Professional Documents
Culture Documents
INSTRUCTIONS
This exam will be marked out of 10 and will count 10% to your overall mark in the subject.
This is an open book exam which means you can use any notes, books or other materials
on hand. There is no time limit.
The exam should be submitted using the Assignments link on the class website on Canvas
no later than 11:59 pm on Sunday 19 April 2020.
Your answers to the exam may be typed or (neatly) handwritten but must be submitted as
a pdf document. Recent versions of Microsoft Office allow you to save a word, excel or
powerpoint document as a pdf document. Alternatively, you can download an app for your
phone to scan your answers and save them as a pdf document. There are various apps
available including Evernote Scannable or iScanner in the App Store for iOS phones and
Genius Scan or Scan Smarter in the Play Store for Android phones.
REQUIRED
Answer all questions. Please note the word limit for question 1.
You should show sufficient workings and explanations to allow the grader (me) to follow
exactly what you are doing.
Please ensure you include your name and student ID number on the first page of your
answers.
2
QUESTION 1 (3 marks)
Mr White owns 8% of the voting shares in RD Limited, Mr Blue owns 9% of the voting
shares in RD Limited and Mr Orange owns 10% of the voting shares in RD Limited. Mr
Blue also has a call option on all the shares owned by Mr Orange. RD Limited is listed on
the ASX.
QUESTION 2 (2 marks)
Consider a project which is expected to generate the following stream of unlevered free
cash flow over the next two years:
End of year 1 2
𝐹𝐹𝐹𝐹𝐹𝐹𝑡𝑡𝑢𝑢 $4,990 $5,954
The project has been partly financed by bank debt of $4,000 which is to be fully repaid over
the life of the project in accordance with the following schedule:
End of year 1 2
Principal Repayment $2,000 $2,000
The cost of equity is 10% per annum, the interest rate on the debt is 5% per annum and the
corporate tax rate is 30%.
Use the FCFE model to calculate the current value of equity in the project.
2
3
QUESTION 3 (2 marks)
Consider a project which is expected to generate the following stream of unlevered free
cash flow over the next two years:
End of year 1 2
𝐹𝐹𝐹𝐹𝐹𝐹𝑡𝑡𝑢𝑢 $10,000 $10,070
The unlevered cost of equity is 8% per annum, the cost of debt is 5% per annum and the
corporate tax rate is 40%. Assume the interest tax shields have the same risk as the firm’s
operations.
The project is financed in accordance with the following target leverage ratio
End of year 0 1 2
𝐿𝐿𝑡𝑡 50% 25% -
QUESTION 4 (3 marks)
Consider a project which is expected to generate the following stream of unlevered free
cash flow over the next three years:
End of year 1 2 3
𝐹𝐹𝐹𝐹𝐹𝐹𝑡𝑡𝑢𝑢 $1,000 $1,000 $991
The cost of equity is 15% per annum, the cost of debt is 5% per annum, the corporate tax
rate is 40% and the target leverage ratio is 50%. All dollar amounts are in millions.
A colleague has valued the firm today at $2,480 million using the standard WACC model
and asks you to check her result. What should you tell her ?