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Requirement: Please type answer into word form and please write every formula question will need. Q1 ? DCF Analysis (25 marks) Based on its recent success in Amsterdam, Green Bikes Inc. is considering an expansion into the Toronto area. The company will provide cheap bicycle rentals to help reduce traffic congestion in the city?s core. Green Bikes estimates an initial outlay of $5,000,000 in new bikes and bike stations. The bikes and stations will be depreciated straight-line over five years to an expected salvage value of $500,000. It is estimated that the project will bring in $2,700,000 in annual revenues, but will also result in $1,250,000in annual maintenance and lost bikes expenses. As well, an investment in working capital of $380,000 will be required at the beginning of the project but will be fully recovered at the end of year 5. The firm already spent $180,000 last year on a feasibility study which concluded that the project would be profitable. Green Bikes Inc. has a 35% tax rate and an 8% percent cost of capital. (a) Should Green Bikes go ahead with the project? (ignore the half-year rule) (15 marks) (b) Would the project decision change if the bikes and bike stations purchased in year 0 fall into a 20% declining balance asset class (and the half-year rule applies)? All of the other cash flows remain the same. (10 marks) Q2 ? Scenario Analysis (25 marks) Miranda Manufacturing Corporation is considering a capital project which costs $1,200,000 with a six-year life and no salvage value. Depreciation is straight-line. Sales are projected at 100,000 units per year; selling price per unit will be $60, variable cost per unit will be $45 and fixed costs will be $950,000 per year. Past experience suggests that unit sales, selling price, variable cost and the fixed cost projections given here are probably accurate to within ? 8 percent. The required return on the project is 16 percent and the corporate tax rate is 40 percent. (a) Calculate the operating cash flow (OCF) and net present value (NPV) for the base-case, best-case and worst-case scenarios. (9 marks) (b) Suppose that the probability of the base-case scenario is 50 percent of the probability of either the worst-case scenario or the best-case scenario. Should the project be accepted? Why? (3 marks) (c) What is the best-case accounting break-even sales level for this project? (2 marks) (d) Calculate the degree of operating leverage (DOL) for the best-case scenario. What is your interpretation of this number? (3 marks) (e) Suppose Miranda just found out that Jade Ventures Limited is planning to carry a similar product. The marketing department announces that in the event of a competing product, the sales (units) projections will fall for all three scenarios by 10%. Assuming that all the other variables and their values remain the same, should the project still be accepted? Show all supporting calculations. (8 marks) Q3 - Risk and Return (25 marks) The following table presents the three possible states for stocks P and Q returns. State Probability Stock P Return Stock Q Return Optimistic 0.2 11% 19% Base 0.5 6% 9% Pessimistic 0.3 -2% -8% (a) What are the expected returns and the standard deviations on Stocks P and Q? (8 marks) (b) What is the covariance between Stocks P and Q? (5 marks) (c) What is the expected return and standard deviation of a portfolio with weights of 40% in Stock P and the remainder in Stock Q? (7 marks) (d) What is the correlation coefficient between stocks P and Q? Interpret this result. (5 marks) Please carry forward 6 decimals for this question so that you get the most accurate answer for part d. Q4 ? CAPM Analysis (25 marks) You are a recent York graduate and have assumed an investment role with ?Do We Cheat?em & How? Investments. Your first client has $10 million and wants to invest in the stock of 3 companies (Ashley Corp., Joshua Inc. & Julia Ltd.) and in T-bills. Assume that investing in the 3 stock portfolio has the same level of risk as investing in an index that represents the market. (a) If you invest 20% of the money in Ashley which has a Beta of 0.8 and 40% in Joshua with a Beta of 1.2 and if Julia has a Beta of 1.3 how much will you invest in Julia and in T-Bills? (9 marks) (b) Assume that the stocks of the 3 companies are priced correctly and that the T-bill rate is 5% and the average market rate of return is 8%. What is the expected rate of return on each stock? (8 marks) (c) If there was another stock selling at $25 (Beta of 2) with an expected dividend of $2 and a growth rate of 6%. Based on the CAPM, is this stock priced correctly? (8 marks),the first question : i want 1 to 5 is more clear. like text book year 0 1 2 3 4 5 initial cash flow working capital balala like that more detail same with b

Paper#3751 | Written in 18-Jul-2015

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