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

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.

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?