UNIVERSITY OF MANITOBA

Faculty of Management
Department of Accounting and Finance

FIN 2200 Corporation Finance Professors: A.Dua, J.Falk, A.Paseka, and R. Scott
Final Examination April 23, 2007; 6:00 p.m. - 9:00 p.m.

I. Multiple Choice Section:

2 marks each

1. In the 2-period model of consumption, Tracy should invest available funds if
a) she is willing to postpone consumption at t = 0.
b) the NPV of the investment > 0.
c) the market clearing rate of interest exceeds 0; i.e., r > 0.
d) the equilibrium rate of interest, r, exceeds the rate of return on the investment.
e) both a) and b) are true.

2. Consider a growing annuity of five annual payments. The first payment of $25,194.24 is in
three years; each subsequent payment is 8% greater than the previous payment; and the
effective annual discount rate is 8%. The present value today (to the nearest cent) of this
growing annuity is
a) not determinable since the growth rate equals the discount rate.
b) $92,592.59
c) $100,000.00
d) $108,000.00
e) $116,640.00
f) $125,971.20
g) none of the above.

3. The Government of Canada has issued 7.2% coupon bonds with semi-annual coupons and
22 years to maturity. If the yield-to-maturity for the bonds is quoted as 7.5% per year
(compounded semi-annually), then the price of a $1,000 face value bond is
a) $967.92
b) $968.15
c) $1,000.00
d) $1,032.64
e) $1,032.88
f) none of the above.

4. Consider a 2-period world. Alexis has a salary this year of $45,000 and a guaranteed salary
next year of $50,000. Also, this year she has an investment opportunity which requires
$32,000 and which has an NPV = $1,148.15. She wishes to consume the same amount in
both years. The equilibrium market rate of interest is 8%. After deciding on her options,
she calculates that she will have to
a) take the investment lowering her consumption at t = 0 to $30,000.
b) take the investment lowering her consumption at t = 0 to $13,000.
c) take the investment and borrow $45,000 at t = 0 to be repaid at t = 1.
d) take the investment and borrow $35,000 at t = 0 to be repaid at t = 1.
e) do none of the above.

5. Five years from now Snehil will deposit $1,000 into a savings fund for her daughter
Margaret. Each year she will make an additional $1,000 deposit. The last deposit will be
twenty years from now. How much will accumulate if the money will be left in the savings
fund (with no further deposits) until 30 years from today and the effective annual rate is
12%?
a) 42,655.31
b) 42,748.25
c) 42,753.28
d) 132,785.20
e) 175,538.48

6. Spot rates of interest for zero-coupon Government of Canada bonds are observed for
different terms to maturity as follows:

Term to maturity Rate (r
i
)
1 year from today 5.75%
2 years from today 6.25%
3 years from today 6.35%
4 years from today 6.25%
5 years from today 6.40%

What is the forward rate of interest from year 3 to year 4, i.e., what is
3
f
4
?
a) 5.950564%
b) 6.35%
c) 6.550282%
d) 7.002121%
e) none of the above

7. In the market today, you observe the following yields on Treasury securities:

Maturity Yield (effective/year)
3 years 6.2%
4 years 5.9%
5 years 5.7%

Assume that the pure expectations theory holds. What does the market expect the yield on
Treasury securities maturing in four years to be three years from today?
a) -.282486%
b) 5.005075%
c) 4.903770%
d) 5.90%
e) 7.943032%
f) -.00188857%

8. The NPV profile shows
a) the NPV at different discount rates.
b) an NPV of 0 at the IRR.
c) an NPV equal to the net value of all cash flows at a discount rate of 0.
d) all of the above.
e) none of the above.

9. Project A has an internal rate of return of 18% per year, while Project B has an internal rate
of return of 16% per year. However, if the companys cost of capital (WACC) is 12%,
Project B has a higher net present value. Which of the following statements is most
correct?
a) The crossover rate for the two projects is less than 12%.
b) Assuming the timing of the two projects is the same, Project A is probably of larger
scale than Project B.
c) Assuming that the two projects have the same scale, Project A probably has a
faster payback than Project B.
d) Statements a and b are correct.
e) Statements b and c are correct.

