Question: Compare the payoff of a call option

> You are given the following information: C0 = $300,000; CCA rate (d) = 0.3; T = 0.4; RF = 4.5%; project beta = 1.2; market risk premium = 10%; SVn = $35,000; UCCn = $55,000. This project has a 5-year life. a. Calculate the discount rate. b. Assuming that

> Paolo, the CEO of Paola Bros Inc., wants to have a fleet of electric cars. These electric cars cost $1.5 million. For tax purposes, assume that these cars will depreciate at a rate of $160,000 per year. In five years, the electric cars can be sold for $8

> List and briefly describe the four basic stages of the IPO process.

> Determine the call price ( C ), given the following information: stock price ( S) $36, s trike price (X) $32, r isk-free rate (r) 5% , t 2 years, 20%.

> What is the price of a put option with a strike price of $50 and six months to maturity when the stock price is currently trading at $45? Assume the stock‐price variance is 0.5 and the risk‐free rate is 5 percent.

> Complete the following table. Assume that the asset class is left open, and/or the salvage value is less than the UCC for the entire class. CCA Tax Discount Initial Rate Rate Rate Investment Value Life (n) Shields) Salvage Project Тах A 15% 35% 10% $

> Back in their college days, David and Douglas Finn started renting refrigerators to other students for use in their dormitory rooms. Over the years, Finns’ Fridges has grown and financed its operations by retaining most of the profits it made. Now, howev

> What are continuous disclosure requirements?

> Fill in the missing information in the following table for a non‐dividend‐paying stock and European call options.

> Richards & Co. Analysts has provided FinCorp Inc. with incomplete information, and it is your job to fill in the missing information in the table below. At expiration Value of Value of Payoff Long or Call or Strike option underlying (intrinsic Pr

> Why do corporations issue long‐term bonds, knowing that interest rate risk is higher for longer‐term bonds?

> In your job as treasurer of Collingwood Corp., you have to arrange a line of credit for the firm. The following is taken from the company ’ s balance sheet. The bank will provide credit up to the sum of 75 percent of the value of receiv

> State three types of distributions of securities determined by the OSC.

> Suppose you are going to enter into a six‐year, $25,000 financial lease that requires monthly payments based on an 9‐percent lease rate. Alternatively, you could borrow $25,000 via a six‐year loan that requires monthly payments based on a 8‐percent lendi

> State the five major areas in which the Ontario Securities Commission (OSC) is involved.

> Discuss the important characteristics of money market debt instruments. How are these characteristics important to money market participants?

> Calculate the value of the one‐month CP given the following: par value is $2 million, promised yield is 4%, probability of not defaulting is 97%, recovery rate is zero, and required return is 14%. Round to the nearest dollar.

> Calculate the price of a 91‐day T‐bill if the face value is $1 million and the quoted interest rate is 3.8 percent. Round to the nearest dollar.

> On a one‐year loan of $10,000, a bank charges interest at 8 percent. The bank also charges an application fee of $75 to cover processing expenses. What is the effective interest cost (annual rate) being paid by the borrower?

> What is a “road show”?

> Describe the overallotment or “green‐shoe” option.

> What is the “quiet period”?

> Describe limit orders and market orders.

> Your boss is very puzzled by the finance courses in his MBA program. He has learned that “cash flow is king,” but notices that the capital budgeting problems spend a lot of time and effort dealing with depreciation and CCA but not with interest expense.

> How is goodwill treated for accounting purposes in Canada and the United States?

> Julius is a shareholder in a public corporation, which has recently acquired another company, and the consequences for the bidding firm have been catastrophic. Julius is suing the bidder’s board of directors for breach of duty as he believes that they fa

> Marcel owns 12 percent of Steam Forge Company (SFC). SFC trades on the Toronto Stock Exchange and has been the subject of a takeover attempt by Iron Forge Company (IFC). Assuming that Marcel is the only minority shareholder who will not co‐operate with I

> You observe the following data on different options (all are European options with the same exercise date, and all are written on the same underlying security). What are the profits you would earn for every possible price of the underlying stock at the e

> You have observed that a very smart and successful investor has bought a call and a put on the S&P/TSX Index. The options have the same strike prices and expire on the same day. What does the smart investor think is going to happen to the S&P/TSX Index?

