FINANCE-BUS290 – INTRODUCTION TO FINANCE 2015 Fall Session

BUS290 – 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

Gov’t
of
Canada

5.0%

Paid
Semiannually

10

$1000

6.6%

Gov’t
of
Canada

4.5%

Paid
Semiannually

12

$1000

$944.22

Gov’t
of
Canada

7.2%

Paid
Semiannually

$1000

5.780952%

$1080.75

Gov’t
of
Canada

Paid
Semiannually

3

$1000

5.751795%

$982.12

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

Year

Beginning UCC

CCA

CCA Tax Shield

1

2

3

.0/msohtmlclip1/01/clip_image001.gif”>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 company’s
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-annual
dividendfourmonthsago.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.

.0/msohtmlclip1/01/clip_image002.gif”>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:

.0/msohtmlclip1/01/clip_image001.gif”>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:
Company’s tax rate: 20%
Company’s
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
company’s
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?

.0/msohtmlclip1/01/clip_image001.gif”>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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