Page 2 of 15

10. The QT Company is generating a net cash flow of $333,000 per year. If they invest in a
new press machine they expect to increase their net cash flow to $400,000 per year. The
cost of the new press machine is $250,000. To accept or reject the investment they have to
consider
a) the press machine cost of $250,000 and total net cash flow of $400,000.
b) the change in net cash flow of $67,000 versus the press machine cost of $250,000.
c) the current net cash flow of $333,000 and the cost of $250,000.
d) the opportunity cost of the facility of $333,000.
e) none of the above.

11. The cash flow in dollars received in year 3 is expected to be $12,372. The firm uses a real
discount rate of 4% and the inflation rate is expected to be 2.5%. What is the real cash
flow for year 3?
a) $13,916.82
b) $11,488.63
c) $10,998.66
d) $10,242.15
e) $14,944.75
f) None of the above.

12. You have been asked to evaluate an infinitely-lived project. Sales in the first year are
projected to be $100. Costs are projected at $50. There is no depreciation, and the tax rate
is 30%. The real required return is 10%. The inflation rate is projected to be 8%. Sales
and costs will increase at the rate of inflation. The project costs $300. What is the NPV?
a) $142.03
b) $36.36
c) $71.72
d) $24.07
e) None of the above.

13. If the inflation rate was positive the expected NPV of an investment would be:
a) understated if real cashflows were discounted by the nominal discount rate.
b) understated if nominal cashflows were discounted by the nominal discount rate.
c) overstated if the real cashflows were discounted by the nominal discount rate.
d) understated if the nominal cashflows were discounted by the real discount rate.
e) overstated if the real cashflows are discounted by the real discount rate.
f) None of the above.

14. Excelsior shares are currently selling for $25.00 each. You bought 200 shares one year ago
at $24 and received dividend payments of $1.50 per share. What was your percentage
capital gain (to two decimal places) this year?
a) 10.42%
b) 4.17%
c) 6.25%
d) 110.42%
e) 104.67%
f) None of the above.

Page 3 of 15

15. Capital market history shows us that the average return relationship between securities
from lowest to highest return is
a) lowest return is inflation, then corporate bonds, Treasuries, small company stocks, to
highest return all common stocks.
b) lowest return is Treasury bills, inflation, small company stocks, highest return all
common stocks.
c) lowest return is Treasury bills, corporate bonds, government bonds, all common
stocks, highest small company stocks.
d) lowest return is Treasury bills, government bonds, corporate bonds, all common
stocks, highest small company stocks.
e) There is no ordering.

16. Which of the following statements is most correct? (Assume that the risk-free rate remains
constant.)
a) If the market risk premium increases by 1 percentage point, then the required return
on all stocks will rise by 1 percentage point.
b) If the market risk premium increases by 1 percentage point, then the required return
will increase for stocks that have a beta greater than 1.0, but it will decrease for
stocks that have a beta less than 1.0.
c) If the market risk premium increases by 1 percentage point, then the required
return will increase by 1 percentage point for a stock that has a beta equal to
1.0.
d) Statements a and c are correct.
e) None of the statements above is correct.

17. Currently, the risk-free rate is 5 percent and the market risk premium is 6 percent. You
have your money invested in three assets: an index fund that has a beta of 1.0, a risk-free
security that has a beta of 0, and an international fund that has a beta of 1.5. You want to
have 20 percent of your portfolio invested in the risk-free asset, and you want your overall
portfolio to have an expected return of 11 percent. What portion of your overall portfolio
should you invest in the international fund?
a) 0%
b) 40%
c) 50%
d) 60%
e) 80%

18. If the projects IRR plots above the security market line the project should be
a) accepted because it is overvalued.
b) accepted because it is undervalued.
c) rejected because it is overvalued.
d) rejected because it is undervalued.
e) none of the above.

19. The NuPress Valet Co. has an improved version of its hotel stand. The investment cost is
expected to be 72 million dollars and will return 13.50 million dollars each year for 5 years
in net cash flows. The ratio of debt to equity is 1 to 1. The cost of equity is 13%, the cost
of debt is 9%, and the tax rate is 34%. What is the NPV of the project?
a) -$4,500,000
b) -$19,489,708
c) -$20,123,870
d) -$24,517,378
e) none of the above

Page 4 of 15

20. Assume that markets are semi-strong-form efficient, but not strong-form efficient. Which
of the following statements is most correct?
a) Each common stock has an expected return equal to that of the overall market.
b) Bonds and stocks have the same expected return.
c) Investors can expect to earn returns above those predicted by the SML if they have
access to public information.
d) Investors may be able to earn returns above those predicted by the SML if they
have access to information that has not been publicly revealed.
e) Statements b and c are correct.