> Mr. Cabinet is interested in the payoffs to combinations of options. Graph the intrinsic values of the following portfolios (all options expire on the same day and are written on the same non dividend‐paying asset). a. long one call, strike $35; long one

> Your boss has observed that the call options on XCT and BRG are trading at different prices. Both options have the same strike price and the same time to expiration. Provide two possible explanations for this observation.

> Briefly state all the factors that affect the value of a call option and a put option.

> Jensen’s Juice Bar is considering purchasing a new blender. Indicate which of the following statements is a relevant consideration in the new-blender decision. a. Last year, Jensen’s spent $500 on a new blender. b. Customers would prefer to have their ju

> DPG, a non‐dividend‐paying stock, is currently trading for $150 a share. There is a 30‐percent chance that the stock will trade for $125 in one year, and a 70‐percent chance that the price will increase to $175. The risk‐free rate is 5 percent per year.

> QBV, a non‐dividend‐paying stock, is currently trading for $100 a share. There is a 25‐percent chance that the stock will trade for $85 in one year, and a 75‐percent chance that the price will increase to $135. The risk‐free rate is 5 percent per year. A

> What are some of the more important issues arising from the fact that securities regulation is a provincial and territorial, but not a federal, responsibility in Canada?

> a. Describe how CCA expenses change through the life of a project. b. Given C0 = $250,000; CCA rate = 20%; tax rate = 40%; and year 2 operating income = $150,000, calculate the cash flow in year 2.

> QBV, a non‐dividend‐paying stock, is currently trading for $100 a share. There is a 25‐percent chance that the stock will trade for $85 in one year, and a 75‐percent chance that the price will increase to $135. The risk‐free rate is 5 percent per year. A

> QBV, a non‐dividend‐paying stock, is currently trading for $80 a share. There is a 25‐percent chance that the stock will trade for $65 in one year, and a 75‐percent chance that the price will increase to $105. The riskfree rate is 5 percent per year. All

> In most markets, you are not permitted to short sell if the stock price has fallen. That is, you can only short sell on an “uptick.” Using put‐call parity, show that you can replicate the cash flows of a short sale.

> Which of the following items, relating to working capital, would be considered a cash inflow or outflow when evaluating a project (and why)? a. Increase in inventory b. Increase in accounts payable c. Increase in accounts receivable d. Decrease in invent

> Complete the following table. CCA Tax % % k% Life C$ NWCS SVS UCC$ Class ECF.S 's A 15 35 10 B 20 40 14 Project Asset (ECF.) 6 16,000 1,000 800 6,567 Open 5 12,000 800 1,000 4,424 Closed C 25 35 5 12 50,000 2,000 2,500 1,848 Closed D 20 45 12 8 30,00

> Niagara Vineyards and Winery needs to raise $4 million in new equity. a. If the costs of the share issue are estimated to be 6 percent of gross proceeds, how large does the offering need to be? How much will Niagara pay in flotation costs? b. If the unde

> If the IPO for Finns’ Fridges (see Practice Problem 28) goes well, the contract with the investment bankers has a “green‐shoe” clause that permits them to sell 15 percent more shares than originally planned. These additional shares would all be issued by

> Richards & Co. Analysts have provided the following partially completed table of information about different securities. All options are written on XCT, a nondividend‐ paying stock, and expire on the same day in one year. Fill in th

> Complete the following table. Annual Cash Discount Project Life Flow before PV(Future CFs) Таx Rate Тахes Rate A 24% $5,000 5% 5 B 43% $3,000 10% 6 36% $8,000 8% 3 D 50% $15,000 15% 4 E 15% $9,000 36% 30% $20,000 12% 27

> What is a reverse takeover and a backdoor listing?

> List and briefly describe the six basic factors used to determine a DBRS rating.

> Collingwood Corp.’s bank is willing to provide it with a 10‐year term loan for $25 million. The annual payments on this loan will be $2.65 million, and there is a “bullet” payment of $25 million at maturity. What is the interest rate being charged by the

> Describe four different types of public offerings.

