Your company is considering the purchase of a fleet of cars for $195,000. It can borrow at 8.5%. The cars will be used for four years. At the end of four years they will be worthless. You call a leasing agent and find that the cars can be leased for $55,000 per year. The corporate tax rate is 34% and the cars belong in CCA class 10 (a 30% class), what is the net advantage to leasing?

A) $6,594 B) $9,988 C) $10,134 D) $15,363 E) $21,802

Investment and Speculation

• What do you think is the difference between investment and speculation?
• Some claim that the recent record-high oil prices are due to the speculations in the oil futures market. Do you think the investments in the futures markets made the market more volatile?
• Is the speculation a bad thing? Be brief.

Suppose you purchase a​ ten-year bond with 9 % annual coupons.You hold the bond for four years and sell it immediately after receiving the fourth coupon. If the​ bond's yield to maturity was 8.05 % when you purchased and sold the​ bond, a. What cash flows will you pay and receive from your investment in the bond per $ 100 face​ value? b. What is the internal rate of return of your​ investment? Note​: Assume annual compounding.

1A. Which of the following is not a type of financial cash flows?

1. Interest expenses on commercial papers
2. Capital raised from a private firm’s initial public offering (IPO)
3. Larger bonus payments to the senior executives due to an elevated share price
4. Cash spent on share repurchases in the secondary stock markets

1B. What type of risk matters to an investor with a well-diversified portfolio? How is this type of risk measured?

1. Systematic risk; beta
2. Unique risk; standard deviation
3. Idiosyncratic risk; beta
4. Total risk; standard deviation

Part I Simple Annuities

1. Len Stine is saving for his retirement 15 years from now, and has set up a savings plan into which he will deposit $500 at the end of each month for the next 15 years. Interest is at 6% compounded monthly.
2. 1. How much will be in Mr. Stine’s account on the date of his retirement?

2. How much will Mr. Stine have contributed.

3. How much is interest?

2. Jill is planning to retire in eight years, and wants to receive $300 a month for 15 years after she retires to supplement her pension, beginning one month after her retirement date. How much will she have to invest now, at 6% compounded monthly, to be able to achieve her goal?

3. What amount would be required today to pay an annuity of $72 a month for 15 years, if money earns 4% compounded monthly?

Financial Mathematics

FORMULA SHEET

i = j / m

I = Prt

t = I / Pr

P = I / rt

S = P(1 + i)ⁿ

f = (1 + i)^m - 1

n = ln (S / P)

ln (1 + i)

Sn = R[(1 + p)ⁿ - 1]

p

R =          Sn

[(1 + p)ⁿ - 1] / p

14. = ln [1 + pSn/R] ln (1 + p)

Sn(due) = R[(1 + p)ⁿ - 1](1 + p)

p

n = ln [1 + [pSn(due) / R(1 + p)] ln(1 + p)

14. = -ln[1 - (p[1 + p]^dAn(def))/R] ln(1 + p)

An(def) = R [1 - (1 + p)^-n] p(1 + p)^d

A = R / p

m = j / i

S = P(1 + rt)

r = I / Pt

P = S / (1 + rt) = S(1 + i)^-n

c = # of compoundings/# of payments

p = (1 + i)^c - 1

i = [S / P] ^1/n - 1

An = R[1 - (1 + p)^-n]

p

R =          An

[1 - (1 + p)^-n] / p

14. = -ln [1 - pAn/R] ln (1 + p)

An(due) = R[1 - (1 + p)^-n](1 + p)

p

n = -ln[1 - [pAn(due) / R(1 + p)] ln(1 + p)

d = -ln{R[1-(1 + p)^-n] / pAn(def)} ln(1 + p)

Sn(def) = Sn

A(due) = (R / p)(1 + p)

Congratulations! Your portfolio returned 9.1​% last​ year, 2.3​% better than the market return of 6.8​%. Your portfolio had a standard deviation of earnings equal to 21​%, and the​ risk-free rate is equal to 4.1​%. Calculate​ Sharpe's measure for your portfolio. If the​ market's Sharpe's measure is 0.38​, did you do better or worse than the market from a​ risk/return perspective?

The​ Sharpe's measure of your portfolio is ____ (Round to two decimal​ places.)

Your​ portfolio's performance is ___

equal

inferior

superior

to the​ market's performance. ​ (Select from the​ drop-down menu.)

Assignment

You are a consultant, external to this firm. Create two years (2020 and 2021) of pro forma income statements and balance sheets and the statement of cash flows, including operating, investing and financing sections for 2020 only.

Techno Corporation

Techno Corp

Income Statement

Actual results 2019 for 12 months ending December 31, 2019

Techno Corp

Balance Sheet

December 31, 2019

Techno Corporation Paper

Techno Corporation is developing its pro forma financial statement forecasts for 2020 and 2021. Its actual results for 2019 are shown in the income statement and balance sheet.

Background

• The relationship between cost of goods sold and sales revenue Is expected to continue in the near term and no inflation is expected.
• Operating expenses include $200,000 in depreciation (fixed expense), the remainder is variable costs tied to sales revenue.
• Fixed assets are adequate to support sales growth for the next two years and long=term debt will decline $200,000 per year.
• Dividend policy calls for 40% of net profits after taxes to be paid before yearend.
• Interest is 10% of long-term debt and notes payable
• Inventory needs to grow at half the rate of sales growth and accounts receivable maintains the same relationship to sales as was the case on December 31, 2019 for 2019 sales. Accounts payable maintains the same relationship to cost of good sold as of December 31, 2019 for 2019 sales.
• Any cash over $500,000 is put in marketable securities, Interest income is negligible
• Other current liabilities are stable.
• Taxes payable are equal to one-half of the current year’s taxes.
• Assume sales will increase 10% per year for each of the next two years.