21. A lawyer works for a firm that advises corporate firms planning to sue other corporations
for antitrust damages. He finds that he can "beat the market" by short-selling the stock of
the firm that will be sued. This finding is a violation of the
a) moderate form of the efficient market hypothesis.
b) semi-strong form of the efficient market hypothesis.
c) strong form of the efficient market hypothesis.
d) weak form of the efficient market hypothesis.
e) none of the above.

22. A corporation has 2,000 shares outstanding and 6 directors are up for election. The stock
features cumulative voting. About how many shares do you have to own to guarantee
electing at least yourself to one position on the board of directors (ignoring possible ties)?
a) 1,000
b) 333
c) 286
d) 1,715
e) 343

23. Assume the corporate tax rate is 50%. A firm has perpetual expected EBIT of $100. The
firm has no debt in its capital structure. Its cost of equity is 10%. What would be the
value of the firm if it issued $400 in perpetual debt?
a) $700
b) $800
c) $900
d) More information is needed to answer the question.
e) None of the above.

24. Given the following information, leverage will add how much value to the un-levered firm
per dollar of debt (assume the debt is perpetual)?

Corporate tax rate 34%
Personal tax rate on income from bonds 20%
Personal tax rate on income from stocks 0%


a) $0.825
b) $0.528
c) $0.175
d) $0.472
e) None of the above

Page 5 of 15

25. Under the _____ method, the underwriter buys the securities for less than the offering price
and accepts the risk of not selling the issue; while under the _____ method, the underwriter
does not purchase the shares but merely acts as an agent.
a) best efforts; firm commitment
b) firm commitment; best efforts
c) general cash offer; best efforts
d) competitive offer; negotiated offer
e) seasoned; unseasoned

26. The winner's curse is used to describe
a) the payoff you receive on lottery tickets.
b) getting a full allocation of undesirable IPO shares.
c) acquiring all under-priced IPO issues.
d) a fully underwritten issue.
e) none of the above.

27. Even though many bonds have deferred sinking funds, the sinking fund has the following
effects on bondholders:
a) It provides extra protection to bondholders as both an early warning system and
perhaps some collateral cash.
b) It provides an option to the firm to buy bonds at the lower of market or face value.
c) It puts the bondholders at added risk due to potential inability to meet sinking fund
payments.
d) a and b are correct.
e) b and c are correct.

28. Futures, forward, and option contracts are all similar in that
a) both parties to the contract (person who is long and person who is short) have an
obligation.
b) all the parties who are sellers (or are short) have an obligation.
c) only the party who is the buyer (or is long) has an obligation.
d) there is daily marking-to-market and the contract is rewritten at a new price.
e) b and d
f) none of the above

29. A futures contract is similar to a financial option in that
a) they both are very risky and serve no purpose other than to gamble on price changes.
b) they both can be used to speculate on price changes but they both can also be used,
in combination with other assets, to reduce the overall risk caused by price changes.
c) they both require the buyer to pay the seller the price (futures price or option price)
when they enter into the initial transaction.
d) they are derivative securities, i.e., their prices depend on the value of some other
asset.
e) a, c, and d
f) a and d
g) b, c, and d
h) b and d


Page 6 of 15

30. Which of the following statements is true for American options?
a) For calls, but not puts, an increase in the risk-free interest rate will cause an increase
in the option price.
b) For puts, but not calls, an increase in the risk-free interest rate will cause an increase
in the option price.
c) For calls, but not puts, a decrease in the exercise price will cause an increase in the
option price.
d) For both calls and puts a decrease in the exercise price will cause an increase in the
option price.
e) For puts, but not calls, a decrease in the exercise price will cause an increase in the
option price.
f) a and c
g) a and d
h) b and c
i) b and d
j) d and f

31. Tele-Tech.Com has announced a large loss in their on-line services division causing the
stock price to drop and the volatility (total risk) of the stock to rise. Which of the following
correctly identifies the probable impact of these changes on the value of a call option on
Tele-Tech.Com stock?
a) Both changes cause the price of the call option to decrease.
b) Both changes cause the price of the call option to increase.
c) The volatility change will normally cause the price of the call option to decrease,
while the lower price of the stock will normally cause the price of the call option to
increase.
d) The volatility change will normally cause the price of the call option to increase,
while the lower price of the stock will normally cause the price of the call option
to decrease.
e) Volatility has no direct effect on the price of the call option while the lower price of
the stock will cause the price of the call option to decrease.




