## BUS290 â INTRODUCTION TO FINANCE 2015 Fall Session Assignment 1

BUS290 â INTRODUCTION TO

FINANCE

2015 Fall Session

Assignment1:DueNovember

26, 2015atthebeginning

ofclass

Name Instructions:

StudentNumber

Complete the following questions and place

your

answers

in

the

space

provided

below. Do not round intermediatecalculations.

Finaldollaranswersshouldberounded

to two decimal places. Final

interest rate answersshouldberoundedto4decimalplacesifstatedas

a percentage, and 6 decimal places

otherwise. Final answers indicating periods should be rounded up to whole

periods. Show all relevant work (i.e., formulas

and substitutions). DO NOT INDICATE WHICH CALCULATOR BUTTONS YOU HAVE PRESSED.

Question 1.Fill in the missing

data in the table below:

Bond Type

Coupon

Rate

(per

year)

Coupon Frequency (per year)

Maturity

(Years)

Face Value

Quoted yield

(per year compounded semi- annually)

Price

Govât of

Canada

5.0%

Paid

Semiannually

10

$1000

6.6%

Govât of

Canada

4.5%

Paid

Semiannually

12

$1000

$944.22

Govât of

Canada

7.2%

Paid

Semiannually

$1000

5.780952%

$1080.75

Govât of

Canada

Paid

Semiannually

3

$1000

5.751795%

$982.12

Question2.GiventhebeginningofUCCis$856,000;theCCArateis42%;thecorporatetaxrateis20%.Fillin thefollowingtable(assuminghalf-yearruleapplies).

Year

Beginning UCC

CCA

CCA Tax Shield

1

2

3

Question 3.IPM Corp. just paid an

annual dividend of $1.35. The Board of Directors at IPM decides that its

dividend policy should reflect the companyâs

high growth strategy. Yearly dividends will increase at a rate of

18% per year over the first

2 years, then will increase at a rate of15%

for the third year, and finally

grow at

13% per year thereafter.

How much should you pay for such a

stock if you expect a 1% effective monthly

rate of return?

Question4.IPMCorp.paid$3semi-annualdividendfourmonthsago.Thefirmisexpected

topay$3.2dividendin twomonths,

andthefollowingsemi-annualdividendsareexpectedtogrowatarateof2.2%every6-monthforever. GiventheeffectiveannualrateofreturnonIPMis8%,whatisitsstockpricetoday?

Question

5:

Given the following realcash flows at the end of each

year, nominalinterest rate (6% per

year), and inflation rate (3% per year) information

(note: use the precise formula):

Year

1

2

3

Real cash flow

$6500

$4580

$7950

a) Calculate the nominal cash flow amount in year 2.

b) Calculate

the NPV of the cash flows.

Question 6.You are the CFO at IPM Corporation. You have been

authorized to spend up to $50,000 for any potential investment projects. You are considering two projects which have the following

characteristics: (assuming a 12% discount rate is used)

Timeperiod

0

1

2

3

ProjectA

-23150

12000

7300

12500

ProjectB

-31580

2990

7850

26600

a) Determine the NPV for

project A:

b) Determine the PI index for

project A:

c) Determine the IRR for project

B:

d) Determine the Payback

Period for project B:

e) Calculate the incremental

IRR assuming that projects A and B are mutually

exclusive:

Question 7.IMG has hired you as a

consultant to evaluate the NPV of a major

four-year project that the company is

considering to pursue. IMG has already incurred $78,000 in marketing research costs in investigating

the feasibility of this project. The CFO provided you with the following data

and worksheet and asked you to determine,

using an NPV analysis, if the project should be undertaken.

Data Sheet:

Companyâs tax rate: 20%

Companyâs opportunity cost of capital: 12% Expected rate of

inflation: 2%

Net working capital requirements of the project if accepted:

Year

0

1

2

3

4

NWC

$275,000

$220,000

$180,000

$70,000

0

New equipment purchases required for this project

are$1,070,000. At the end of the

project, it is expected that the equipment

can be sold to a competitor for

$350,000. This equipment would be

placed in the companyâs

19.9% CCA pool. During

each year of the project it is expected that incremental revenues of $3,500,000 and incremental expenses of $2,300,000 will be generated. Assumethat

these amounts occur at the end of

each of the four years.

A labor shortage will occur

at each of the IMG factories resulting in increased labor costs in those

facilities. The expenses are expected to be $100,000 at the end of the first

year, and are expected to decline by 5% per year for the remainder of the project. In addition, IMG expects

that a one-time tax deductible

severance settlement to those workers

who are laid off at the end of the project will amount to $250,000. All cash flows are given in nominal amounts,

expect that the salvage amount is in

real term.

a) What

is the impact on the NPV of the

project of the marketing research

costs?

b) What is the impact on

the NPV of the project of the net working capital requirements associated with the project?

c) What

is the impact on the NPV of the

project of the salvage of the equipment?

d) What

is the impact on the NPV of the

project of the CCA tax shields associated with the use ofthe equipment in the project?

e) What is the impact on the NPV of the project of the incremental revenues and expenses associated

with the project?

f) What is the impact on the NPV of the project of the expected incremental labor costs including the severance

package?

g) What

is the NPV of the project, and what is your recommendation?

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