2018

Assignment 1
Problem # 1:

Canadian Tire Corporation

Abridged Statement of Financial Position as of January 2, 2016 and December 31, 2016
($ millions)

Assets Liabilities and Owner's Equity

2016 2015 2016 2015

Current assets Current liabilities

Cash and Short Term Investments 946.9 996.7 Accounts payable 1,856.9 1,957.1

Accounts receivable 5,829.2 5,790.5 Other Current Liabilities 2,824.0 1,926.7

Inventory 1,710.7 1,764.5 Total 4,680.9 3,883.8

Other Current Assets 150.9 140.6

Total 8,637.7 8,692.3 Long Term Liabilities 4,884.6 5,314.3

Fixed assets Owner's equity

Tangible Fixed Assets 4,097.2 3,978.2 Common stock and

Other Fixed Assets 2,567.9 2,317.3 paid-in surplus 1,486.4 1,617.7

Total 6,665.1 6,295.5 Retained earnings 4,250.9 4,172

Total 5,737.3 5,789.7

Total liabilities and

Total assets 15,302.8 14,987.8 owner's equity 15,302.8 14,987.8

Canadian Tire Corporation

2016 Abridged Statement of Comprehensive Income
($ millions)

Sales and Other Income 12,681.0

Cost of goods sold 8,288.5

Other Selling, General and Admin Expenses 2,845.6

Depreciation and Other Non-cash items 442.0

Earnings before interest and taxes 1,104.9

Interest / Finance costs 93.9

Taxable income 1,011

Taxes 263.5

Net income 747.5

Dividends 668.6

Addition to retained earnings 78.9

1
a. What is the operating cash flow for the Current Year?
OCF = EBIT + Dep’n – Taxes = 1,104.9 + 442 - 263.5 = 1,283.4
b. What is the amount of the net capital spending for the Current Year?
NCS = Ending FA – Beginning FA + Dep’n = 6,665.1 – 6,295.5 + 442 = 811.6
c. What is the change in the net working capital from the Previous Year to the
Current Year?
Change NWC = Ending NWC – Beginning NWC = (8,637.7 – 4,680.9) – (8,692.3 –
3,883.8) = 3,956.8 – 4,808.5 = -851.7
d. What is the cash flow from assets for the Current Year?
CFFA = OCF – NCS – Change NWC = 1,283.4 – 811.6 – (-851.7) = 1,323.5
e. What is the cash flow to creditors for the Current Year?
CF to Creditors = Interest Paid – Net new borrowings = 93.9 – (4,884.6 – 5,314.3) =
523.6
f. What is the cash flow to stockholders for the Current Year?
CF to Stockholders = Dividends paid – Net new equity raised = 668.6 – (1,486.4 –
1,617.7) = 799.9
g. What is Canadian Tire Corporation’s tax rate?
Tax rate = 263.5/1,011 = 26.06%
h. In no more than 3 sentences, what are your thoughts on Canadian Tire
Corporation’s changes in net working capital?
The negative change in NWC means that Canadian Tire ending NWC was lower than the
beginning NWC. Since current assets remained largely the same between 2015 & 2016
the increase in current liabilities is the main reason for the decrease.

2
Problem # 2:

Capital Asset 550,000

Asset Life 6
Salvage Value (pre-tax) 40,000
Tax Rate 34%
Initial NWC 25,000
Yearly NWC % 5% of annual sales
Rate of Return 9%
Fixed Cost 50,000 per year

Year 0 1 2 3 4 5 6
Sales Volume 10,000 12,500 15,750 20,000 25,250 30,500
Price 30 30 30 25 25 25
VC per unit 18 18 18 15 15 15
Revenue (sales volume*price) 300000 375000 472500 500000 631250 762500
VC (sales volume*VC per unit) 180000 225000 283500 300000 378750 457500

Depreciation 550,000/6
Yr 0 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6
Investment -590,000
Revenue 300,000 375,000 472,500 500,000 631,250 762,500
VC 180,000 225,000 283,500 300,000 378,750 457,500
FC 50,000 50,000 50,000 50,000 50,000 50,000
Depreciation 91,666.67 91,666.67 91,666.67 91,666.67 91,666.67 91,666.67
EBIT (21,666.67) 8,333.33 47,333.33 58,333.33 110,833.33 163,333.33
Taxes (7,366.67) 2,833.33 16,093.33 19,833.33 37,683.33 55,533.33
EBIT (1-T) (14,300.00) 5,500.00 31,240.00 38,500.00 73,150.00 107,800.00
Depreciation 91,666.67 91,666.67 91,666.67 91,666.67 91,666.67 91,666.67
OCF 77,366.67 97,166.67 122,906.67 130,166.67 164,816.67 199,466.67
Change in NWC -25,000 (3,750) (4,875) (1,375) (6,563) (6,563) (48,125)
Total CF 73,616.67 92,291.67 121,531.67 123,604.17 158,254.17 247,591.67

