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Intermediate Finance Midterm Winter 2010

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UNIVERSITY OF TORONTO at Scarborough
Management
MGTC09 (Intermediate Finance)
Midterm Exam
Total Marks: 100

ASSIGNMENT 1

Date: February 24, 2010
Time: 5:10-7 p.m.

Due Date : June 3, 2010 by 11 am

Prof. Syed W. Ahmed

QUESTION NO.

MAX. MARKS

MARKS OBTAINED

1

20

__________________

2

25

__________________

3

25

__________________

4

30

__________________

100

__________________

TOTAL MARKS

QUESTION 1:
Ellesmere International has 1 million shares of common stock outstanding. The current share price is $25 per share. The most recent dividend was $1 and the growth rate is 5%.
Ellesmere also has a bond issue outstanding, which is maturing in 25 years, has a face value of
$20,000,000; 8% coupon payable semiannually, and sells for 125.73%% of the face value.
Ellesmere also has 500,000 preferred shares outstanding, which are currently selling for $40 per share and pay a dividend of $2 per year.
The corporate tax rate is 40%. Determine the weighted average cost of capital?

QUESTION 2:
Equity Unlimited (EU) an all equity firm expects EBIT of $1,000,000 next year, after that it will decline at 2.5% per annum. The corporate tax rate is 40%, and cost of unlevered equity is 10%.
EU is considering replacing some of the equity with perpetual debt. It has been determined that risk of bankruptcy is a function of amount of debt. PV of bankruptcy related costs will be
$2,000,000. EU is considering the following debt levels.
Debt
$2,000,000
$3,000,000
$4,000,000
Probability of Bankruptcy
0.10
0.15
0.40
a. Determine the optimal level of debt, and the value of the firm at that level.
b. If personal tax rate on stock income is 16%, and the personal tax rate on bond income is 32% at what debt level value of the firm be optimal

-2QUESTION 3:
UTS Manufacturing Limited expects EBIT of $2,000,000

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