The CFO of CanGold Company is considering investing in a gold mine in Mongolia. The mine will cost $200 million to get into production and will last for one year. At the end of one year, it is expected to produce 1 million ounces of gold. The price of gold is expected to be $500 an ounce in one year (the forward price). The current price of gold is $300 an ounce. Fixed costs of production are $50 million and variable costs are $250 per ounce. Assume no taxes or CCA. The appropriate discount rate for the mine is 15 percent. Risk-free borrowing and lending is available at a rate of 3 percent per year. a. Based on NPV, should CanGold invest in the Mongolian gold mine? b. If in one year, we know that the price of gold will be either $200 per ounce or $850 per ounce: i. Describe how having the choice of closing the mine can change the value of the asset. ii. Describe how the volatility of the price of gold could increase the value of the mine. iii. Draw the decision tree for this project. iv. Value the mine as a call option on gold. (Hint: use the arbitrage arguments behind the binomial option pricing model. Think of the mine as a financial security).
> In what ways is DCF capex analysis similar to valuing common shares, and in what ways is it different?
> What is the difference between a tangible asset and an intangible asset?
> Describe the economies of scale of M&A.
> Describe horizontal M&A, vertical M&A, and conglomerate.
> Describe the possible market price change after a tender offer and the possible reasons.
> Briefly describe three common defensive tactics against a takeover and the difference between U.S. and Canadian practice on poison pills.
> Describe the process of a friendly acquisition.
> Sharon McKee has been appointed finance minister and is convinced that the leasing business is just a way to avoid paying taxes. She asked her department officials to evaluate the cash flow effects for both the lessee and the lessor in financial leases.
> The Bynum Private Equity group has just made a tender offer for, at most, 60 percent of Vendall Company. Vendall has 1,000 shares outstanding. Mr. VanDuun is a shareholder of Vendall and has tendered his shares. For each situation below, indicate the num
> List and briefly describe the two types of takeovers.
> What mistakes can occur if firms do not make the appropriate adjustments?
> How and why do we adjust the discount rate for multi-divisional firms?
> Briefly explain “the Greeks” (delta, theta, Vega, and rho) in option pricing.
> Charles Zhang, the owner of a small moving company, has decided that economic conditions are perfect for him to expand his business. Such an expansion will require him to buy five new moving trucks at a total cost of $275,000. Mr. Zhang’s company has $8,
> What are the cash flow from operations and the free cash flow implications of an operating versus a financial lease?
> Briefly describe operating LCs, revolving LCs, and term loans.
> What are risk-neutral probabilities?
> Explain how to create a risk-free portfolio from the stock and the option’s payoff.
> Expedic Utility Corp. needs to increase its electricity production capacity. It is interested in a slightly used reactor located in Ontario. It has been offered two alternatives: buy the reactor for $16 billion (and hold onto it for 20 years) or lease it
> Why is IPO underpricing less severe in Canada than it is in the United States? What causes underpricing?
> Carla is the CEO of Superior Sausage Company (a Canadian firm, listed on the Toronto Stock Exchange) and believes that the best way for the company to grow is through acquisitions. She has identified a likely target, Bunns & Bagels (B&B), which is also l
> A used car that currently costs $25,000 will have a market value of $8,000 in four years. As a student, you cannot afford to pay $25,000, but you want to have a car while you are going to university for the next four years. Your father agrees to lend you
> A firm has the option of borrowing $2.5 million through a 12‐year loan with monthly payments based on a 7.5-percent lending rate, or entering into a 12-year, $2.5‐ million financial lease arrangement with monthly payments based on a 7.5-percent lease rat
> Calculate the post‐merger EPS and market value of equity, assuming no synergies arise in the following acquisition settled in cash. Analyze the difference, if there is any. Further, calculate the new P/E ratio and share price for post&a
> ABC Inc. is planning to purchase DEF Inc. in one of two ways: (1) by paying $24 per share in cash; or (2) by giving DEF ’ s shareholders two shares in the new combined firm ABC‐DEF for each share of DEF. Prior to the merger, DEF had 500,000 shares outsta
> In Practice Problem 33, if the free cash flow to equity grows at 8 percent for the first two years and then grows at 5 percent indefinitely, what is the market value of the firm now? (Round your answer to the nearest dollar.)
