Final_MGTB09_Winter2009_incl+solutions

# Final_MGTB09_Winter2009_incl+solutions - UNIVERSITY OF...

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2 Question 1 (17%) Gazelle is considering starting a new factory to produce bicycles. The factory would cost \$1,500,000. The expected number of bikes produced and sold is 4000 for the first year, 5000 for the second year and 5500 for the third year. The sales price is \$250 per bike in the first year in nominal terms. This price is expected to grow at 3% per year in real terms. The variable costs per bike are \$120 in the first year, again in nominal terms. These costs are expected to increase at 2.5% per year in real terms. The factory requires temporary additional personnel, which will result in additional labor costs of \$50,000 per year (in nominal terms), which remains constant in real terms. All costs and sales are incurred at the end of each year. Additional net working capital requirements at the beginning of each year are 15% of expected sales for that same year. The market value of the factory after three years is \$1,300,000 in real terms. The asset class is closed upon selling the factory. The CCA rate is 4%, the tax rate is 35%, the expected inflation rate is 2.5% and the opportunity cost of capital is 10% in real terms. Calculate the project’s NPV. Question 2 (10%) Returns for the next period for the stocks of Low Risk Limited (X) and High Risk Inc. (Y) and the TSX Composite Index are given by the following probability distributions: State of the Probability of Rate of Return Economy State Occurring X Y Boom 0.30 5% -15% Normal 0.40 10 10 Recession 0.30 20 50 a. Calculate the expected rate of return for stock X, stock Y, and a portfolio consisting of 60% X and 40% Y. b.
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Final_MGTB09_Winter2009_incl+solutions - UNIVERSITY OF...

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