> The cost (interest rate) of the loan Jackie needs for her business is 6 percent per year. Given that the company s net income will fall by less than the amount of interest paid (see Practice Problem 21), is Jackie correct to think that the after‐tax cost

> Jackie would like to borrow $125,000 to expand her small business, but needs to understand the impact of the 6-percent interest payments. Last year, her company did not pay any interest and had total earnings before tax of $143,500. The tax rate was 30 p

> Describe the basic stages of IPOs.

> Describe three major categories of exempt purchasers.

> Mr. Cabinet, your boss at FinCorp Inc., prefers to have his information presented visually. At his request, graph the payoffs (intrinsic values) and profits at expiration for the following option investments. a. long call, strike $65, cost today $10 b. s

> You are in the process of interviewing for a promotion at FinCorp Inc. and have to identify the type of security based on the payoff diagrams below. All options expire on January 15, 201x, and the underlying asset is the index. Match the series from the

> Explain how offering memorandums differ from prospectuses and how exempt markets differ from public markets.

> In late 2006, Canada Post began issuing “permanent” stamps. Purchased at the current first‐class letter rate these stamps may be used indefinitely even if the price of stamps increases. Arthur Ponzarelli (known to his friends as “Ponzi”) is always lookin

> Nash Business School is considering whether to lease or buy shuttle buses for students travelling between its two campuses. The buses cost $2 million, with a CCA rate of 20 percent. The lease payments are $450,000 per year for the next five years, with p

> Igor, the intern at FinCorp Inc., has just presented your boss, Mr. Cabinet, with his valuation of Kitchen Gadget Company (KGC). Igor has identified two other companies, Kitchen Widgets and Kitchen Thingies, in exactly the same line of business as KGC an

> White River Manufacturing Company has just signed several leases and has hired FinCorp Inc. to do the initial classification of the leases as operating or financial for accounting purposes. White River could have bought each asset for $1 million instead

> Financial statements for Canadian public corporations are available from corporate websites or from the System for Electronic Document Analysis and Retrieval (SEDAR) at www.sedar.com. a. Review a copy of Air Canada’s annual report for fiscal year end Dec

> A bond is currently trading at par, which is $1,000. If the bond pays an annual coupon rate of 10 percent, calculate the IRR of this bond.

> Using NPV, should you invest in a project where the initial cash outflow is $24,000 and the cash inflow in the first year is $1,600 and “grows” at a rate of 3 percent thereafter? Assume cost of capital is 10 percent.

> Using initial cost of I 0 , and annual cash inflows of R over N period, express R in terms of I 0 and N such that the payback period is equal to its life.

> Name one condition under which the discounted payback period will be equal to the payback period.

> You are interested in an investment where the initial investment is $118,000 and your required cost of capital is 12 percent. Cash inflows from this project are expected to be $11,400 at the end of the first year and are expected to grow at 4 percent a y

> Explain how real option valuation (ROV) is applied.

> Your truck has a market value of $60,000. You can sell it to your brother, who agreed to buy it now and pay $75,000 three years from now, or you can sell it to your cousin who agreed to pay you $65,000 at the end of the year. To whom should you sell the

> For the following decisions, indicate whether they are examples of a bottom‐up analysis or a top‐down analysis: a. Replacing the printing press at a newspaper b. A newspaper’s decision to sell all its

> What are the practical difficulties when attempting to apply the NPV evaluation process to foreign investments?

> For each pair of investment opportunities, indicate if they are more likely to be mutually exclusive or independent projects. Explain your choices. a. Cruise line: i. Build a cruise ship to carry 10,000 passengers ii. Build two ships each carrying 5,000

> What are independent projects? What are mutually exclusive projects?

> You have two mutually exclusive projects: Irrespective of the project, the discount rate is 10 percent. Calculate the payback and discounted payback periods for the projects. Which one will you consider? Year Cash Flow (A) Cash Flow (B) -160,000 -110

> Calculate the NPV and IRR of the following project and check whether they produce the same decision. After‐tax initial investment is $66,777; after‐tax cash flows at each of the following six year‐ends are $20,000. The year‐end cash flow at year 7 is $40

> SK Inc. has a project that requires a $60,000 after‐tax initial investment and produces these after‐tax cash flows at each year‐end: $20,000; $22,000; −$8,000; $38,050; $55,000; and $16,000. The appropriate domestic discount rate is 16.6 percent. The pro

> State the decision rules for NPV, IRR, PI, and the discounted payback period. List two possible consequences of using IRR.

