North South University
Tks
School of Business and Economics
Marks Obtained
Department of Accounting and Finance
FIN440: Corporate Finance
Final Exam | Spring 2021
General Rules:
1. Students are not allowed to use financial calculators. Use of cell phone during the exam may
result in dismissal from the exam.
2. Students are allowed to use one page formula sheet (strictly formulae). Students must write their
name on the formula sheet. Proctors will examine the formula sheet to evaluate if anything other
than formulae is on the sheet.
3. Students are required to make statements about the answer. When asked, necessary explanation,
justification is to be provided.
TOTAL MARKS: 50
DATE:
NAME:
NSU ID#
Section:
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Section-A (Problems and Written Answers)
Total Marks 40
1. Grab Singapore is comparing two different capital structures: an unlevered firm (Plan A) and a levered
firm (Plan B). Under Plan A, the company would have total 9 million USD worth assets. On the other
hand, under Plan B, Grab wants to include debt their capital structure. There would be $3 million in
debt outstanding. The interest rate on the debt is 15 percent. Currently Grab SG’s shares are trading
@ $30/share in the Singapore stock exchange. Assume there’s no tax in either plan.
Required:
a) What is the break-even EBIT (EBIT/EPS Indifference point)? (4)
b) Grab is expecting its EBIT to be roughly $180,000. Based on the break-even EBIT, should they
go for plan B (incorporating debt)
c) If EBIT were $150,000, what would be the EPS and ROE under Plan A and Plan B?
(3)
d) If EBIT were $200,000, what would be the EPS and ROE under Plan A and Plan B?
(3)
2. Sunlight Batteries has a 40% debt. Its required return on assets (WACC) is 12% and cost of debt is 8%. What is
the company’s cost of equity capital? If we increase debt to 55% what will be the new cost of equity. What
will be weight of equity in sunlight if cost of equity is 20%. Assume we live in a world, where there’s no tax.
Explain MM proposition 2 (no tax; case 1).
(6)
3. A firm has free cash flow of 3,500,000 USD. When the firm was unlevered it had a cost of equity of 9%.
Then it went for permanent leverage by borrowing 500,000 USD at 8% interest rate. Corporate tax rate
40%. What is the WACC of the company? If FCF increase to 4 million next year, what will be the value of
the company? (4+2=6)
4. Baba Rafi’s bonds will be sold 10-year bonds paying 5% coupon per year at the market price of
$1060 (firm’s tax rate is 40%). Per value would be $1000 for the bonds. Preferred stock paying a
$2 dividend can be sold for $30. Common stock for is currently selling for $50 per share. The
firm paid a $4 dividend last year and expects dividends to continue growing at a rate of 10% per
year. Flotation costs of issuing new common stock will be $6 per share. Calculate the WACC of
BR? (8 Marks)
5. Baba Rafi wants to replace their existing BBQ machine in front of NSU gate 1 with a newly
improved and more efficient equipment. The new machine will include grilling, as well as baking
options with a burner. This means Baba Rafi is considering the introduction of flat bread pizzas.
The old one costs $500,000 and was bought 5 years back. The old machine should run for 5 more
years. Today salvage value of the old machine is $265,000 and from 5 years from now it should
be $10,000. Currently the old truck uses the straight-line method of depreciation. The
replacement will also require an initial investment in current assets of $20,000, of which $10,000
will be coming from short-term creditors (hint: working capital = CA-CL).
The new BBQ machine, which will be in operation for 5 years, will cost the company $650,000.
For the new equipment the company will follow a three years MACRS depreciation schedule and
the depreciation percentage every year for the new truck is given below.
Year 1
.3333
Year 2
.4444
Year 3
.1482
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Year 4
.0741
2
The new truck will save $250,000 per year during its operation years but will not have any
salvage value after that. The tax rate for the company is 40%.
a) Using the above-mentioned information give your justification whether Baba Rafi should
replace its current BBQ machine with the new composite machine using the NPV. Use the
WACC calculated in previous question.
(14 marks)
6. Baba Rafi is considering opening a small sandwich outlet inside the NSU campus. It will require
an initial investment of $20,000 and throughout the next 5 years the project will potentially
generate free cash flows in the following form:
0
1
2
3
4
5
-20,000
6000
10000
-4000
3500
6500
Now, as we can see an unconventional cash flow in year 3, please calculate the MIRR to decide
whether Baba Rafi should invest in this project or not? The required rate of return is the WACC
calculated in problem 4.
(6 Marks)
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