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

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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
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This note was uploaded on 05/07/2010 for the course BUS 312 taught by Professor Alan during the Summer '03 term at Simon Fraser.

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

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