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FIN_982 - Question#1 Because the markets are efficient both...

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Page 1 Question #1 0 Because the markets are efficient, both shares are correctly priced. Both will be priced to give the same expected return seeing they are in the same business sector. Because B has a higher ROE it must have a higher growth rate. Because the shares are the same price B must have lower earnings. Neither share is over or under-valued. The only reason why one would choose a particular share is because the expected cash flow better suits personal requirements. Question #2 Project life (years) 10 10 Investment A 80000 80000 CCA rate (declining balance) 20% 20% Salvage at end 40000 40000 Investment B 50000 50000 Straight line CCA. Salvage at end 0 0 Total TC needed t=0 12000 12000 Total TC needed t=1 18000 18000 Sales year 1 85000 85000 Sales other years 135000 135000 Variable costs % of sales 40% 40% Fixed costs 20000 20000 p.a. Int costs for cash raised 12000 12000 Tax ded. cleanup costs 15000 15000 Tax rate 40% 40% Discount rate 15% 16% CFO excl CCA year 1 18600 18600 CFO excl CCA other years 36600 36600 B CCA TS 2000 2000 PV investment -130000 -130000 PV TC year 0 -12000 -12000 PV TC year 1 -5217.39 -5172.41 PV salvage 9887.39 9067.34 PV cleanup cost -2224.66 -2040.15
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