FINA211 2024 Trimester 1 Assignment# 2
Total marks: 15
Due time and date: 4pm, 16 May, 2024
Submission Requirements:
1. Only electronic submission via Canvas is accepted.
2. Hand-written work is accepted but typed one is preferred.
3. Keep at least three decimal places in intermediate steps.
4. Necessary workings are required. Partial marks may be awarded.
1. SlowGrowth Corporation currently pays a dividend of $6 per year. Stock analysts expect the company would continue to pay the current dividend amount for two years and, after the two years, increase dividend by 1% per year in perpetuity. According to the stock analysts forecast of future dividends, what should be the stock price today if the discount rate is 6%? [2 marks]
2. WellyFish is a seafood company supplying crayfish to Wellington’s local restaurants. The company has the following information:
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Sales price per unit
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$43
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Variable costs per unit
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$10.45
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Fixed costs per year
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$435,000
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Depreciation per year
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$130,000
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Tax rate
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30%
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The discount rate for the company is 15 percent, the initial investment in equipment is $910,000, and the project's economic life is seven years. Assume the equipment is depreciated on a straight-line basis over the project's life. [2 marks]
a. What is the accounting break-even level for the project?
b. What is the financial break-even level for the project?
3. Simplicity Investors, Inc. is a Wellington-based consulting company. The company is currently considering the purchase of a $385,000 automating machine with an economic life of five years. The machine will be fully depreciated over five years using the straight-line method. The retired machine is expected to have a market value of $30,000. During its service period, the machine will replace two office employees whose combined annual salaries are $90,000. The machine also will immediately lower the firm’s required net working capital by $70,000. This amount of networking capital will need to be restored once the machine is sold. The corporate tax rate is 30 percent. Is it worthwhile to buy the machine if the appropriate discount rate is 9%. [2 marks]
4. Bridgton Golf Academy is evaluating new golf practice equipment. The “Dimple-Max” equipment costs $64,000, has a three-year life, and costs $6,000 per year to operate. The operation cost occurs at the end of each year. The relevant discount rate is 12 percent. Assume that the straight-line depreciation method is used and that the equipment is fully depreciated to zero. Furthermore, assume the equipment has a market value of $7,500 at the end of the project’s life. The relevant tax rate is 34 percent. [2 marks]
a) What is the after-tax salvage value of this equipment?
b) What is the equivalent annual cost (EAC) of this equipment?
5. Schwert Corp. shows the following information on its 2019 income statement: sales = $246,000; costs = $135,000; other expenses = $7,100; depreciation expense = $19,100; interest expense = $10,000; taxes = $18,876; dividends = $9,800. In addition, you’re told that the firm issued $7,900 in new equity during 2019 and redeemed $6,800 in outstanding long-term debt. Net capital spending is X. There is no change in networking capital. What is X? [2 marks]
6. You are the financial analyst for a tennis racket manufacturer. The company is considering using a graphite-like material in its tennis rackets. The company has estimated the information in the following table about the market for a racket with the new material. The company expects to sell the racket for six years. The equipment required for the project is straight-line depreciated and has no salvage value. The required return for projects of this type is 13 percent, and the company has a 21 per cent tax rate. What is the NPV of the project in a scenario analysis in which pessimistic state happens for market size and market share. [2 marks]
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Pessimistic
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Expected
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Optimistic
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Market size
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100,000
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120,000
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132,000
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Market share
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0.15
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0.23
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0.25
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Selling price
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139
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143
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147
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Variable costs per unit
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77
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73
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70
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Fixed costs per year
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975,000
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920,000
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890,000
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Initial investment
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2,300,000
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2,150,000
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1,950,000
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7. You are a real estate agent thinking of placing a sign advertising your services at a local bus stop. The sign will cost $10,000 and will be posted for one year. You expect it will generate additional revenue of $1500 per month. [3 marks]
a) What is the payback period?
b) What is the discounted payback period if the discount rate is 1% per month?