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COMM 203: Hand-in assignment #3

Professor: Amarjit Gill
Session: Term I 2017/18
Total Points = 40
Due Date: December 7, 2017
Chapters: 12, 13, 14, 19, 20

Please Tick Mark ( ) Section Numbers: 05 (11:00 AM - 12:50 PM) 07 (1 PM - 2:20 PM)

________________________________ ____________________
Name (Last, First) Student Number

Notes: Hard copies of assignments are due at the beginning of class on their due date. Late assignments will not be
accepted and will result in a grade of zero. If you are unable to be in class on the due date, then you must fax, e-mail,
or arrange for a third party to drop off your assignment; (they can be delivered to the undergraduate office if the
instructor is unavailable). Please feel free to turn in your assignments early if you may not be in class on the due date.

Also please note that hand-in assignments are take home exams; therefore, professors are not allowed to involve in
answering any questions.

Chapter 12

1) Explain why it is that in an efficient market, investments have an expected NPV of zero. (4 Points)
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Chapter 12

2) A stock had the following prices and dividends. What is the geometric average return on this stock? Please
show all the calculations by which you came up with the final answer. (5 Points)

Year Price Dividends

1 22.57 -
2 22.90 0.30
3 22.26 0.31
4 24.08 0.33
5 25.09 0.35
6 26.20 0.37
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Chapter 13

3) If the economy booms, Frank's Welding Supply stock is expected to return 19%. If the economy falls into a
recession, the stock's return is projected at 5%. The probability of a boom is 80% while the probability of a
recession is 20%. What is the variance of the returns on this stock? Please show all the calculations by which
you came up with the final answer. (4 Points)

Chapter 13

4) What is the standard deviation of the returns on a stock given the following information? Please show all the
calculations by which you came up with the final answer. (5 Points)
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Chapter 14

Q5) a) Ibrahim and his sons (Ibrahim & Sons) have been operating an excavation company in British Columbia for the
last 15 years. The company has been successful in generating revenue and free cash flows (FCF). The
company is planning to replace five excavators. The supplier will trade in old excavators and will deduct
$150,000 from the total purchase price of new excavators. Each new excavator will cost $100,000.

The corporate tax rate is 30%. The company beta (A) is 0.90, risk free return (Rf) is 1%, and return on the
market portfolio (E(RM) is 8%. Based on the risk, the bank will charge 6% on the commercial loans/chattel
mortgages granted for excavators. The company will use 70% equity financing and 30% debt financing.

Based on the above information, please calculate the WACC. Please show all the calculations by which you
came up with the final answer. (4 Points)

b) Another excavation company called Diamond 15 has 20,000 shares of common stock outstanding with a
market price of $200 per share. It has 2,000 bonds outstanding, each selling for $1,200. The bonds mature in
15 years, have a coupon rate of 7%, and pay coupons annually. The firm's beta is 1.09, the risk free rate is
1%, and the market risk premium is 7%. The tax rate is 34%.

Based on the above information, please calculate the WACC. Please show all the calculations by which you
came up with the final answer. (4 Points)
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c) Based on your analysis and findings (Questions: a & b), which company has higher risk (Ibrahim & Sons or
Diamond 15) and higher cost of capital? Why? How would you define business and financial risk? Where do
business and financial risk come from? Please explain your reasoning. (5 Points)
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Chapter 19
6) Describe the various sources of float discussed in the text. What is the relevance of float and float
management for the typical small firm? (4 Points)

Chapter 20
7) Why might firms forego discounts even though it is costly to do so? What steps might a firm pursue to be able
to take these discounts? (5 Points)