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2 short questions, one regarding interest rates and anther regarding the time value of money there are 3 questions on the document, just need 1 and 2 answered please
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BUS/ECON-2819-002 – Corporate Finance I
Assignment 1
Due: Tuesday, Jan. 30th
Please submit your completed assignment on Nexus (or a handwritten portion for Q1 b and
c, Q2 and Q3 in class). Click on Assessments, then Assignments, and upload your file(s) to
the Assignment 1 submission folder. Please submit a separate Excel file for Q1a, and a Word
or PDF document for Q2 and Q3.
Please show your work (i.e. If solution requires a formula, show substituted numbers and
solution). Total /30
1. Go to https://money.tmx.com/en
This is the website for the Toronto Stock Exchange. Look up the stock market quote for Parkland
Corporation (enter “PKI” or “Parkland” in the search box, then click on it when it appears).
Click on the Financials & Filings tab. This will bring up the most recent Income Statement. You
can also access the cash flow statement and balance sheet by clicking the appropriate links.
Download all of the financial statements as a .csv file which you can open in Excel and then copy
and paste them into the same file in Excel (make sure you save this as an Excel file).
a) Calculate all of the ratios from the Chapter 2 slides for all years from 2019 to 2022 and present
your results in table format. Complete all calculations in Excel. Assume their tax rate is 25%. 10
marks
Note that some of the ratios require the share price, which is available by clicking the Overview
tab. You can find the share price on the required date (eg. End of December, 2019) by changing
the time period on the chart to 5Y, scrolling to find the date closest (and prior) to December 31
2019. Several prices will be displayed: Open (O), High (H), Low (L) and Close (C). Use the close
price. Rather than searching for the shares outstanding on previous dates, you may use the current
shares outstanding for every year, which can be found in the statistics just below the chart, under
“Listed Shares Out”.
Note that some of the terminology is different than what we use in the course. Please use the
following:
For the cash ratio, please use “cash and cash equivalents”, instead of “cash”.
For Total Debt, calculate Total Debt = Current Debt + Long Term Debt
For Owner’s Equity and Book Value of Equity, the corresponding item is “Stockholders’ Equity”
For Interest Expense, the corresponding item is “Interest Expense Non Operating”
Important: when calculating any ratios involving market cap, note that the units on the financial
statements are in millions, but calculating market cap involves multiplying the share price by the
number of shares outstanding, which will give you an answer in dollars, not millions of dollars.
You must adjust it to the same units as the financial statements.
b) Explain whether you think Parkland’s financial health is improving or worsening, based on the
changes to its ratios from 2019-2022. As part of your answer, summarize the trend of each set of
ratios and explain what it means (eg. The liquidity ratios are increasing/decreasing over the period
and this means…). Note: there is no need to discuss each individual ratio. (6 marks)
c) Examine Parkland’s Statement of Cash Flows from 2019-2022, describe what you believe is
significant, and explain what led to these significant items. Also explain whether you believe
Parkland’s financial health is improving or worsening, based on its cash flow statements. (4 marks)
2) A bond promises a risk-free payment of $1000 in one year. The risk-free rate of interest is
2.64%.
a) What is the price of the bond? (1 mark)
b) If the price of the bond is actually $960, what is the arbitrage strategy? Illustrate all cash flows
today and one year from today. (2 marks)
c) If the price of the bond is actually $990, what is the arbitrage strategy? Illustrate all cash flows
today and one year from today. (2 marks)
Hint: you are able to borrow money from the bank, or deposit money into the bank, at the risk-free
rate of interest. After one year you will pay back your loan plus interest, or receive your savings
plus interest.
