ECON 3050 assignment 1

ASSIGNMENT I

DUE THURSDAY OCTOBER 6 AT 2:30PM IN CLASS

Please staple together all of the pages of your answers before handing in.

Write down your name and the course (ECON 3050) on the first page.

1-The balance sheet and income statement of Spirex Corporation are given on page 2 below. (All valuesare in millions of dollars.) Refer to these financial statements for the following questions.

Assume that Spirex is listed on the TSX and has 12.5 million shares outstanding in 2015 with a price of $28 per share, up from $26.5 in 2014. The earnings growth is expected to be 15%.

(28pts) a) Complete the following table on the basis of the financial statements provided for Spirex. Write down the formula for each ratio, fill in the numerical value and briefly answer the analysis question.

(22pts)b) Prepare the Statement of Cash Flows (for 2015 only)for Spirex Corporation knowing that $21.7million were paid out in dividends in 2015. (Read carefully section 2.6 on pp. 44-48 in first edition, section2.4,pp. 35-39 in the second edition.)

Balance Sheet and Income Statement Ratios

						Analysis questions
Market-to-book ratio		2015		2014		What can you infer from this ratio with
						respect to how successful the firm is?
						Explain briefly.
Quick ratio						What can you infer from this ratio?
						Compare
Accounts-receivable days						What is the change in this ratio between
						2014 and 2015? What does this change
						imply?
Accounts payable days						What is the change in this ratio between
						2013 and 2014? What does this change
						imply?
Debt-to-Equity ratio (book						Explain the difference between the book
versus market)						and market ratios. Which of the two is
						more useful? Why? What does this ratio
						tell us about the way Spirex is financed?
Price-to-earnings ratio						What can you infer from this ratio with
						respect to the market value of Spirex
						stock? Explain briefly.
ROE						How would an increase in leverage affect
						the company's ROE?

1

Spirex

Corporation

Balance Sheet

Assets	2015	2014		2015	2014
		Liabilities
Current Assets			Current Liabilities
Cash	50	47.5	Accounts payable	42	39.1
Accounts receivable	22	17.2	Notes payable/short-term debt	7	5.5
Inventories	17	15.3
Total current assets	89	80	Total current liabilities	49	44.6
Long-Term Assets			Long-Term Liabilities
Net property, plant,	121	99.3	Long-term debt	128	105
and equipment			Total long-term liabilities	128	105
Total long-term assets	121	99.3	Total Liabilities	177	149.6
			Shareholders' Equity
			Common Stock	18	18
			Retained Earnings	15	11.7
			Total shareholders' equity	33	29.7
Total Assets	210	179.3	Total Liabilities and	210	179.3
			Shareholders' Equity

Income Statement

	2015	2014
Total sales	312	296.4
Cost of sales	-210	-202.5
Gross Profit	102	93.9
Selling, general, and	-34	-33.5
administrative expenses
Research and development	-10	-9
Depreciation and amortization	-5	-4.5
Operating Income	53	46.9
Other income	-
Earnings before interest	53	46.9
and taxes (EBIT)
Interest income (expense)	-20	-15
Pretax income	33	31.9
Taxes	-8	-7.7
Net Income	25	24.2

2

Draw the timeline for each of the following problems before you solve them. Indicate clearly the steps in your calculations and the formula used. Show your work. Indicating only a numerical value as an answer will not receive credit. Round off figures to the fourth decimal place. Not following this guideline can lead to substantial rounding-off errors.

(5pts) 2.You have holdings of 250 troy ounces of platinum, currently valued at $815 dollars per ounce. Youestimate that the price of platinum will rise to $850 per ounce in the next year. If the interest rate is 8%, should you sell the platinum today? Show your work.

(5pts) 3.Consider the following timeline:

If the current market rate of interest is 12%, what is the value of the cash flows in year 0, year 2 and year 3 as of year 1? Show your work.

(5pts) 4.You need to take out a loan for your business from an investor. In exchange for a lump sum today, youoffer to pay the investor $1000 in one year's time, $2000 in two years' time, $3000 in three years' time and $4000 in 4 years' time. If the interest rate is 8%, what is the minimum value of the lump sum you must receive from the investor if the net present value (NPV) is to be equal to zero? Show your work.

(5pts) 5.A mine produces $10,000 worth of ore in the first year of operation. As the ore closest to the surface isremoved, it will become more difficult to extract the ore. Therefore, the value of the ore that you mine will decline at a rate of 8% per year forever. If the appropriate interest rate is 6%, what is the value of this mining operation today?

(5pts) 6.Suppose that you are 30 years old today, and that you are planning to retire at age 65. Your currentsalary is $45,000 and you expect your salary to increase at a rate of 5% per year as long as you work. To save for your retirement, you plan on making annual contributions to a retirement account. Your first contribution will be made on your 31st birthday and will be 8% of this year's salary. Likewise, you expect to deposit 8% of your salary each year until you reach age 65. Assume that the rate of interest is 7%. What is the present value (at age 30) of your retirement savings?

(10pts) 7.A newly married couple would like to purchase a house worth $370,000. They can afford to make adown payment of $70,000 and need to take out a mortgage. The bank offers them a 30-year mortgage with annual payments. The interest rate is 7%.

a) What would be their annual payment?

b) They can only afford to make payments of $22,700 per year. The bank agrees to this on the condition that they pay the remaining amount in a lump sum fashion at the end of 30 years. How much will the couple have to pay lump sum at the end of 30 years?

(15pts) 8.Optix is a high-tech company with current earnings of $1 million. Its earnings are expected to grow at20% per year for the next 5 years. After this period of high growth, earnings will only grow at 3% per year forever due to other competitors entering the market. If the interest rate is 8%, what is the present value of Optix’s future earnings? Hint: Take period 5 as the “new period 0” for the calculations involving the remaining horizon.

3