A 5-year project requires an initial investment of $100,000 in fixed assets. The fixed assets can be depreciated according to CCA at 20%, and are expected to have $20,000 of salvage value in five years. Fixed costs are $6,000 per year, variable costs are $12 each and the sale price is expected to be $18 each. The tax rate is 40%. The required return on the project is 12%.
What must be the annual unit sales for the investment to be worthwhile?
Question2.Dexter Ltd. is considering a toaster project. The production system will cost $500,000, can be depreciated according to CCA at 30%, and has a capacity of 20,000 toasters per year. The project is expected to last six years, and will have a salvage value of about $20,000. The variable costs are about $12 per toaster, and the fixed costs are $80,000 per year. Dexter has found that the cost of capital of other toaster manufacturers is 15%. The risk-free rate is 3%. Dexter pays tax at 34%.
a. What is the present value of CCA Tax Shield?
b. If the annual unit sales are 10,000 toasters per year, what must be the selling price, per toaster, which will make the project worthwhile?
c. If the selling price is $30 per toaster, what must be the annual unit sales to make the project worthwhile?
Question3. Abco is an all equity firm with 40,000 shares of stock outstanding at a market price of $50 a share. The company's earnings before interest and taxes are $300,000. Abco has decided to add leverage to its financial operations by issuing $500,000 of debt at a 10 percent rate of interest. The debt will be used to repurchase shares of stock. You own 800 shares of Abco stock. You could also loan out at a 10 percent rate of interest. How many shares of Abco stock must you sell to offset the leverage that Abco is assuming? Assume you loan out all of the funds you receive from the sale of stock and there is no tax.
Question4.Estimate the Beta of BMO and Air Canada.
a. Acquire monthly stock/asset returns on BMO (ticker: BMO.TO), Air Canada (ticker: AC.TO), and S&P/TSX Composite index (ticker: ^GSPTSE) over the period from January 2012 to December 2014. Each stock/asset should have 36 monthly stock returns. Report the table of dates and monthly returns on the three assets, and plot them in one figure (use dates as the x-axis and asset returns as the y-axis).
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