I have attached the assignment copy again along with the solution I needed to be double checked. Thanks

AFF 210 Assignment Two Summer 2017 STUDENT NAME __________________________ STUDENT NUMBER ________________________ STUDENT NAME _____________________________ STUDENT NUMBER____________________________ STUDENT NAME_______________________________ STUDENT NUMBER_____________________________ PLEASE NOTE THE FOLLOWING: Make sure ALL formulas, calculations, and timelines are clearly shown as these constitute a significant portion of the total marks available. If you make any assumptions to solve the problem, clearly state them at the beginning of the solution and explain the reason. REMINDER: This problem set is due at the June 22nd at the beginning of the final exam. The assignment may be done either individually or in groups of up to three. AFF 210 Assignment Two Summer 2017 PROBLEM 1: REPLACEMENT DECISION (20 MARKS) ABC Inc. is debating the purchase of a new digital printer. The printer they acquired 3 years ago for $55,000 is worth $23,000 today, and will have a salvage value of $7,500 after 5 more years. It requires $5,500 per year in maintenance. Maintenance costs are incurred at the end of each year. The new printer will cost $70,000. It will cost $3,500 per year to maintain the new machine, maintenance costs will be incurred at the end of each year. The new machine will increase the company's annual revenue by $22,000 during its 5-year life. At the end of 5 years, it will have a salvage value of $18,000. Currently the company has $15,000 invested in operating net working capital. If the company purchases the new machine the investment in operating net working capital will decrease to $8,000. The company's corporate tax rate is 25%, the CCA rate is 30% and the required rate of return is 12%. a) Using net present value (NPV) calculation, determine if the company should purchase the new digital printer. Show all work. (You will need to calculate the incremental cashflows.) PROBLEM 2: PURCHASE DECISION (20 MARKS) DEF Inc. is considering buying a bottling machine for $650,000. It will have a useful life of 3 years and a salvage value of $195,000. The machine has a rate of return is 8% and they have a corporate tax rate of 30%. The CCA rate is 25%. DEF would need to invest $15,000 in initial net working capital. DEF assumes that this project will generate the following pre-tax savings in operating costs (NOTE pre-tax savings are not the same as cash flow from the assets). Year 1 $270,000 Year 2 $240,000 Year 3 $225,000 a) Calculate the exact Payback Period and the discounted Payback Period. b) Calculate the IRR. c) Calculate the NPV. d) Should DEF Inc. purchase the machine based on the results from a), b) and c)? Hint: A reduction in operating costs is the same as an increase in revenues. AFF 210 Assignment Two Summer 2017 AFF 210 Assignment Two PROBLEM 3: BID PRICE (20 Summer 2017 MARKS) Sarah works in the marketing department of a large firm. The firm has been approached by a client that wishes to order some silicone wristbands. The client will purchase 500,000 wrist bands each year for the next 5 years. In order to fulfill the order Sarah's firm would need to purchase a silicone wristband-maker, at a cost of $385,000. The machine can produce a maximum of 500,000 units each year. Sarah expects to use the machine for the next 5 years and then sell it for its salvage value of $120,000. The wrist bands have a variable cost of $0.80 per unit and there will be a fixed cost of $60,000 per year to operate the new machine. The CCA rate is 30%, corporate tax rate is 40.0% and appropriate discount rate is 11.0%. In order to successfully promote her event, at what price should Sarah set the minimum selling (bid) price per wristband? Show all work for full/part marks. PROBLEM 4: RETURNS AND RISK ON STOCKS (20 MARKS) You work for a small investment management firm. You have been provided with the following historical information for three stocks and the market index. The information is shown in the table below. New Inc. Stock Price Old Inc. Dividend Stock Price Newer Inc. Dividend Stock Price Dividend Market Index 2016 $160 $2.10 $80 $2.00 $50 $1.50 19,740 2015 $155 $1.90 $60 $1.50 $45 $1.40 18,320 2014 $162 $1.90 $76 $1.00 $55 $1.30 19,520 2013 $150 $1.90 $70 $1.00 $40 $1.20 21,325 2012 $155 $1.75 $60 $0.06 $35 $1.10 19,800 2011 $140 $1.60 $40 $0.40 $25 $1.00 19,020 2010 $135 $1.50 $30 $0.00 $20 $0.90 18,500 AFF 210 Assignment Two Summer 2017 Using the data provided you are to calculate the following for each of the stocks and the market index. a) What is the average annual return for the past six years? b) What is the population standard deviation and the sample standard deviation? c) What is the coefficient of variation for each of the stocks and the market index? d) What is the beta of each of the stocks? You can use excel's slope function to estimate this. PROBLEM 5: USING DIVIDENDS TO VALUE A STOCK (20 MARKS) You are an analyst in charge of valuing common stocks. You are expected to give a buy-hold-sell recommendation for DEF, a pharmaceutical company specializing in anti-inflammatory drugs. Observing the current market trends, you expect future growth in this company. You expect the firm to pay its first dividend of $6.00 per share 2 years from today. You expect the dividends to increase by 50% the following year. The year after that dividends will increase by 40%, and then for the following 2 years dividends will increase by 20.0% and thereafter dividends will increase by 4% each year in perpetuity. DEF's required rate of return is 20.0% for the next 2 years, 15% for the following 3 years and thereafter the required rate of return will be 12%. a From your analysis what is the value of DEF today? b If the company's stock was $50.00 in the market is the stock overvalued or undervalued? Hafsa Khalid Problem 4 New Inc. Old Inc. Newer Inc. Stock Price Dividend Stock Price Dividend Stock Price 2016 $160 $2.10 $80 $2.00 $50 2015 $155 $1.90 $60 $1.50 $45 2014 $162 $1.90 $76 $1.00 $55 2013 $150 $1.90 $70 $1.00 $40 2012 $155 $1.75 $60 $0.06 $35 2011 $140 $1.60 $40 $0.40 $25 2010 $135 $1.50 $30 $0.00 $20 a) Average Annual Returns New Inc. Old Inc. Newer Inc Market Ind. 2011 4.89% 34.67% 30.00% 2.81% 2012 11.96% 50.15% 44.40% 4.10% 2013 -2.00% 18.33% 17.71% 7.70% 2014 9.27% 10.00% 40.75% -8.46% 2015 -3.15% -19.08% -15.64% -6.15% 2016 4.58% 36.67% 14.44% 7.75% b) Population and Sample SD New Inc. Old Inc. Newer Inc. Market Ind. Sample Standard Deviation 5.98% 24.55% 21.95% 6.98% Population Standard Deviation 5.46% 22.41% 20.04% 6.37% c) Coefficient of Variation Standarad Deviation Mean Coefficient of Variation New Inc. Old Inc. Newer Inc. Market Ind. 5.98% 24.55% 21.95% 6.98% 4.26% 21.79% 21.95% 1.29% 140.49% 112.65% 100.00% 540.10 d) Beta Beta New Inc. Old Inc. Newer Inc. -3.77% 243.18% 39.36% Newer Inc. Dividend Market Ind. $1.50 $19,740 $1.40 $18,320 $1.30 $19,520 $1.20 $21,325 $1.10 $19,800 $1.00 $19,020 $0.90 $18,500