General Electric Co. inked the first deal to move itself away from banking -- by selling its private-equity-lending unit to Canada’s largest pension fund in a deal valued at about $12 billion.

It's the first piece of GE Capital Corp., the industrial conglomerate's finance arm, that the parent company has sold since announcing plans to exit the business in April. Investors offered the company modest applause for its deal, sending the stock up 0.3% on a day when broader markets were down.

GE Capital was at the epicenter of the storm after Lehman Brothers Holdings Inc. declared bankruptcy in September 2008. GE ultimately became one of the largest recipients of the federal government's lifelines during the financial crisis.

Here's a look at how GE's business has changed since then:

2008: To survive the financial crisis, GE froze its dividend, suspended its share-buyback program, scaled back its finance unit and made moves to reduce its reliance on short-term borrowing. It raised $15 billion by selling $12 billion in new shares and offering $3 billion of preferred stock to Warren Buffett‘s Berkshire Hathaway Inc.

2009: Mr. Immelt continued to scale back the company, announcing a deal with Comcast, which would give Comcast majority control of NBC Universal.

2010: GE made several big (and what now look like ill-timed) bets on oil, including the announcement of a $3 billion deal to buy Dallas-based oil-and-gas equipment maker Dresser Inc. and a $1.25 billion deal to acquire U.K.’s Wellstream Holdings PLC, a bet on deep-water oil exploration.

2011: GE paid back Mr. Buffett and continued its acquisitions of oil and gas assets, announcing a deal to buy the well-support division of John Wood PLC, which makes submersible electric pumps that help extract oil, for $2.8 billion.

2013: Mr. Immelt paid $3.3 billion for Lufkin Industries Inc., a drilling-equipment maker positioned to benefit from North American shale drilling. GE also acquired Italian aviation supplier Avio SpA for $4.3 billion.

The conglomerate raised $18.1 billion by selling off its remaining stake in NBC Universal and 30 Rockefeller Center to Comcast Corp.

2014: GE sold off the electric toaster, self-cleaning ovens and other appliances it helped create to Sweden-based Electrolux AB for $3.3 billion, but the appliances still hold the GE name. Mr. Immelt also inked a $17 billion deal to buy Alstom‘s power-generation business, the company’s largest acquisition ever. The Alstom deal has not yet closed.

GE began the process of spinning off its consumer credit operation into a new stand-alone business, Synchrony Financial, through an initial public offering.

2015: GE said earlier this year that it would sell off $100 billion in assets in 2015.

In late 2014, GE agreed to sell its Budapest Bank unit to Hungary’s government for roughly $3.3 billion (It counts this deal in the $100 billion.). In March, GE sold the consumer-lending business of GE Capital in Australia and New Zealand to an investor group for roughly $6.3 billion. GE has also inked deals to sell roughly $26.5 billion in real estate to Blackstone Group LP.

That leaves the company with roughly $45 billion in assets left to sell this year by its own estimations. Earlier this month, the WSJ said that GE kicked off the auction for another large chunk of GE Capital -- U.S. portions of its dealer financing and corporate finance businesses, which provide loans for equipment purchases and truck vendors.

Meanwhile, as the WSJ's Ted Mann reported Tuesday morning, it's difficult to value exactly what's left of GE Capital as the industrial conglomerate uses several different measurements of its size and assets.

After the credit market turbulence, however, GE had difficulties in borrowing short-term debt. GE had a $50 million line of credit that they thought they would never need but were confident that would definitely get it when requested. Things however, changed dramatically during the financial crisis in 2008. GE couldn’t pull its line of credit because it would render the bank that granted the line bankrupt and cause a series of cascade bankruptcies after that. GE learned a painful lesson that a line of credit is not as good as cash.

What GE experienced illustrates how important working capital management to the firms’ financial position and risk.

In order to meet their working capital needs, companies have the option to hold cash or hold on to a line of credit.

Discuss:

questions to answer

1. Evaluate whether you would recommend companies to hold cash or to rely on the line of credit. Why or why not.

2. Would you make different recommendations for different types of firms?

3. What implications does liquidity management have on your recommendation?

4. Find news examples and evidences to support your position.

QUESTION 1 [41 MARKS]
ABC Holdings is considering two projects. The projects are similar in nature and are expected to both operate for four years. Due to unavailability of funds to undertake both of them, only one project can be accepted. The cost of capital is 12%.
The following information is available:

Depreciation is charged on the straight line basis.

a) Calculate the following for both proposals:

(i) the payback period (round off your answer to one decimal place)

(ii) the net present value (NPV)

(iii) the return on investments (ROI)

(iv) the residual income (RI)

(v) If the two projects are mutually exclusive, which project should be chosen and why?

(b) Determine the sensitivity of Project A to a change in cost of capital

(c) Determine the sensitivity of Project B to a change in initial investment

(d) Assuming that the management of ABC holdings have decided to undertake both projects and the projects can be undertaken in part, how much NPV will they get if they have N$80 000 000 available to invest.

(e) Explain three non-financial considerations that should be taken into account before a project is chosen.

Discuss the four elements of negligence, and illustrate each element with an example.

Financial accounting involves identifying, measuring, recording, and communicating in dollar terms the economic events and status of an organization. This is typically done through the use of 3 financial statements. These 3 statements are used to summarize the organization's financial status and performance. This is key to the survival of most healthcare organizations today. We have to know how much money we made and how much we spent. List the 3 financial statements used in financial accounting. Discuss the importance of these financial statements. Why do we use these? Who are the users of this information? Discuss how a healthcare manager might use each one. In your opinion, do you feel that one is more important than another? Why or why not? What would happen if we didn't have these types of tools?

Define the following terms:

A- portfolio
B- Diversification
C- Correlation
D- Beta