ENSC201 Assignment #6 Due Nov 7, 2007 (5%)    Name and ID____________________________

Grading: 1 pt per question.

1. What is an "accretive" acquisition?

ANS: The takeover of a company such that the earnings per share of the merged entity have increased. Check the glossary at: http://www.sfu.ca/~mvolker/biz/glossary.htm#A

2. What is subordinated debt?

ANS: Debt (ie loans from lenders) that does not have primary collateral.

3. Hopefully, you have done this already, in which case you can just hand it in. If not, good luck! (yes, you can use your laptop or calculator)
    You want to acquire a nice new Mazda5 that costs $21,385 by leasing or financing it. Which of the following is economically better?
    (Ignore any PST/GST aspects of this, i.e. assume PST/GST=0 (I wish!). These numbers are from an actual newspaper ad from last week.
    1.Lease (4years): downpayment of $2,965, pay $219/month for 4 years. Buy it for $9,550 at end of lease.
    2.Finance (3 years): downpayment of $1,385, pay $572/month for 3 years.

ANS: 1)2.9% 2)1.9%. Therefore 2 is more economical. See spreadsheets calcs at: www.sfu.ca/~mvolker/ensc201/assign6.xls

4. You are considering some investments for your RRSP. You offered returns of 6% (low risk), 12% (medium risk), and 18% (high risk).
     At these rates, approximately how long will it take for you to double your money? 

ANS: 6% = 12 years; 12% = 6 years; 18% = 4 years (using the "rule of 72" approximation)

5. Suppose that, as an angel investor, I invest $100K in your startup company. As an angel I expect a 10-fold return in 5 to 10 years for taking
    such a big risk. Suppose I get that in 10 years, what's my ROI (approx)?

ANS: In 10 years I get back $1million. As a "guesstimate", I can use the "rule of 72". I need to double my money over 3 times, i.e. $100K to $200K; $200K to $400K; $400K to $800K. To double it in 3 years, the interest would have to be 24%. So a good guess is 25-30%.
Check it: $100K(1+.26)^10 = $1,008,568 - close enough!

6. For a bonus point: Your business plan projects monthly profits & losses over a 10 year period. What discount rate should I use to determine
    the value of your company today? Why?

ANS: At least 30% due to the high risk.

7.For 1/2 bonus point: How much did Microsoft pay for its original DOS Operating System?  ANS: $50K (must be exact)