Corporation Finance (9.220)
Name________________
Assignment 1: Due September 17, 2002 at the beginning of class
ID Number (last 5 digits)___________
Professor _____________
Instructions: complete the following questions and place your answers on the lines or in the spaces provided. In the
questions below “your ID” refers to the 5 digits you write on the upper right hand corner of this page. Your
answers should be accurate to 4 decimal places.
1) The value of Unilever’s current assets is $ (50 + last 2 digits of your ID) million while its long-term asset value
is $250 million. If the value of Unilever’s current liabilities is $40 million and the value of its long-term
liabilities is $ (60 + first 2 digits of your ID) million, then the value of its equity is
_________________________.
2) Primus Corp. promises to pay $ (6 + first 2 digits of your ID) million at the end of the year to the Toronto
Dominion Bank in order to extinguish its debt (i.e., pay off its loan).
a) If Primus Corp.’s assets will be worth $ (110 + last 2 digits of your ID) million just before the debt is
repaid, then the payoff to Primus debt holders will be _____________________ and the value left for
Primus equity holders will be ________________________.
b) If Primus Corp.’s assets will be worth $7 million just before the debt is repaid, then the payoff to Primus
debt holders will be _____________________ and the value left for Primus equity holders will be
________________________.
c) If Primus Corp.’s assets will be worth $ (4 + last 2 digits of your ID) million just before the debt is repaid,
then the payoff to Primus debt holders will be _____________________ and the value left for Primus
equity holders will be ________________________.
3) When the Government of Canada issues short-term treasury bills (T-bills) this transaction takes place in the
_________________ __________________ market.
4) When Nova Corporation issues shares of common stock to the public this transaction takes place in the
_____________________ ___________________ market.
5) When Mrs. Clinton phones her broker to sells her shares of IBM, this transaction takes place in the
_______________________ _____________________ market.
For the remaining questions, assume a 2-period world.
6) The market rate of interest is (10 + (1/100) times the first two digits of your ID) %. Sally will have income of
$50,000 now (t = 0) and $30,000 next year (t = 1). She could consume $50,000 now and $30,000 next year,
but she prefers to forgo some consumption now, invest, and consume more next year. For every extra $100 in
consumption that Sally gives up now and invests, how much more consumption can she obtain one year later (t
= 1) than the amount she could obtain at t = 1 without giving up the $100 in consumption at t = 0?
________________________________________
Corporation Finance – 9.220
Page 2 of 2
Assignment 1
7) You currently (t = 0) earn $ (50,000 + 100 times the last 2 digits of your ID) but will be promoted into a
position earning $100,000 next year (t = 1). Based on your income, what is the most that you could consume
this year? Assume the market rate of interest is 15%.
________________________________________
8) Suppose that Fred's consumption opportunities are as follows. He can consume nothing at t = 0 and $100,000
at t = 1, or he can consume $ (80,000 +100 times the last 2 digits of your ID) at t = 0 and nothing at t = 1.
What market rate of interest does this imply?
_______________________________________ %
9) Your earnings are $60,000 at t = 0 and $ (80,000 + 100 times the first 2 digits of your ID) at t = 1. The market
rate of interest is (15 + 1/100 times the last 2 digits of your ID) %. Suppose that your stockbroker, Joe Izuzu,
calls you with the following investment opportunity. If you invest $40,000 in Sure-Thing Oil Exploration, Inc.,
you will receive $45,000 at the end of one year (with certainty). What is the net present value (NPV) of this
investment?
________________________________________
10) Suppose that you decide to make the investment in (9). If you consume $ (50,000 + 100 times the first 2 digits
of your ID) at t = 0, what will your consumption be at t = 1?
________________________________________
11) Suppose that you decide not to make the investment in (9). If you consume $(50,000 + 100 times the first 2
digits of your ID) at t = 0, what will your consumption be at t = 1?
________________________________________
12) Should the investment in (9) be made? (Yes or No)
________________________________________
13) The director of capital budgeting at Nova Corp. has found a one-year project that will have a cash flow of $ (7
+ the last 2 digits of your ID) million in 1 year, and will result in a positive NPV of $500,000. She estimates
the one-year return on this project to be (26 +1/100 times the first 2 digits of your ID) %.
(a) What is the initial investment? _______________________________
(b) What is the market rate of interest?____________________________%