> Which project(s) will be selected if the company uses the discounted payback period method in Practice Problem 34 and the discount rate is 12 percent?

> What is the difference between sensitivity analysis and scenario analysis?

> SK Inc. has two projects as follows: If SK set 2.6 years as a cut‐off period for screening projects, which projects will be selected, using the payback period method? Project Initial CF CF, CF, CF, CF, A -2,500 008 1,200 900 2,000 B

> If the NPV of a project is $5,360 and its after‐tax initial investment is $12,050, what is its PI? Should the firm accept the project? Does the PI yield the same decision as the NPV? (Assume all the cash flows except for the initial investment are inflow

> What is the crossover rate ( r ) given the following? Project A: C F0 $25,000; C F1 $6,600; C F2 $10,200; C F3 $19,800 P roject B: C F0 $20,000; C F1 $5,400; C F2 $7,800; C F3 $16,500

> Daria is evaluating two investments—investment 1 will produce cash flows for the next 5 years and has an NPV of $1,000. Investment 2 will produce cash flows for the next 15 years and has an NPV of $700. Based on this analysis, Daria recommends investment

> Elaine is evaluating two investments—investment 1 has a profitability index (PI) of 2.4 while investment 2 has a PI of 1.2. As these investments are mutually exclusive, Elaine is recommending investment 1. The chair of the board of BigCo has asked for yo

> Cutler Compacts will generate cash flows of $30,000 in year 1 and $65,000 in year 2. However, if it makes an immediate investment of $20,000, it can instead expect to have cash streams of $55,000 in total in year 1 and $63,000 in year 2. The appropriate

> The CEO of BigCo has just bought a fancy financial calculator and calculated the IRR and NPV of Project D from Table 1. He is utterly confused. His calculator is telling him that the IRR is 20.72 percent, but when he uses a cost of capital of 1 percent,

> You have conducted an analysis of BigCo and have found that the firm is made up of two different divisions: SatellitesRUs (a satellite launching service) and a bank. Projects A to G are all related to satellite‐launching technology. You

> Calculate the crossover rate for projects B and C from Table 1. Table 1 Annual Cash Flows (All Amounts in $Million) Project A Project B Project C Project D Project E Project F Project G Year 0 -1,200 -2,400 -8,500 -5,100 -5,600 -11,000 -3,200 Year 1

> The CFO of BigCo is concerned about the sensitivity of his decisions to the choice of discount rate. For projects A, C, and E, plot the NPV profiles on the same graph. Does the NPV ranking of the three projects remain the same for every possible discount

> Describe how CCA recapture and CCA terminal losses occur and their tax treatment.

> Using projects A to F in Table 1, construct BigCo’s investment opportunity schedule. If BigCo has $9,000 (millions) available for investment, which projects should it undertake (assume all projects are independent)? Justify your recommendations to the CE

> a. If the firm is not capital constrained and the projects in Table 1 are mutually exclusive, which project should the firm undertake using the following criteria? i. NPV ii. IRR iii. Payback period iv. Discounted payback period v. Profitability index b.

> a. If the firm is not capital constrained and the projects in Table 1 are independent, which projects should the firm undertake using the following criteria? i. NPV ii. IRR iii. Payback period iv. Discounted payback period b. Are any of your recommendati

> Assume that BigCo’s cost of capital for all the projects is 10 percent. Calculate the NPV, IRR, payback period, discounted payback, and profitability index for each project in Table 1 . The firm requires a payback period of 2 years and

> Name some unique risks that may arise when evaluating FDI.

> What is so different about evaluating FDI compared to domestic projects?

> Explain how the purchase method gives rise to goodwill.

> Xiang Zhu, a client of FinCorp Inc., has phoned you with a question. She has been reading a finance textbook and cannot understand how to use the binomial option pricing model to value a call option. The underlying stock is currently trading for $100. Th

> In the next period, the economy can be in either state 1 or state 2, with a probability of 50 percent. You may trade any combination, including fractions of shares, of the following three securities: a. Are these securities correctly priced? If not, why

> You have just been appointed manager of the equity portfolio of a large pension plan. The portfolio has a current value of $100 billion and is well diversified; consequently, it has a beta close to one. The trustees of the pension plan are very risk aver