The Long Answer section continues on the next page

Page 7 of 15
II. Long Answer Section: (45 marks)

Answer each question in the spaces provided. Show all relevant work (i.e., formulas and
substitutions). Do NOT indicate which buttons were pushed on your calculator. Do not
round any intermediate calculations. Final dollar answers should be rounded to two
decimal places. Final interest rate answers should be rounded to 4 decimal places if stated
as a percentage (12.3456%), or 6 decimal places if expressed as a decimal (0.123456) unless
otherwise specified. Other final answers may be rounded to 6 decimal places, unless
otherwise specified.

QUESTION ONE (8 marks)

a) The following data have been provided for two securities:

Security Expected Return Standard Deviation
1 0.34 0.38
2 0.13 0.17

A portfolio of security #1 and security #2 is being considered. It is has been calculated
that
12
= 0.15. Calculate the standard deviation of a portfolio composed of 30% security
1 and the remainder in security 2. (2 marks)


15194473 . 0
0230872 . 0
) 17 . 0 )( 38 . 0 )( 15 . 0 )( 7 . 0 )( 3 . 0 ( 2 ) 17 . 0 ( ) 7 . 0 ( ) 38 . 0 ( ) 3 . 0 (
X X 2 X X
p
2 2 2 2
2 1 2 , 1 2 1
2
2
2
2
2
1
2
1
2
p
= o
=
+ + =
o o + o + o = o

b) The following data have been provided for two securities:

Security Expected Return Standard Deviation
1 0.30 0.26
2 0.12 0.14

Assume 12 = 1.00. Calculate the portfolio weights for a portfolio of both securities that
will result in a minimum variance portfolio and indicate clearly what the variance of that
portfolio is. (2 marks)

0
% 35 35 . 0 X
% 65 65 . 0 X
14 . 0 26 . 0
26 . 0
X
X
2
p
2
1
1
2 1
2
1
= o
= =
= =
+
=
o + o
o
=

) 5 . 0 (
) 5 . 0 (
) 5 . 0 (
) 5 . 0 (
mark
mark
mark
mark




Page 8 of 15

c) Given the following data:

Security Expected Return
i

Market portfolio 0.25 0.30
T-bills 0.05 ?
Security X 0.19 0.20


Determine the covariance of security X with the market. (3 marks)

063 . 0
3 . 0
7 . 0
7 . 0
) 05 . 0 25 . 0 ( 05 . 0 19 . 0
) R R ( R R
M , x
2
M , x
2
M
M , x
x
x
x
f M x f x
= o
o
=
o
o
= |
= |
| + =
| + =


What is the standard deviation of the T-bills (0.5 mark)





What is the beta of the T-bills (0.5 mark)

Page 9 of 15

QUESTION TWO (17 marks)

Part I

Assume that the M&M model holds and that CAPM is true. Company A is subject to a
corporate tax rate of 40%. Now it is 100% equity financed and its firm value is $100,000. The
risk-free rate is 5%. The market risk premium is 6%. Consider the following independent
scenarios:

a) Company A has an investment opportunity costing $5,000 with perpetual earnings before
interest and taxes (EBIT) of $1,875. If the un-levered cost of equity for Company A is 15%
and it the investment were financed by new equity, S, then what is the value of Company A
after investing? (2 marks)

500 , 2 $
15 .
) 40 . 1 ( 1875 $
000 , 5 $ NPV =

+ =


500 , 107 $ 000 , 5 $ 500 , 2 $ 000 , 100 $ Vu = + + =


b) If Company A in part (a) chose instead to finance the new project with debt, then what would
be the value of Company A after investing? (2 marks)

500 , 109 $ ) 000 , 5 ($ 40 . 500 , 107 $ = + =
+ =
L
L
V
B Tc Vu V
[Note continuing error problem]






c) Suppose Company A does not take on the investment opportunity presented in part a). What
will be the firm value and equity value if Company A borrows $50,000 of debt to replace
some equity? (2 marks)