> Calculate the market value of the firm given the following additional information: cost of equity is 8.25 percent, free cash flow to equity grows at 6 percent indefinitely; total debt outstanding = $1,000,000; increase in current assets = $400,000; incre
> Calculate the trailing and forward P/E ratios using the following assumptions: RF = 3.5 percent; β = 1.12; market risk premium = 5 percent; dividends and earnings grow at 6 percent indefinitely; and the firm maintains its current dividend payout ratio. (
> Calculate the trailing and forward P/E ratios using the price calculated in Practice Problem 30. Assume a 6‐percent earnings growth. (Round your answer to one decimal.)
> What are the changes in current assets, longterm assets, current liabilities, and long‐term liabilities at the end of the first year in Practice Problem 16?
> Java Cafe’s tax rate is 45 percent and the appropriate discount rate is 8 percent. It is considering a project. Each asset class consists only of the project asset and will be terminated at the end of the project. Java Cafe is not capital constrained. Th
> KRZ Company’s tax rate is 40 percent and the appropriate discount rate is 8 percent. It is considering a project. Each asset class is large and continues after the project terminates. KRZ is not capital constrained. There is no change in net working capi
> KRZ Company ’ s tax rate is 40 percent and the appropriate discount rate is 10 percent. It is considering a project. Each asset class is large and continues after the project terminates. KRZ is not capital constrained. There is no change in net working c
> You are considering buying a machine that will cost you $15,000. There will be a maintenance cost of $1,200 at the beginning of each year, and the machine will generate cash flows of $5,750 over the next five years. After the five years, the machine will
> GiS Inc. has the following four projects on hand: Note the cash flow in the table is accumulative. Assume that R F = 5%, ER M = 12%, firm‐beta = 1.2, after‐tax cost of debt = 6.5%. The firm is financed by 40â
> A project has an NPV of $55,000. Calculate the cost of capital of this project if it generates the following cash flows for six years after an initial investment of $200,000: Year 1: $40,000 Year 2: $60,000 Year 3: $80,000 Year 4: $70,000 Year 5: $60,000
> Westlake Corp. has a capital structure that has 60‐ percent debt at a cost of 10 percent and 40‐percent equity. Westlake’s stock has a beta of 1.6, market risk premium of 7 percent, and risk‐free rate of 3 percent. The firm has a potential project on han
> Longlife Company is considering an investment in Ponce Leon Mineral Baths. The investment has the same risk characteristics as the firm. It is assumed that all cash flows are perpetuities and that there are no taxes. Currently the firm has cash flows of
> Malcolm, a very junior reporter, has asked for your help with his first article for a major national newspaper. He has provided you with the following excerpt from his article and would like your comments: The BathGate Group, one of the few all‐equity fi
> Project X has a cost of capital of 10 percent and the following cash flows: investment of $20,000 in year 0, cash inflows of $8,500, $6,400, and $11,200 in years 1, 2, and 3. a. What is the IRR? What is the assumption of IRR on reinvesting cash? b. Suppo
> Estimate the change in NI, CFO, and CFF if the economic life of the lease described in Practice Problem 16 is seven years instead of six years.
> Assume that SK Inc. has a capital budget of $250,000. In addition, it has the following projects for evaluation. Determine which project(s) should be chosen, assuming k is 15 percent. Project Initial CF CF, CF, CF, A -120,000 90,000 90,000 B -100,000
> Redo Practice Problem 61 using the EANPV approach.
> Refer to the information for BigCo Manufacturing Company in Table 1. BigCo is debating whether to invest in Project H (a three‐year project) or Project D. Project H has cash flow of −$3,500, $1,800, $1,400, and $1,000 (all $million) in years 0, 1, 2, and
> Solve Practice Problem 59 using EANPV.
> BathGate Group has just completed its analysis of a project. The CFO has presented the following information to the board of directors: The initial cost of the project is $15,000. Sales are expected to be 10,000 units in year 1 and are expected to grow b
> MedCo, a large manufacturing company, currently uses a large printing press in its operations and is considering two replacements: the PDX341 and PDW581. The PDX costs $400,000 and has annual maintenance costs of $10,000 for the first 5 years and $15,000
> Consider the following scenario and calculate the beginning UCC, CCA, ending UCC, CCA tax shield, and after-tax incremental cash flow for each and every year of the project.. Assume the asset class is closed on termination of the project. Decide whether
> A consultant has presented the following statement to the board of directors of BigCo: When comparing two mutually exclusive projects, we only need to consider the NPV. When the two projects have different lives, we recommend comparing the NPV/life (i.e.