NPV = -590,000+((73,616.67/(1.09)+((92,291.67/(1.09)^2)+((121,531.67/(1.09)^3)+((123,604.17/(1.09)^4)+((158,254.17/(1.09)^5)+((247,591.67/(1.09)^6)
NPV = 686,139

a) Additions to NWC during year 1 3,750

b) OCF during year 4 130,166.67

c) NPV of the project 686,139

3
Problem # 3:
a) What is the depreciation tax shield in the third year of this project
Beg UCC CCA 30% End UCC
Yr 1 (Half-year rule (300,000/2) 150,000 45,000 105,000
Yr 2 255,000 76,500 178,500
Yr 3 178,500 53,550 124,950

Depreciation Tax Shield (53,550*0.4) = 21,420

b) What is the present value of the CCA tax shield?

Salvage Value = (300,000*0.2) = 60,000

PVCCATS = (IdTc)/(d+k)*(1+0.5k)/(1+k) - SndTc/(d+k)*1/(1+k)^n =

(300,000*0.3*0.4)/(0.3+0.15)*((1+0.5(0.15)/(1+0.15)) - (60,000*0.3*0.4)/(0.3+0.15)*1/(1+0.15)^5 = 66,773.78

c) What is the minimum price that your company should bid per single flag?
Year 0 1 2 3 4 5
Initial Cost -300,000
Initial NWC -50,000
Recovery of NWC 50,000

Annual CF
Sales 150,000P 150,000P 150,000P 150,000P 150,000P
VC (8*150,000) 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000
FC 100,000 100,000 100,000 100,000 100,000
Total Cost 1,300,000 1,300,000 1,300,000 1,300,000 1,300,000
Salvage value 60,000
NWC Recovered 50,000
Calculations:
PV of Initial Cost -300,000
PV of Initial NWC -50,000
PV of Annual CF (150,000P -1,300,000) * (1-0.4) * 3.352 (150,000P-1,300,000)*(1-0.4)*((1-(1/((1.15)^5))/0.15)
PV of Salvage Value 29,830.60 ((60,000/(1.15)^5))
PV of NWC Recovered 24,858.84 ((50,000/(1015)^5))
PVCCATS 66,773.78 calculation the same as in b)
NPV 0

Solve for P -300,000 - 50,000 + (150,000P - 1,300,000) * (1-0.4)*3.352 + 29,830.60 + 24,858.84 + 66,773.78 = 0
(150,000P - 1,300,000)*2.0112 = 300,000 + 50,000 - 29,830.60 - 24,858.84 - 66,773.78
(150,000P - 1,300,000) = (228,536.78/2.0112)
150,000P = 113,632.05 + 1,300,000
P=9.42

d) NPV when price $9.50

Calculations
PV of Annual CF 251,400 (150,000*9.5-1,300,000)*(1-0.4)*((1-(1/((1.15)^5))/0.15)
PV of Initial Cost -300,000
PV of Initial NWC -50,000
PV of Salvage 29,830.60
PV of NWC Recovered 24,858.84
PVCCATS 66,773.78

NPV 22,863.22

4
Problem # 4:

System A System B
Initial Cost 8,500 Initial Cost 9,200
Expected Life 3 yrs Expected Life 4 yrs
Pre-tax operating cost 550 Pre-tax operating cost 525
Salvage Value 900 Salvage Value 975

CCA rate 30%

Tax rate 35%
Rate of return 15%

EAC System A System B

After-tax operating cost 550*(1-0.35) 357.5 525*(1-0.35) 341.25
PVIFA ((1-(1/((1+0.15)^3)))/0.15) 2.283 ((1-(1/((1+0.15)^4)))/0.15) 2.855
PV of operating cost (357.5*2.283) 816.244 (341.25*2.855) 974.269
PVCCATS calc below 1,715.90 calc below 1,876.60
Initial Cost -8,500 -9,200
Salvage Value 900/((1+0.15)^3) 591.76 975/((1+0.15)^4) 557.46
NPV (1,715.90-816.244-8,500+591.76) -7,008.58 (1,876.60-974.296-9,200+557.46) -7,740.21
EAC (7,008.59)/2.2832 -3,069.63 (7,740.21)/2.855 -2,711.10

PVCCATS System A (8,500*30%*35%)/(30%+15%)*((1+0.5(15%)/1.15) - (900*30%*35%)/(30%+15%)*(1/(1.15)^3)

1715.90
PVCCATS System B (9,200*30%*35%)/(30%+15%)*((1+0.5(15%)/1.15) - (975*30%*35%)/(30%+15%)*(1/(1.15)^4)
1876.60

NPV for System A -7,008.58

NPV for System B -7,740.21
System B has a lower EAC, therefore Learning Corp. should buy System B

Problem # 5:

Lower Base Upper

Quantity 90%*15,000 15,000 110%*15,000

SP 95%*30 30 105%*30

VC 97%*20 20 103%*20

FC 99%*45,000 45,000 101%*45,000

a) What is the base-case operating cash flow?

