Q # 2 (10 marks)

The financial statements for Dramdock Consulting included the following information (in $millions):

1. Comparative Balance Sheets: Dec 31, 2019 | Dec 31, 2020

ASSETS
Cash		30				33
Accounts Receivable		160				180
Short Term Investments		65				55
Inventory		315				370
Prepaid expenses		15				10
Land		100				100
Plant & Equipment	650				725
Less: Accum. Dep'n	230	420			280	445
TOTAL Assets			1,105				1,193
LIABILITIES
Accounts Payable		250				315
ST Notes Payable		100				90
Accrued Liabilities		50				41
Bond Payable (25 years, 6.5%)		305				265
Preferred Shares (8%)		100				100
Common Shares		100				95
Retained Earnings		200				287
TOTAL Liabilities & S/Equity			1,105				1,193

1. Income Statement for the year ending December 31, 2020

Sales			725
Expenses
Cost of Goods Sold		190
Rent		50
Salaries		185
Operating expenses		81.5
Depreciation		50
Total Expenses			556.5
Net Operating Income			168.5
Interest Expense			18.5
Earnings after interest			150
Taxes (30%)			45
Net Income			105

Question # 4 continued

Required:

(a) Calculate (include labelled equations):

(i) Free Cash Flow from Operations

(ii)Free Cash Flow to the Firm

(iii) Free Cash Flow to Common Equity

(b) Define Free Cash Flow to Common Equity andgive 1 example (including $ amount) of how Dramdock Consulting used the Free Cash Flow to Common Equity

Q # 3 (10 Marks)

In October 2013, JJ Ltd., purchased an asset for $50,000. The asset was sold in

January 2015 for $30,000. A replacement asset was purchased for $56,000 and it

is now the only asset in the class.

In 2017, the company sold the "new" asset in July for $34,000. The asset was not

replaced and the asset class was closed.

Assume that the firm has been in business since 2001 and has a December 31 year end, the applicable tax rate is 40% and the CCA rate is 20%.

Required:

(a) Calculate CCA claimed in each year from 2013 through 2017.

(b) For 2017, also calculate the

(i) recapture depreciation, terminal loss, capital gains if any, that result from

the sale of the asset

(ii) AND Calculate the After Tax Cash Flow that results from the sale in 2017

Q # 4 (10 Marks)

AJ Pty. Ltd. is in need of $100,000 additional financing to support expansion plans. As owner-manager of AJ, you are uncertain about whether you should provide the firm with a loan or with additional equity capital. The combined federal and provincial corporate tax rate is 50%. Your personal federal tax rate is 29% and the provincial tax rate is 11.16%. If you make a loan, the interest rate would be set at 12%. Conversely, if equity capital is purchased, you expect the dividend yield to be 4% (that is, for each $100 stock purchased, the annual dividend will be $4).

Required:

Should you, as owner-manager, provide the firm with a loan or with new equity financing?

Q # 5 (8 Marks)

Sunrise Industries wishes to accumulate funds to provide a retirement annuity for its vice president of research, Jill Moran.Ms. Moran will retire in exactly 12 years' time.

One year after her retirement she will receive her first annual payment of $42,000. In total, she will receive 20 annual payments.

During the 12 year accumulation period, Sunrise wishes to fund the annuity by making equal semi-annual deposits into an account earning an effective 9% return.The first payment will be made today.

On the date of Ms Moran's retirement, Sunrise plans to move the accumulated monies into a safer account earning an effective 6% per year.

Required:

Calculate the amount Sunrise Industries must invest each year of the 12 year accumulation period to fully fund Ms. Moran's retirement annuity.

Q # 6 (6 Marks)

Erica and Jon just purchased a boat for $75,000. They were able to make a 20% down payment and the remaining balance was financed. The rate quoted by the ban was 8.4% APR financing with monthly payments. The loan has a 10 year amortization period and a 3 year term.(Timelines are not required.)

Required:

1. What is the monthly payment

1. What is the effective annual rate on interest paid

1. How much will need to be financed at the end of the 3 year term?

Question #7 (3 marks)

A client is considering two possible investments, each pays $10,000 per year (end of year). (timeline not required)

1. A 30-year annuity, 15 percent compounded annually, OR
2. A perpetuity, 15 percent compounded annually.

Which investment would you recommend and why? (show all calculations)