> AK Radio has hired a consultant to help in the assessment of a project to launch a satellite to deliver a 24/7 infomercial radio station to the world. The satellite costs $400 million and has a CCA rate of 30 percent. The satellite is expected to last 10
> A firm decides to enter into a lease agreement. The lease term is five years, while the economic life of the asset is six years. The annual lease payment is $12,000 at the beginning of each year, and the appropriate discount rate is 7 percent. There is n
> You are evaluating a project for a small manufacturing firm. The firm has provided the following data: the initial cost of the project is $2,500; the CCA rate is 10 percent; the tax rate is 25 percent; and the cash flow in the first year is $700. Cash fl
> The analysis of a two‐division company (DV2) has indicated that the beta of the entire company is 1.35. The company is 100‐percent equity funded. The company has two divisions: Major League TV (MLTV) and Minor League Shipping (MLS), which have very diffe
> Calculate the NPV of the project described in Practice Problem 49, but assume that the discount rate has changed based on the following information: RF = 3.4%; project beta = 1.2; the market risk premium = 5.5%; and the firm is financed entirely by equit
> Repeat Practice Problem 48 assuming that the project would generate annual revenue of $70,000 and annual costs of $40,000 for six years. Also, the asset class will be closed at the end of six years.
> Repeat Practice Problem 48 assuming that the project would generate annual revenue of $70,000 and annual costs of $40,000 for six years. Also, assume the asset class will remain open.
> GG Inc. has a project that requires purchases of capital assets costing $60,000 and additional raw material inventory of $3,000. Shipping and installation costs are $1,800. GG Inc. estimated that the project would generate an annual operating after-tax c
> You have been hired as consultants to XrayGlasses Corporation (XGC). XGC is in the process of deciding whether to invest in a new production facility. The new facility will enable it to produce and sell X-ray machines to airports. The manufacturing and m
> Calculate the NPV in Practice Problem 45 assuming a best case of the following: project life = 10 years; project beta = 0.8; SVn = $100,000; Rev1 = $500,000.
> Brigid Co. has the following potential project: Machine price = $1,800,000; additional inventory requirement = $150,000. Cash flows will be generated at year end. Rev1 = $400,000 and grows at 5 percent each year for five years, while Cost1 = $125,000 and
> You are trying to decide whether to continue renting an apartment or to buy a house. In 20 years, you plan on leaving Canada and moving to a warm tropical island and would like to have as much money as possible. You have just won $25,000 in the lottery a
> Briefly discuss the possible motivation for firms to enter into IPOs, and relate these motivations to the five stages of firm development discussed by Myers (1999).
> You are trying to decide whether or not to go to graduate school. If you get a job right after you get your bachelor’s degree, you expect to earn $40,000 a year, and you expect your salary to increase by 5 percent a year for the next 40 years. If you go
> KRZ Company has hired you to help evaluate several projects. The firm’s tax rate is 40 percent and the appropriate discount rate is 15 percent. Each asset class is small and will be terminated at the end of each project. KRZ is not capital constrained. T
> KRZ Company has hired you to help evaluate several projects. The firm ’ s tax rate is 40 percent and the appropriate discount rate is 10 percent. Each asset class is small and will be terminated at the end of each project. KRZ is not capital constrained.
> Java Cafe’s tax rate is 40 percent and the appropriate discount rate is 12 percent. It is considering another project. Each asset class consists only of the project asset and will be terminated at the end of the project. Java Café is not capital constrai
> Java Cafe’s tax rate is 45 percent and the appropriate discount rate is 8 percent. It is considering another project. Each asset class consists only of the project asset and will be terminated at the end of the project. Java Café is not capital constrain
> Complete the following balance sheet for the post‐merger firm B‐T. The bidder acquired the target for $8,000 in cash. Target (Fair В-T Target (book Market value) (post- merger) Bidder Value) Current 25,000 4,500 4,
> Why do banks typically impose debt covenants on their borrowing customers?
