1. a) (10 marks) You own 100 sh that will pay 5$ in one yr and 15$ in 2yrs. Calculate the current value of your shares if the discount rate is 12% pa. You would prefer equal dividends in both years. Calculate the size of the dividend and detail the actions you would take. Show that the value of your shares has not changed.

b) (5 marks) Calculate the % cost of not taking the discount when credit terms are 3/10 net 60. What is the % cost if you stretch the payment to 90 days? What are the disadvantages of stretching?

2. a) (6 marks) You can borrow 10 million $ on a LOC (line of credit) at .5% per month (which is compounded monthly), with a 4% CB (compensating balance) of the borrowed amount. Calculate the EAR if you borrow 10 million for one yr. What is the EAR if you borrow 3 million?

b) (4 marks) In (a), what is the EAR for 10 million and 3 million if you pay an up front fee 50,000$ regardless of the amount borrowed?

c) (6 marks) Calculate the EAR if you borrow 4 million$ for one year on a 5 million$ LOC (priced as a 7% pa discount loan), with a 6% CB on the face value of the borrowed amount, and a 0.1% up front fee on the face value of 5 million$.

3. a) (7 marks) The current share price is 10$/sh , there are 50,000 shares outstanding and you have 0,000$ to pay a dividend or repurchase shares. There is no debt in the capital structure and net income is 100,000$ pa. Calculate the P/E ratio for each alternative and compare it to the current P/E ratio. Show that in perfect markets with no taxes a shareholder is indifferent between these alternatives.

b) (8 marks) Calculate the cash cycle for a firm with starting (ending) inventory of 1500$ (1700$); starting (ending ) A/R of 5000$ (4500$); starting (ending ) A/P of 3,000$ (2500$) if net sales are 12,000$ pa and cost of goods sold are 8,000$ pa. If your suppliers offer a discount to pay early, what is the effect on the cash cycle and the operating cycle?

c) (6 marks) ACE Co. wants to raise $15 million via a rights issue with a subscription price of 40$/Sh. Currently share sell (rights on) for 60$ each. There are currently 1 million shares. What is the value of a right? What is the ex rights share price? Use another formula to check the ex rights share price.

4. Company U and L have the same business (operating) risk with EBIT of 50,000$ pa (perpetuity) but L is levered with 150,000$ of perpetual debt @ 4% interest rate. Us unlevered cost of equity is 8%. The market value of Ls equity is 3 00,000$. There are no taxes.

1. (2 marks) What is the levered cost of equity for L?
2. (4 marks) Assuming MM are correct, what should be Bs levered cost of equity?
3. (3 marks) Draw a graph of % return vs D/E ratio to illustrate your answers in (a) and (b).
4. (5 marks) Show how MM would make risk free profits.
5. (2 marks) What is the WACC, assuming MM are correct? Check your answer.

5. a) ( marks) Your company has a residual dividend policy, a constant debt to equity ratio of 1.5, and earnings of 60k$. What is the maximum capital outlay you can undertake without issuing new equity? What is the dividend if capital outlays are 110k$?

b) (5 marks) you order 10,000 units/yr which sell for 8$ each, the carrying cost is 40 cents/yr and the order cost is 1$/order. What is the optimal order quantity using the EOQ model? Prove this amount has carrying costs equal to order costs for the year.

c) (5 marks) Calculate the NPV of changing from a cash only sales policy to a 60 day credit sale if the current sales of 800 units for 60 days increases to 1000 units. The sales price per unit will increase from 120$ to 125$ but the variable cost per unit stays at 80$ /unit. The required return for 60 days is 3%.

d) (4 marks) There are currently 10 million$ in current sales which have an ACP (average collection period) of 30 days. Should you offer 1/10 net 30 if 40% of the customers will take the discount (pay on day 10) with the rest paying on day 30? The cost of capital is 7% pa. Show your calculations.

6 Your company is considering an all equity capital structure with 2.5 million shares @20$/share or one with 27.5 million$ in debt @8% interest and 1.25 million shares @ 18$/share. Corporate taxes are 30%.

a) (7 marks) Graph EPS against EBIT for these alternatives plot the indifference point and intercepts. Check that your indifference EBIT has the same EPS for both plans.

b) (8 marks) Calculate the financial leverage for both plans at EBIT 5 million$ and 4 million$. Check your answer using the elasticity definition of financial leverage by calculating EPS at EBIT of 4 and 5 million$.

You may answer ONLY 1 Bonus question

BONUS question #1 (10 marks)

Should you buy an asset costing 75,000$ or lease it for 12,000$ pa for 6 yrs with payments in advance if the CCA rate is 25%, the tax rate is 30% and the salvage value in 6 yrs is 15,000$? The borrowing rate is 7% pa, tax shields are at the end of each yr. Calculate the NAL to support your answer. Assume the CCA pool stays open.

Bonus question #2 (12 marks)

Repeat #4 with a corporate tax rate of 30%.