lting assignment on which the ACET is working is with Keep You Warm Corp (KYC), who has asked ACET for an evaluation of a six year $924,000 project to sell hi-tech ski glove warmers There is a zero salvage value on the project assets which use straight-line depreciation (to zero) Assume that the CCA is the same as depreciation The new hi-tech glove warmers will sell for $34 with a variable cost of $19 Sales are expected to be 130,000 pairs of gloves per year Fixed costs are $800,000 per year KYC has a 35% tax rate and a 15% cost of capital Consider this as the base case scenario (a) Calculate the accounting breakeven and the degree of operating leverage at that point (4 marks) (b) What is the sensitivity of Operating Cash Flows to change in the variable cost figure? What does your answer suggest about a $1 reduction in the variable costs? (5 marks) (c) Calculate the NPV for the base case (most likely scenario) and a sensitivity analysis by identifying the best case and worst case scenarios by changes to the sales numbers Explain why you selected these numbers and what the impacts may be on your decision as to whether or not to move forward with the project (8 marks) Question (10 marks) Calculate the expected returns, variances, and standard deviations for stock C, for stock E, and for a portfolio of both stocks C (2/3 weight) and E (1/3 weight) Scenario Probability Happiness 30% Indifference 50% Unhappiness 20% Return on C 15% 8% -4% Return on E -5% 4% 10% Page ADMS3530 3.0 Assignment #2 Question (12 marks) Use the following to answer the questions below: A market portfolio contains two stocks with the following returns: Aggressive Stock A, and Defensive Stock D: Scenario Bust Boom Market -8% 32 Rate of Return Aggressive Stock A -10% 38 Defensive Stock D -6% 24 (a) Find the beta of each stock In what way is stock D defensive? (5 marks) (b) If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock (4 marks) (c) If the Treasury bill rate is percent, what does the CAPM say about the fair expected rates of return on the two stocks? (3 marks) Question (6 marks) Calculate the nominal return, real return, and risk premium for the following common stock investment: Purchase price $60.00 per share Dividend $3.50 per year Sales price $73.00 per share Treasury bill yield 8.5% Inflation rate 7.5% Question (13 marks) A company issued $35,000,000 of 15-year, 7.5%, $1,000 par value debt at par three years ago Assume semi-annual coupon payments The yield to maturity on comparable debt today is 9% The firm also has 6,000,000 common shares outstanding, which currently trade at $26.00 per share The firm’s β is 1.26, the T-bill rate is 3.5% and the market risk premium is 6.7% Due to the early stage in its corporate life cycle, the firm has significant tax-loss carry forwards, resulting in the firm not expecting to have to pay taxes in the foreseeable future (a) Compute the firm’s weighted average cost of capital (WACC) (6 marks) Page ADMS3530 3.0 Assignment #2 (b) If the firm were able to issue an additional $26,000,000 in debt ($1,000 par value) at an 8.5% coupon rate (paid semi-annually) and use the proceeds to retire 1,000,000 shares, what would be the firm’s WACC? (4 marks) (c) How would your answer in part (a) change if the firm were taxable at 35%? (3 marks) Page ADMS3530 3.0 Assignment #2 Atkinson Faculty of Liberal and Professional Studies YORK UNIVERSITY Toronto, Ontario, Canada ADMS3530 3.0 Finance Professor Section Assignment #2 Due Date: Start of the last class, March 28 – April 3, 2007 (please check your class schedule) Personal Work Statement I, the undersigned: • warrant that the work submitted herein is my work and not the work of others • acknowledge that I have read and understood the Senate Policy on Academic Honesty • acknowledge that it is a breach of the University Regulations to give and receive unauthorized assistance on a graded piece of work Name (typed or printed) York Student # Signature Page ... and Defensive Stock D: Scenario Bust Boom Market -8 % 32 Rate of Return Aggressive Stock A -1 0% 38 Defensive Stock D -6 % 24 (a) Find the beta of each stock In what way is stock D defensive? (5... Assignment #2 Atkinson Faculty of Liberal and Professional Studies YORK UNIVERSITY Toronto, Ontario, Canada ADMS3530 3.0 Finance Professor Section Assignment #2 Due Date: Start of the last class, March... share The firm’s β is 1.26, the T-bill rate is 3.5% and the market risk premium is 6.7% Due to the early stage in its corporate life cycle, the firm has significant tax-loss carry forwards, resulting