ENSC201 Assignment #3 QUIZ Sept 26, 2007   ANSWER KEY (5%)  

Name:___________________________________   ID#_______________________________

1. Yes, I want to be an automatic millionaire (have $1 million in cash or liquid securities) by the time I am 30/40/50 (choose one). I can accomplish this in exactly  ___ years from today by making automatic monthly contributions to my RRSP account (e.g. automatic bank account withdrawals/transfers).  Using a low-risk interest rate of ___% (annual), my monthly contribution would have to be $______.  (Most spreadsheet programs and fancy calculators have built in financial functions that let you calculate this)

ANS: Use the XLS Formula to check this. Example: in 40 years from today, at 8%, my monthly contribution would have to be:
=PMT(8%/12,40*12,0,1000000,1)   NB: MUST USE THE PMT FUNCTION.

Note: annual interest of 8% is divided into 12 monthy payments, the number of payments is the number of years (40 in this example) X 12 months/year.
The 3rd term is the present value or what you are starting with - in this example it is 0. If you already have some money saved, you could get off to a running start.
The 4th term is the amount you want to have at the end of the time period, in this case $1 million.
The 5th term is 1 if payments are made at the beginning of the month; 0 if made at the end of the month.

Scoring: 1 point for the use of the PMT formula and 1 point for using it correctly. Answers obtained using a calculator or manual method are also acceptable.

2. My Burnaby tech company has a US receivable of $1million due in the next month. The profit on this is $100K (i.e. 10%). If the Loonie rises from US$1.00 to US$1.02 between now and when I collect my cheque, what will my profit be?

ANS: Today $1m U$ is equal to $1m in C$.
If the Loonie rises to $1.02 US dollars, I will get only 1m/1.02 = $980,392
i.e. I have "lost" $19,608 which reduced my profit to $80,392 - a reduction of 20%! (1 point)

      Can such a profit reduction be avoided?  How?

ANS: YES. Using a futures contract or a bank forward contract. This is called a "hedge" and it is almost risk-free. You can virtually guarantee that you will NOT suffer an exchange loss. (1 point)

3.a) What's an IPO?

ANS: Initial Public Offering of (a number of) a company's shares to the general public. After this, a company's shares can trade on a stock exchange. (1 point)

       What's an RTO?

ANS: Reverse Take Over - a public company takes over a private company by issuing a big block of shares to the private company's shares but after the takeover, the private company's shareholders control the public company. (1 point)

       What's the opposite to doing an IPO?

ANS: Taking a company private by buying enough shares from the many public shareholders that forces all shareholders to tender the shares to the buyer(s). (1 point)

4. Define Market Cap and give an example of a company's (any existing company) market cap.

ANS: Market Cap is the MARKET VALUE of a company. It is calculated by taking the number of shares X the price per share. (1 point)
or using % is the same thing, e.g. if 5% is worth $100K, then 100% is 20X$100K=$2M.

Example: Plutonic Power Corp (PCC.TO) has 39.6 million shares. Today they closed at $8.34/share. Therefore the market cap is $330 million (1 point)

TOTAL MAXIMUM POSSIBLE SCORE = 9 points (=5%).

updated 27Sep2007 (re Plutonic Calculations)