BFIN 350 Assignment T1f

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Humber College *

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350

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Finance

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Jan 9, 2024

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Corporate Finance BFIN350 Rajigan Thayanantharajah Assignment #1 Complete all questions. Place only final answers in ‘boxed answer area’. Include details of your work below the ‘boxed answer area’ (mandatory). Show all calculations, formulas used, financial calculator inputs/buttons. State all assumptions. Submit a single MS Word document. Submit an attachment in the Assignment area of the course site. Submit on time per the Critical Path. Late assignments are subject to 20% penalty per day and will not be accepted after 5 days late. Note the Humber College policy on plagiarism . Please note this applies equally to copying copyright materials as it does to using your friends’ solutions to problems. If I notice ‘copy and paste’ duplications in submissions all parties identified will be awarded zero grades with potentially additional implications. While I encourage students to work together and support each other on course work, you are all aware of the differences between this and copying another’s work. Respect this and your will learn more, faster! Page 1 of 6

Corporate Finance BFIN350 Question 1 a) What is liquidity a measure of? Discuss the potential merits of high liquidity verses low liquidity. b) You are reviewing the books of a firm you are considering purchasing and notice a considerable difference between the market value of some assets and the book value. Why might there be a difference? c) If you consider purchasing a firm what is the firm’s enterprise value based on? (Hint: consider this in terms of the balance sheet entities). Comment on the difference between ‘enterprise value’ and ‘market value’. d) What is the purpose of a firm? Express your response in terms of owner’s perspective. e) A firm is engaging in a large capital project. It requires 100 million dollars for this project. What options does the firm have to raise funds to finance this large capital project. Answer Place only your final answer in the box. a) How quickly an asset can be converted into cash without any loss. High liquidity means that a company can easily meet its short-term debts while low liquidity means thecould imminently face bankruptcy. b) There might be a difference between both values due to changes in asset value over time, such as appreciation and depreciation, also market value is influenced by supply and demand. c) Enterprise value reflects the total value of a firm's operations. Whereas market value typically only considers the market capitalization of its common stock. d) To generate profits, to increase the firms brand leading to more investors, which can lead to a higher stock value e) Debt financing, borrow money through loans. Joint Venture, partnering with an established company to jumpstart and receive funds Equity financing, issuing new stocks Page 2 of 6

Corporate Finance BFIN350 Question 2 Your daughter is considering two options for her career. The first is to go to law school at Harvard. You estimate this will cost you $500,000 and you will have to pay this in one lump sum 5 years from today. Her alternative is to go to Europe to a musical conservatory school. For this she will need a violin worth $100,000 which you need to buy now. The cost of her schooling will be $100,000 per year for 3 years starting in 2 years. That is, in 2 years you will need $100,000, another $100,000 in 3 years and another $100,000 in 4 years. If the interest you can achieve is 10% compounded annually which option requires less money if you invest today to cover these educational expenses? Answer Place only your final answer in the box. Question Your Answer Harvard or Europe? European Show your work below (you must show all calculations used to derive you answers): Option A) Present Value (PV) = FV / (1+r)n PV = $500,000 / (1+0.1)^5 = $310,460.662 Option B) PV = $100,000 Schooling PV = $100,000 / (1+0.1)^2 = $82,644.6281 PV = $100,000 / (1+0.1)^3 = $75,131.4801 PV = $100,000 / (1+0.1)^4 = $68,301.3455 Total PV = $326,077.454 Page 3 of 6

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Corporate Finance BFIN350 Question 3 Joe’s Tree Service bought new machines 3 years ago for $600,000. The machines can be sold today to his brother’s company Sam’s Tree Service for $430,000. Joe’s current statement of financial position show net fixed assets of $380,000, current liabilities of $720,000, and net working capital of $250,000. If all Joe’s assets were liquidated today, he would receive $1M. a. What is the book value of Joe’s company? b. What is the market value of Joe’s company? c. Explain the difference between book and market value. d. Why is it important to know these the book and market values of an asset? e. What is the implication of depreciation on book and market values? f. How do non-cash expenses impact a company’s profitability? Answer Place only your final answer in the box. a) $1,350,000 b) $430,000 c) Book value relies on the financial and accounting reports, which is based on deprecation and its initial cost whereas Market value relies on the actual market value meaning the current cost of the asset and how much would it sell right now. d) It is important to know both values when it comes to selling or purchasing new assets so it can better help your decision-making skills to succeed. e) The implication of deprecation of a book lowers the value of the book whereas market value is priced according to supply, rarity and how easily accessible the book is, which could increase the value and possibly lead to a profit. f) It reduces net income and reduces tax liability but do not represent actual cash flow Show your work below (you must show all calculations used to derive you answers): a) $380,000 + $250,000+$720,000 = $1,350,000 b) NRV- Current Liabilities =$1,000,000- 720,000 Page 4 of 6

Corporate Finance BFIN350 Question 4 The NewLife Insurance Company is offering an insurance policy that will give you and your offspring $18,000 per year forever. a. If you require 6% return on investment the how much would you have to pay for the policy? b. If in part a. above, the cost of the policy was $360,000, what would you expect the interest rate to be for this to be a fair deal? c. You’re considering getting a loan. Bank A charges 15% annually and Bank B charges 15.25% accrued semi-annually. Which bank has the lower effective rate of interest? d. Payments are made on a 15-year annuity of $1500 at the end of each month. Calculate the present value if the interest rate is 11% compounded monthly for the first 7 years and 7 percent compounded monthly thereafter. Answer Place only your final answer in the box. a) $300,000 b) 5% c) Bank A has a lower effective rate of interest d) Show your work below (you must show all calculations used to derive you answers): A) Annual Cash flow / Required Return 18000/6% 300,000 B) Annual Cash Flow/ Cost of Policy 180,000/360,000 =0.5 C) = (1+APR/m)^m-1 = (1+ 0.1525/2)^2-1 = 15.83% Page 5 of 6

Corporate Finance BFIN350 Question 5 If the first Thor Marvel comic book was issued in 1949 and in 2016 it was sold for $533,500, at a return of 25.9% per year then how much would the comic book have originally sold for? Answer Place only your final answer in the box. Selling Price? 0.11 Show your work below (you must show all calculations used to derive you answers): n=2016-1949 = 67 n=67 r= 0.259 FV= $533,500 PV = FV(1+r%)n PV= 533,500(1+0.259)^67 PV= 533,500(1.259)^67 PV= 0.1060 Page 6 of 6

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