000 , 70 $ S
000 , 50 000 , 120 $ S
B V S
000 , 120 $ V
) 000 , 50 ($ 40 . 000 , 100 $ V
TcB Vu V
L
L
L
L
=
=
=
=
+ =
+ =








Page 10 of 15

d) If the un-levered cost of equity for Company A is 15% and the debt cost is constant at 6.5%,
what will be Company As expected return on equity, its equity beta, and its WACC if it has
a debt/equity ratio of 1.0 exactly? (3 marks)

2010 . r
) 40 . 1 )( 065 . 15 (. 1 15 . r
) T 1 )( r r (
S
B
r r
1
S
B
065 . r
15 . r
s
s
c b o o s
b
o
=
+ =
+ =
=
=
=



66 51 . 2
) 06 (. 05 . 2010 .
s
s
= |
| + =



Or
66 51 . 2
) 40 . 1 )( 25 . 66 . 1 ( 1 66 . 1
S
s
s
= |
+ = |
) Tc 1 )( (
B
D o o s
| | + | = |

25 .
) 06 (. 05 . 065 .
and
66 . 1
) 06 (. 05 . 15 .
CAPM by where
D
D
o
o
= |
| + =
= |
| + =



12 . WACC
1005 . 0195 . WACC
2010 .
1 1
1
) 40 . 1 ( 065 .
1 1
1
WACC
=
+ =

+
+
+
=


e) Again, suppose that Company A does not take the investment opportunity presented in part
a). Assume that the Miller Model with corporate and personal taxes holds. Investors are
taxed at a rate of 20% on equity income and 45% on debt income. Assume that Company A
has experienced enough tax losses that it will not have to report a positive corporate income
for the foreseeable future. What will be the firm value and equity value if Company A issues
$50,000 of debt to replace some equity? (2 marks)
( )( )
( )
( )( )
( )
( )( )
( )
72 . 272 , 77 V
45 . 1
20 . 1 0 1
1 000 , 50 $ 000 , 100 $ V
45 . 1
20 . 1 0 1
1 000 , 50 $ 000 , 100 $ V
T 1
T 1 Tc 1
1 B Vu V
L
L
L
PD
PE
L
+ =
(

+ =
(

+ =
(

+ =







f) Assume the conditions of part e) hold. Suppose that the un-levered capital structure of
Company A allows management shirking and perquisite consumption to occur, and includes
Page 11 of 15

( )(
( )
)
(

+ =
PD
PE
L
T 1
T 1 Tc 1
1 B Vu V +Shirking and perq saved PV Fin Distress costs

( )( )
( )
63 . 363 , 112 $
000 , 10 $ 000 , 16 $ 63 . 363 , 6 $ 000 , 100 $
000 , 10 $ 000 , 16 $
45 . 1
20 . 1 40 . 1
1 000 , 50 $ 000 , 100 $
=
+ + =
+
(

+ =
L
L
L
V
V
V
63 . 363 , 62 $
000 , 50 $ 63 . 363 , 112 $
=
=
=
s
s
L s
V
V
B V V


g) Again, suppose that Company A does not take the investment opportunity presented in part
a). Assume that the Miller Model with corporate and personal taxes holds. Investors are
taxed at a rate of 25% on equity income and 25% on debt income. Company As effective
corporate tax rate is 40%. It is assumed there are no shirking and perquisite consumption
costs.

i. If the present value of the costs of financial distress are equal to [($100,000-
B)($60,000-B)] find the optimal amount of debt that Company A should have in
its capital structure. Verify that you have found a maximum firm value and not a
minimum firm value. (3 marks)

Take derivative of firm value with respect to B and solve for B; optimal
debt is $79,999.80

Verify that this is actually a minimum firm value, as second derivative is >0

Restate that the true optimal amount of debt in this case is zero.


ii. Ignoring costs of financial distress, what conditions must hold to make investors
indifferent towards debt versus equity financing? (1 mark)

) 1 ( ) 1 )( 1 (
PD PE c
T T T =
Page 12 of 15

QUESTION THREE (10 marks)
Company B has shares currently trading. Calls and puts on Company Bs shares also exist.

a) Draw the payoff diagram for the writer of a call option (on 1 share of Company B) that is
about to expire. The exercise price is $10. Label the diagram carefully. Indicate on your
diagram the exact payoff when the price per share is $16. (3 marks)

