Rotman School of Management
UNIVERSITY OF TORONTORotman School of ManagementFebruary 14th, 2013. Fotini ToliasAlexander MackayAdeel MahmoodJennifer So RSM 333H1S MID-TERM EXAMINATIONSOLUTIONSDURATION: 2 HOURSAid 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!QuestionGradeProject Evaluation (NPV)Project Evaluation (Real Options)Equity OptionsLeasingWorking Capital ManagementWorking Capital Management 2Total: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 firms operations. Furthermore, describe the relationship of the IRR to the discount rate, will it be higher or lower than the firms discount rate for positive NPV projects? (do not exceed 1-2 sentences in your answer).(3 marks)The appropriate discount rate is the firms 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.