Rotman School of Management
Autor: Mia Hack • March 2, 2015 • Term Paper • 3,858 Words (16 Pages) • 974 Views
UNIVERSITY OF TORONTO
Rotman School of Management
February 14th, 2013. | Fotini Tolias Alexander Mackay Adeel Mahmood Jennifer So
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RSM 333H1S | MID-TERM EXAMINATION | SOLUTIONS |
DURATION: 2 HOURS
Aid Allowed: Financial calculator and one-sided crib sheet (8.5 x 11 inches). Show all your work.
Instructions:
- Answer five of the six questions on the examination paper.
- Indicate (cross out) the question you are not answering.
- Each question is worth 20 marks.
Name: .
Student Number: .
.
ANSWER ONLY 5 QUESTIONS!! CROSS OUT THE QUESTION YOU ARE NOT ANSWERING!
Question | Grade |
Project Evaluation (NPV) | |
Project Evaluation (Real Options) | |
Equity Options | |
Leasing | |
Working Capital Management | |
Working Capital Management 2 | |
Total: |
QUESTION 1 - NPV (20 marks)
- Describe the mathematical relationship between IRR and NPV. (do not exceed 1-2 sentences in your answer). (2 marks)
IRR is the % amount which, if selected as the discount rate assumption in an NPV calculation, results in a NPV of zero.
- What is the appropriate discount rate (k) to be used for a project a firm is contemplating? Assume the project has the same riskiness as the firm's operations. Furthermore, describe the relationship of the IRR to the discount rate, will it be higher or lower than the firm's discount rate for positive NPV projects? (do not exceed 1-2 sentences in your answer).(3 marks)
The appropriate discount rate is the firm's after-tax marginal cost of capital for projects that are similar to the normal operations of the firm. The discount rate is commensurate with the riskiness of the forecast cash flows.
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