BUS290 – INTRODUCTION TO FINANCE 2015 Fall Session Assignment 1

QUESTION

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.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 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-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:
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?

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?

 

ANSWER:

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