Insert drawing here with the following

Labels: payoff at time t; Stock at time t (1 mark)
Hockey stick shape; downward bend (1 mark)
Clearly label the payoff of -$6 upon exercise (1 mark)








b) Draw the payoff diagram for being short one share of Company B. Label the diagram
carefully. Indicate on your diagram the exact payoff when the price per share is $20. (2
marks)

Insert drawing here with the following

45 degree line with negative slope from origin (1 mark)
Clearly label the payoff of -$20 upon exercise (1 mark)




c) Suppose Company As stock is currently selling for $101, and a call option with a
premium of $10 has an exercise price of $100 and one year until expiration. What is the
value of a put option with the same exercise price and expiration date? Assume options
are European and the risk-free rate is 8% (effective per year). (2 marks)

5926 . 1 $ V
101 $ 10 $
08 . 1
100 $
V
V V ] E [ PV V
put
put
stock call put
=
+
+
=
+ =



d) One can view corporate securities (stocks and bonds) as having characteristics of options.
In particular, the value of a companys shares can be viewed in terms of a call option. In
this context, circle the correct choice:
i. the underlying assets on the call option are the
(firms assets, or the firms shares), (1 mark) (circle one)

ii. the strike price of the call option is
(the PV of the firms debt, or the promised payment to debt holders), (1 mark)
(circle one)

iii. and the current owners of the firms assets are the
(shareholders, or bondholders). (1 mark) (circle one)


QUESTION FOUR (10 marks)

Page 13 of 15
You are the manager of the MegaFoods flourmill. You need 1000 tonnes of wheat in three
months time to fulfill existing orders, but you have no room to store the wheat at the current
time. Since you have already agreed upon a selling price of flour to your customers, you are
concerned about potential changes in your input costs of wheat. The current spot price for wheat
is $127.50 per tonne. Three-month futures contracts on wheat have a current price of $130 per
tonne (assume each futures contract is for one tonne of wheat). Margin requirements are as
follows:

Initial Margin: 10% of total value of the underlying position
Maintenance Margin: 5% of total value of the underlying position (marked-to-market daily)

a) What strategy should you adopt to hedge your risk (briefly describe strategy (i.e. long or
short)? (1 mark)

Long futures contract

b) Given the amount of wheat you want to hedge, what is the total amount you have to
deposit into your margin account at time 0 (beginning of day 1) to establish your hedge
position? (1 mark)

Initial position value: $130*1000 = $130,000 (0.5 mark)
Initial margin: $130,000 * 10% = $13,000 (0.5 mark)




c) At the end of Day 1, the futures price has changed to $120 per ton (closing price on day 1
is $120). Based on the end of day marking to market, by how much will the value of your
margin account change (state the closing balance)? (1.5 marks)

Marking to Market: ($120 - $130)*1000 = - $10,000 (1 mark)

Closing balance = 13000 -10000 = $3000 (0.5 points)



d) Based on the information from part b and c, will you be subject to a margin call (explain
why) and, if so, how much money will you have to deposit into your margin account?
(2.5 marks)

Maintenance margin requirement: $120*1000*5% = $6,000 (0.5 mark)
Margin call will be triggered because $3,000 < $6,000 (0.5 mark)
Have to bring the balance to $120*1000*10% = $12,000 (1 mark)
So have to deposit $12,000 - $3,000 = $9,000 (0.5 mark)


e) At the end of Day 2, the futures price has changed to $125 per ton.
What is your new closing balance (1.5 marks)

Marking to Market: ($125 - $120)*1000 = $5,000 (0.5 mark)
Closing balance = 12000+5000 = 17000 (1 mark)


Page 14 of 15
Page 15 of 15

f) Suppose there are no further changes to the futures price (at the expiry of your futures
contract the spot price is $125 per ton).Suppose at day 91 you offset your position in the
futures contract when the closing price was $125 per ton and purchase the wheat from the
spot market at $125 per ton. Show that hedging worked for you. (2.5 marks)


Net cash Position from futures

Day Cash Flow
0 - 13,000
1 -9,000
2 17,000
Net - 5,000 (1 mark)

Spot Market
Cash out flow of $125 *1,000 = $125000 for 1,000 tonnes (0.5 mark)

Total cash out Flow is $125,000+$5000 = $130,000 for 1,000 tons or $130 per ton. (1
mark)