Directly)
= CSuccess (Prob. of Success) + CFailure (Prob. of Failure)
= $20,000,000 (0.50) + $5,0

Answers to Practice Problems II.
2.
The discount rate for the project is equal to the expected return for the security, RS, since the
project has the same risk as the firm as a whole. Apply the CAPM to express the firms required
return, RS, in terms of th

University of Toronto
Department of Economics
ECO359H1S
Example Problems
ECO359 Sample Problems II, Part 2 (Answer Key)
This question illustrates the usage of CAMP and the industry P/E ratio.
1. You are a research analyst and your boss asks you to perform

University of Toronto
Department of Economics
ECO359H1S
Example Problems
ECO359 Sample Problems II: Using Industry P/E ratio
This question illustrates the usage of CAMP and the industry P/E ratio.
1. You are a research analyst and your boss asks you to pe

ECO359H1S
Sample Problems II
ECO359 Hints and Answers for selected Practice Problems I.
Please attend the review sessions or my oce hours if youd like to discuss solutions.
1. Consider the example from the lecture slides on Alternative Rules of Investment

University of Toronto
Department of Economics
ECO359H1S
Example Problems
ECO359 Sample Problems II (some are from your textbook)
1. Consider the example from the lecture slides on Alternative Rules of Investment,
slide 9 (The timing problem).
(a) Which pr

Chapter 13: Risk, Return, and Capital Budgeting
13.1 With the information given, we can find the cost of equity using the CAPM. The cost of equity
is:
rS = 0.045 + 1.15(0.11 0.045) = 0.1198 or 11.98%
13.2 With the information given, we can find the cost o

ECO359H1S
Sample Problems III
ECO359 Hints and Answers for selected Practice Problems IVB.
Please attend the oce hours if youd like to discuss solutions.
1. Bubble.com question.
(a) VL = B + S = $250. No, by MM proposition.
(b) VL = VU =EBIT/r0 (assuming

ECO359H1S
Example Problems
University of Toronto
Department of Economics
ECO359 Sample Problems IV, Part B
1. Suppose internet startup rm Bubble.com has issued 10 shares that trade at $10
each and 10 bonds that trade at $15 a piece. Assume there are no ba

ECO359H1S, Section L0101
MidTerm Exam II, Spring 2008
University of Toronto
Department of Economics
University of Toronto
MidTerm Test II, Spring 2007-08
ECO 359H1S
Section L0101
Professor: Katya Malinova
Duration: 1 hour 50 minutes (110 minutes).
Aids al

ECO359H1S
Answer Key MidTerm Exam II, Spring 2008
University of Toronto
Department of Economics
Answer Key for ECO359H1S 2007-08 Midterm II
Q.1 [Payout Policy]
[5]
(a) Irrespective of the payout policy,
i. What is the present value per share of these two

ECO359H1S, Section L0101
MidTerm Test II, Spring 2007
University of Toronto
Department of Economics
Answer Key for Midterm II (Section L0101).
Part A: Multiple Choice. Do not explain your answers!
A: [Multiple Choice]:
Do not explain your answers! An unan

ECO359H1S, Section L0101
MidTerm Test II, Spring 2007
University of Toronto
Department of Economics
University of Toronto
MidTerm Test II, Spring 2006-07
ECO 359H1S, Section L0101
Professor: Katya Malinova
Duration: 1 hour 50 minutes (110 minutes).
Aids a

University of Toronto
Department of Economics
ECO359H1S, Spring 2007, sample midterm, version B
Solutions to Sample ECO359 Midterm (version B).
Part A: True/False and Multiple Choice
Do NOT explain your answers!
1. If a rm issues previously authorized sha

ECO359H1S
Sample MidTerm Exam IA, Spring 2007
University of Toronto
Department of Economics
Sample Midterm I, version B.
Part A: True/False and Multiple Choice
Answer all questions! You will receive 2 points for each correct answer. Omitted questions
are

ECO359H1S
Solutions to MidTerm, version A, Spring 2007
University of Toronto
Department of Economics
Midterm Examination I, version A Answers and Hints.
Part A: Basics
1. = 0 = required rate of return = 5%
2. xed cost: 30, 000 + 20, 000 = 50, 000
sale: 15

ECO359H1S
Sample MidTerm Exam IA, Spring 2007
University of Toronto
Department of Economics
Sample Midterm I, version A.
The Fairy Godmother Inc. (FG) is the biggest producer of potions in the Kingdom
of Far Far Away. Their hit product is Ever After, a lo

ECO359H1S, Section L5101
MidTerm Exam I, Spring 2010
University of Toronto
Department of Economics
University of Toronto
MidTerm Test I, Spring 2009-10
ECO 359H1S
Section L5101
Professor: Katya Malinova
Duration: 1 hour 50 minutes (110 minutes).
Aids allo

ECO359H1S, Section L0101
MidTerm Test I, Winter 2012
University of Toronto
Department of Economics
University of Toronto
MidTerm Test I, Winter 2011-12
ECO 359H1S
Section L0101
Professor: Katya Malinova
Duration: 1 hour 50 minutes (110 minutes).
Aids allo

ECO359H1S, Section L0101
MidTerm Exam I, Spring 2010
University of Toronto
Department of Economics
University of Toronto
MidTerm Test I, Spring 2009-10
ECO 359H1S
Section L0101
Professor: Katya Malinova
Duration: 1 hour 50 minutes (110 minutes).
Aids allo

Question. 1(b): Assuming debtholders are open to negotiations, argue that the restructuring should take place (where you assume that the probability of a turnaround is 0 without
the restructure).
Here you must explicitly state that the expected value of t

ECO359H1S
MidTerm Test II, Winter 2012
University of Toronto
Department of Economics
University of Toronto
MidTerm Test II, Winter 2011-12
ECO 359H1S
Professor: Katya Malinova
Duration: 1 hour 50 minutes (110 minutes).
Aids allowed:
1. A Calculator. No fi