## FINANCE-BUS290 â INTRODUCTION TO FINANCE 2015 Fall Session

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.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 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-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:

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?

.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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