OCFbase = [(P-v)-FC] *(1-tc) + tcD
OCFbase = [(30-20) *15,000 – 45,000] (1-0.34) + (100,000/2)*0.34 = 86,300

5
b) What is the base case NPV for the project?
NPVbase = -100,000+86,300*((1-(1/((1+0.12)^2)/0.12) = 45,851.40
c) What is the worst case NPV for the project?
OCFworst = [(28.5-20.6)*13,500 – 45,450)](1-0.34) + (100,000/2)*0.34 = 57,392
NPVworst = -100,000+57,392*((1-(1/(1+0.12)^2)/0.12) = 3,004.59
d) What is the best case NPV for the project?
OCFbest = [(31.5-19.4)*16,500 – 45,450](1-0.34) + (100,00/2)*0.34 = 118,772
NPVbest = -100,000+118,772*((1-(1/(1+0.12)^2)/0.12) = 100,730.74
e) Suppose you want to conduct a sensitivity analysis for the possible changes in unit
sales. What is the IRR when the sales level equals 13,500 units?
OCFunit = [(30-20)*13,500 – 45,000](1-0.34) + (100,000/2)*0.34 = 76,400
Excel IRR formula
Year Cash Flows
0 -100,000
1 76,400
2 76,400
IRR 33.59%
f) Suppose you are interested in the project's sensitivity to unit price. What is the NPV
at a price of $29.00 per unit?
OCFprice = [(29-20)*15,000 – 45,000](1-0.34) + (100,000/2)*0.34 = 76,400
NPVprice = -100,000+76,400*((1-(1/(1+0.12)^2) = 29,119.90
g) What is the base case accounting break-even point?
Qa = (FC + D)/ (P-v)
Qa = (45,000 + 50,000)/(30-20) = 9,500
h) What is the base case cash break-even point?
Qc = FC/(p-v)
Qc = 45,000/(30-20) = 4,500
i) What is the base case financial break-even point? Ignore taxes
Qf = (FC + OCF*)/(P-v)
NPV = 0 implies 100,000 = OCF*(PVIFA 12%,2)
OCF* = 100,000*((1-(1/(1+0.12)^2)/0.12 = 59,169.81
Qf = 45,000+59,169.81/(30-20) = 10,416.98
j) What is the degree of operating leverage under the base-case scenario?
DOL = 1+FC/OCF
DOL = 1+(45,000/86,300) = 1.52

6
Problem # 6:

a) What is the before-tax cost of debt?

N=12*2=24
FV = 1000
PV= -970
PMT = 40
CMP i=4.2*2=8.4%
b) What is the cost of preferred shares?
Cost of Preferred 100*0.09/99 = 0.0909 = 9.09%
c) What is the firm's cost of equity using both the dividend growth model and the
security market line?
DDM ((7*(1+0.05)/62) + 0.05 = 16.85%
SML 0.06 + (1.35*0.08) = 16.8%
d) What is the firm's weighted average cost of capital (WACC)? The cost of equity to
use for the WACC should be based on the security market line approach.
After tax cost of debt 0.084(1-0.35) = 5.46%

E = 125,000(62) = 7,750,000
D = 5,500,000(97) = 5,335,000
P = 16,380(99) = 1,621,620

V = 7,750,000 + 5,335,000 + 1,621,620 = 14,706,620

WACC = ((7,750,000/14,706,620)*(0.168)) + ((5,335,000/14,706,620)*(0.0546)) +

+ ((1,621,620/14,706,620)*(0.071) = (0.0885 + 0.0198 + 0.0078) *0.65 = 7.55%

Problem # 7:

a) What is Tom Hortons' weighted average cost of capital?

WACC = (E/V*Re) + (D/V*Rd)*(1-Tc)
D/E = 0.4 E=1 V=1.4
WACC = (1/1.4*0.13) + (0.4/1.4*0.08) * (1-0.34) = 7.62%
b) Ignoring flotation costs, what is the NPV of the proposed project?
NPV = -2,000,000 * (210,000/0.0762) = 755,905.5
c) What is the weighted average flotation cost for Tom Hortons?
Fa = (E/V*fg) + (D/V*fo) = (1/1.04*0.08) + (0.4/1.4*0.02) = 6.2%
d) What is the dollar flotation cost for the proposed financing?
True Cost = (2,000,000/(1-0.062) = 2,132,196
e) After considering flotation costs, what is the NPV of the proposed project?
NPV = -2,132,196 + (210,000/0.0762) = 623,706
7