> GG Inc. is now considering replacing some old equipment. The market price of the old equipment is $50,000 and the salvage value at the end of five years is $15,000. The new equipment will cost $100,000 and could be sold at the end of five years for $35,0
> Based on the cash flows given below, calculate the PI of a project that has a required rate of return of 15 percent. Also, indicate whether the project should be accepted. Year 0: −$90,000 Year 1: $20,000 Year 2: $40,000 Year 3: −$15,000 Year 4: $100,000
> The balance sheets of a bidder and target companies are as follows: The tax rate for both companies is 25 percent. The acquisition will be accounted for using the purchase method. Prior to the acquisition, the bidding firm had 10,000 shares outstanding,
> Why are prospectuses so important for public market issues?
> Which type of lease, operating or financial, gives a higher asset turnover ratio?
> Calculate the after-tax operating cash flow NPV break-even point for the project described in Practice Problem 48 by using a 12-percent discount rate. Also, the asset class will be closed at the end of six years.
> Calculate the market price of the firm’ s common shares using a relative valuation approach. (Round your answer to one decimal.)
> Why don’t the probabilities of going up and down affect the options value?
> What is a hedge ratio?
> Sometimes, bonds are completely worthless when a company defaults on payments. However, in practice, bonds typically have some market value (recovery rate) even after a default. Collingwood’s bonds are unsecured, but are senior to any other debt. Use the
> Rather than take a term loan from the bank, Collingwood Corp. has decided to issue $25 million of 10‐year bonds. DBRS has assigned a rating of “BB” to this bond issue. a. Determine the probability that no default occurs during the life of these bonds, ba
> In Practice Problem 29, if the time value is $5, calculate the intrinsic value.
> Winnipeg Water & Gas Co. recently issued a series of bonds; the gross proceeds were $25 million. The underwriting fees were 2.8 percent, and additional issuance costs were $150,000. How much did the company actually receive from the sale? As a percentage
> Sous‐Chef Inc. is an employment agency that specializes in the restaurant industry. The company intends to sell 800,000 shares in its IPO and the investment dealers working on the issue have been seeking expressions of interest in the s
> What is the waiting period?
> Calculate the initial cash flows (CF0) for the following projects. Which project has a larger CF0? a. Project A: equipment purchase price = $195,000; installation cost = $4,500; extra working capital requirement = $30,500; opportunity cost = $18,000 b. P
> What is the lock‐up period?
> FinCorp Inc. has both a call option and a put option with exercise prices of $50. Both expire in one year. The call is currently selling for $10 per share, while the put is currently selling for $2 per share. If the risk‐free rate is 5 percent per year,
> Briefly explain the pure play method for estimating beta.
> An investment has the following cash inflows: $2,500 at the end of the first year, $2,000 at the end of the second year, and $1,500 at the end of the third year. What is the discounted payback period if the discount rate is 0 percent and the initial cash
> Collingwood Corp. has a revolving line of credit on which it owes $25 million. One of the restrictions imposed with this financing arrangement is that the company must maintain a minimum interest coverage ratio of 2. If this is the only borrowing, and th
> As the newly appointed treasurer for Collingwood Corp., you have to decide how to raise $25 million in short‐term financing. You believe you could issue commercial paper with a promised yield of 10 percent. However, your bank will charge a commitment fee
> Collingwood Corp’s 60‐day commercial paper has a promised yield of 10 percent per year, but the expected yield is just 1.5 percent due to the risk of default. If the current 60‐day T‐bill yield is 1 percent, what is the yield spread on this commercial pa
> Determine the selling price of a Government of Canada treasury bill that has a quoted annual interest rate of 1.2 percent and will mature in 90 days. Assume a par value of $1,000.
> Pills4u.com and Drugs‐R‐Us Co. both sell prescription medications over the Internet. Each company has recently announced an IPO at $20 per share. At this price, one of the companies is undervalued by $3, while the other is overvalued by $2. Unfortunately
> State the three basic tests the CRA uses to ensure interest payments are tax deductible.
> Briefly describe three motivations for leasing.
> Contrast top down and bottom up analysis.
> What are irrevocable investment decisions? Why are they important for capital budgeting?
> Explain how to estimate the intrinsic value and time value for a call option.
> Explain why the payoff from a call option is non-linear.
