McGill University
Faculty of Management
Finance II (FINE 342)
Fall 2010
SAMPLE FINAL - SOLUTIONS
Finance II (FINE 342)
Sample Final - Solutions
Question 1
Not applicable
Question 2
The Telescoping Tube Company is planning to raise $2,500,000 in perpetual

Exercises: Issuing Debt
N.B. In the following exercises, all bonds have a face value of $1,000.
1
Default and Liquidation
1. Firm F has 4 categories of bonds: 1,000 zero-coupon senior secured bonds (A), 500
zero-coupon junior secured bonds (B), unsecured

Solutions: Capital Structure (I)
Solutions to Exercises in slides
Application 1
If you hold of the equity of Fu , you get V1 in one year.
If you hold of the debt of Fl , you get in one year,
- D(1 + r) if V1 > D(1 + r),
- V1 if V1 D(1 + r).
If you hold of

Exercises: Capital Structure (I)
N.B. In the following exercises, all bonds have a face value of $1,000 and there
are no taxes.
1
Modigliani Miller
1. Are the following statements correct in a MM world without frictions?
(a) As long as debt is risk-free,

Solutions: Capital Structure (II)
Class Exercises (in slides)
Application 1
Annual taxes are 30% (400, 000 3.5% 3, 000, 000) = $88, 500
Without debt, F would pay 400, 000 30% = $120, 000 in taxes every year.
The tax savings are therefore $31,500 per year.

Exercises: Capital Structure (II)
N.B. Unless stated otherwise, rms are subject to corporate taxes at the rate TC = 30%.
1
Modigliani Miller
1. Are the following statements correct?
(a) Everything else being equal, a rm with a higher leverage pays less co

Exercises: Valuation
N.B. Unless stated otherwise, rms are subject to corporate taxes at the rate TC = 30%.
1
Valuation
1. Are the following statements correct?
(a) In the APV method, cash-ows are discounted at the unlevered cost of equity.
(b) If a rm ha

Solutions: Valuation
Class Exercises (in slides)
Application 1
1. Unlevered cost of equity is r0 = 3.0% + 0.9 (10% 3%) = 9.30%.
Unlevered rm value is S0 = 2, 000, 000 (1 40%)/9.30% = $12, 903, 226.
The gain from tax savings is B TC = 6, 975, 000 40% = $2,

Solutions: Payout Policy
Class Exercises (in slides)
Application 1
Equity value after the share repurchase must be identical to equity value after dividend
payment (in both cases, F pays out $500,000). Therefore total equity value post share
repurchase wo

Exercises: Payout Policy
1
Payout Policy
1. Are the following statements correct?
(a) In the absence of taxation on dividends, the timing of dividend payments does
not aect stockholder value.
(b) If the tax rate on dividends is equal to the tax rate on ca

Solutions: Issuing Equity
Solutions to Exercises in slides
Application 1
F pays a constant fraction of its net prot, therefore the expected growth of its net
prot is the expected growth of its dividend. The expected return on F stock is rS =
2% + 1.5 (8%

Exercises: Issuing Equity
1
Shareholders rights
1. Are the following statements correct?
(a) If a rm goes bankrupt and the liquidation value of assets is lower than the
value of debt, shares are worth 0.
(b) Limited liability of shareholders implies that

McGill University
Faculty of Management
Finance II (FINE 342)
Term 20XX
MID-TERM
Please read the following instructions BEFORE you begin:
Formula sheet is provided along with this booklet.
For the multiple-choice questions, please circle your answers on P

December 2014
Final Examination
FINANCE 2
FINE 342
DECEMBER 15, 2PM-5PM SOLUTIONS
Examiner:
Vadim di Pietro
Student Name:
McGill ID:
INSTRUCTIONS:
This is a CLOSED BOOK and CLOSED NOTES examination.
The exam is 180 minutes in length.
SHOW YOUR WORK: In or

FINE 342: Investment Management
Fall 2014
Vadim di Pietro
VA
Assignment 1
Private Equity Issuance
1) Today is t = 0. Vapepsi is a private company that produces high end luxury diet soda. The companys
founder, Vadim, is seeking round 1 financing from 342VC

FINE 342: Finance 2
Fall 2014
Vadim di Pietro
Assignment 2
The assignment is due by 6:30pm on Tuesday Oct 28. You may slide the
assignment under my office door (Bronfman 220) any time before then. Solutions will
be posted shortly after the due date so lat

asset value
-BV of asset
-interest expense
pretax income
-taxes
net income
+BV asset
cash pre FV repayment
-bankruptcy cost?
cash available for FV repayment
face value repayment (or as much as possible)
cash to equity t = 1
equity value at t = 0
dividend

Exercises: Risk, Return, Prices, CAPM.
N.B. anytime a correlation between two securities is mentioned, it stands for the correlation between those securities returns.
1
Risk and Return
1.1
Questions
1. You own a portfolio that is 40% invested in stock A,

Solutions: Asymmetric Information
Class Exercises (in slides)
Application 1
1. The NPV of P is 25/(1 + 5%) 20 = 3.81 > 0.
2. Since insiders dont know if future cash-ow will be high or low, the expected value
of their equity stake if P is not implemented i

Solutions: Derivatives
Class Exercises (in slides)
Application 1
Consider the following strategy: borrow F/(1+rf ) for one year and buy S. Your immediate
payo is F/(1 + rf ) S0 and your payo in one year is S1 F . This is the same maturity
payo as a long p

PRESENT VALUES
MODIGLIANI MILLER - contd.
1. General:
5. MM II (With Corporate tax):
PV
FV
(1 r ) t
rS r0
B
r0 rB 1 TC
SL
2. PV of growing perpetuity:
6. Miller model:
PVP
C
rg
3. PV of annuity:
C
PVA
r
1
1
t
(1 r )
1 TC 1 TS
V L VU 1
B
1 TB

Chapter 14 : Corporate Financing Decisions and
Efficient Capital Markets
14.1
a.
Firms should accept financing proposals with positive net present values (NPVs).
b.
Firms can create valuable financing opportunities in three ways:
Fool investors. A firm ca

CHAPTER 25 (PART): CONVERTIBLES
Convertible Bond: Can be swapped for a fixed number
of shares anytime before maturity at the holders
option.
Terminology:
Conversion ratio: number of shares received per bond
Conversion price: price at which convertible can

Confirming Pages
Chapter 25
EXECUTIVE
SUMMARY
Warrants and
Convertibles
In this chapter, we study two financing instruments: warrants and convertibles. A warrant
gives the holder the right to buy common stock for cash. In this sense, it is very much like

Chapter 2: Accounting Statements and Cash Flow
2.1. To find shareholders equity, we must construct a balance sheet as follows:
Current assets
Net fixed assets
Total assets
Balance Sheet
$ 5,300
Current liabilities
26,000
Long-term debt
Shareholders equity

CHAPTER 18: VALUATION AND CAPTIAL
BUDGETING FOR THE LEVERED FIRM
Role of the financial manager
Financial manager stands between firms real assets
and financial markets
2 basic problems:
Investment decision: Which asset to buy?
CAPITAL BUDGETING
Financing

Chapter 18: Valuation and Capital Budgeting for the Levered Firm
18.1
a.
The maximum price that Budget should be willing to pay for the fleet of cars with allequity
funding is the price that makes the NPV of the transaction equal to zero.
NPV = Purchase P