3) Assume that there are two possible future states of the economy: weak and strong. Two
securities, A and B, are available for trading. Prices (at t=0) and future payoffs (at t=1) in both
states are given in the following table:
Security
Price ($) at t=0
A
B
55.00
65.00
Payoffs ($)at t=1
Weak state
Strong state
0
200
100
0
Assume that both states are equally likely (50% chance of each). Answer the following
questions.
a. There is another security, call it C, whose payoff at t=1 is equal to $300 in the weak state and
$600 in the strong state. Find the no-arbitrage price (at t=0) of security C. (1 mark)
(parts b and c next page)
b. What is the risk-free rate of return in this economy? (2 marks)
Hint: create a portfolio that is risk-free. A portfolio is risk-free if its cash flow is guaranteed.
c. What is the rate of return for security C? What is its risk premium? (2 marks)
BUS/ECON-2819-002 – Corporate Finance I
Assignment 2
Due: Thursday, Feb. 29th
Please submit your completed assignment in class. Please set your calculator to display 8
decimals and DO NOT round intermediate interest rate calculations. Round final dollar
figures to two decimals. Failure to follow these instructions will result in mark deductions.
Please show your work (if solution requires a formula, show substituted numbers and
solution OR show calculator TVM inputs and final answer). Total /23
1. An interest rate is quoted as 3.75% per year compounded quarterly. (1 mark each)
a) What is the effective quarterly rate?
b) What is the effective annual rate?
c) What is the effective semi-annual rate?
d) What is the rate per year compounded semi-annually?
e) What is the effective weekly rate?
f) What is the effective daily rate?
2. You have just negotiated a 5-year mortgage on $332,100 amortized over 25 years at a rate of
4.99% per year compounded semiannually.
a) What are the monthly payments? (2 marks)
b) What are the principal and interest payments each month for the first two months? (2 marks)
c) What is the outstanding principal at the end of the first 5 years? (1 mark)
d) Assume that at the end of the 5-year contract your remaining outstanding principal is $250,000.
The interest rate on your mortgage is still 4.99% per year compounded semiannually, but you
decide to switch to weekly payments (52 weeks per year). What is the amount of your weekly
payment? (2 marks)
e) Now say your mortgage contract allows you to make a larger weekly payment, and you choose
to pay $400 per week. How many years will it take to pay off the rest of your mortgage? (All other
information is the same as part d). (2 marks)
(Question 3 next page)
3. You have just turned 60 and have decided to retire. You have sufficient retirement savings to get
by without taking Canada Pension Plan (CPP) benefits, but you wish to decide between your
different CPP options. You qualify for the maximum benefit of $1364.60 per month if you start
taking CPP at age 65.
If you start taking CPP benefits before age 65, your pension is reduced by 0.6% of the monthly
payment for every month before age 65 that you receive pension payments. For example, if you
take decide to start taking benefits 2 months before age 65, your monthly benefit is reduced by 2
x 0.6% = 1.2%. So instead of receiving $1364.60 per month, you receive $1364.60 – 1.2% x
1364.60 = $1348.22 per month, starting at age 64 and 10 months.
If you delay taking your CPP benefits until after age 65, your monthly income will increase by
0.7% for each month that you delay, up until age 70. For example, if you decide to start taking
benefits 2 months after age 65, your monthly benefit is increased by 2 x 0.7% = 1.4%. So you will
now receive $1364.60 + 1.4% x 1364.60 = $1383.70.
The current life expectancy for someone of your age and other characteristics is 85. You decide to
plan as if you will die at age 85.
Assume the discount rate is 0.4% per month.
Assume that the first payment will always occur in one month, so that the formula/calculator will
always give you PV at time 0, and you will not have to add additional payments, i.e. 5 years = 60
payments.
a) What is the amount of your monthly CPP payment if you take benefits immediately (at age 60)?
(1 mark)
b) What is the PV of your CPP payments if you take them immediately? (1 mark)
c) What is the PV at age 65 of your CPP payments if you begin taking them at age 65? (1 mark)
d) What is the PV at age 60 of your CPP payments if you begin taking them at age 65? (1 mark)
e) What is the PV at age 70 of your CPP payments if you begin taking them at age 70? (1 mark)
f) What is the PV at age 60 of your CPP payments if you begin taking them at age 70? (1 mark)
g) Out of the above three scenarios, what do you conclude is the best time to start taking your CPP
benefits? Why? (2 marks)
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