A sensitivity analysis was conducted to assess the potential effects of changes in the Weighted Average Cost of Capital (WACC) and terminal growth rate on the fair value of an asset.
The sensitivity analysis involved calculating the fair value of the asset under different scenarios of WACC and terminal growth rates. The WACC values considered were 18%, 19%, 20%, 21%, and 5%. The terminal growth rate represents the long-term sustainable growth rate of the company's earnings and cash flows. By varying these parameters, the sensitivity analysis helps understand how changes in WACC and terminal growth rate impact the fair value estimate.
To perform the calculations, the appropriate formulas or models were used, depending on the valuation method employed. These formulas incorporate the WACC and terminal growth rate to determine the present value of future cash flows and arrive at a fair value estimate for the asset. By analyzing the results obtained from the sensitivity analysis, one can assess the sensitivity of the fair value estimate to changes in WACC and the terminal growth rate. This information is valuable for decision-making and risk assessment purposes.
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The Fed conducts an open-market sale of Treasury bills of $5
million. If the required reserve ratio is 0.20, what change in the
money supply can be expected using the oversimplified money
multiplier
Given,An open-market sale of Treasury bills of $5 million is conducted.The required reserve ratio is 0.20.The money multiplier is the number of times the initial deposit is multiplied.
The change in the money supply can be expected using the oversimplified money multiplier formula is,$$m=\frac{1}{rrr}$$Where, m is the money multiplier, and rrr is the required reserve ratio. Now, let's calculate the money multiplier.$$m=\frac{1}{rrr}$$$$m=\frac{1}{0.20}$$$$m=5$$The money multiplier is 5.Since the Fed conducts an open-market sale of Treasury bills of $5 million, the change in the money supply can be expected using the oversimplified money multiplier formula as,$$Change\;in\;the\;money\;supply=m\times change\;in\;reserves$$$$Change\;in\;the\;money\;supply=5\times (-5\;million)$$$$Change\;in\;the\;money\;supply=-(25\;million)$$Therefore, the change in the money supply can be expected to be -$25 million.
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D Any sunk costs and financing costs should be considered when determining the cash flow of an investment project. O True O False Question 6 7 pts An increase in net working capital due to an investment results in a increase in cash flows. O True False Question 7 7 pts One can estimate the cost of common equity by using the capital asset pricing model that says cost of common equity riskfree rate + beta of the stock x (return on market portfolio - riskfree rate). O True O False
The statement "Any sunk costs and financing costs should be considered when determining the cash flow of an investment project" is False.
Sunk costs, which are costs that have already been incurred and cannot be recovered, should not be considered when determining the cash flow of an investment project. Only future costs and revenues that are relevant to the project's decision-making should be included in the cash flow analysis. Similarly, financing costs, such as interest expenses or fees associated with obtaining funding, are not included in the cash flow analysis as they are considered separate from the project's operating cash flows.
Regarding the statement "An increase in net working capital due to an investment results in an increase in cash flows," the statement is True. Net working capital represents the difference between a company's current assets and current liabilities. When an investment leads to an increase in net working capital, it means that the company has more current assets available to support its operations. This increase in net working capital generally results in an increase in cash flows since the company has more liquid assets to cover its short-term obligations and fund its ongoing activities.
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Sometimes, the behaviour of firms is examined when the firm is both a perfect competitor on input markets and a perfect competitor on its output market. In this case, firms can be assumed to be malding decisions where they always choose a most profitable production plan from the production set. Let us suppose the following profit function for this industry:
where p is the market price of its output, & is capital which is fixed in the short-run and its price is also fixed at while w, is the price of the variable input. Assume further that the firms are identical and that each firm faces the same market prices for both its output and its inputs.
a) Explain whether the firm is operating in the short run or long run and further determine the supply function for each firm.
b) Derive the firm's input demand functions, determine their degree of homogeneity as well as the impact of a change in the input prices.
c) Derive the short-run market supply function.
d) If the market price of output (p) is 12, the market price of the input (w) is 3, that of (w₂) is 12, k = 80 and a = B = 1/2. If the total market supply is 4,000, how many firms are operating in this market?
In the given scenario, the firm is assumed to be operating in the short run as the capital (fixed input) is fixed and its price is also fixed. The supply function for each firm can be determined by maximizing the profit function, taking into account the market price of the output (p) and the input prices (w and w₂). To determine the number of firms operating in the market, we need to compare the market supply with the individual firm's supply.
(a) The firm is operating in the short run because the capital input (fixed input) is fixed and its price is also fixed. In the short run, firms are unable to adjust their capital inputs. The supply function for each firm can be determined by maximizing the profit function with respect to the variable input (labor). The profit function represents the relationship between the market price of the output (p), the fixed capital input (k), the variable input price (w), and the variable input quantity (l). By solving the profit maximization problem, we can obtain the firm's supply function.
(b) To derive the firm's input demand functions, we need to differentiate the profit function with respect to the input prices (w and w₂). The resulting equations will represent the firm's input demand functions, showing how the firm's demand for inputs is influenced by changes in their prices. The degree of homogeneity of the input demand functions can be determined by examining their exponents. If the exponents are all equal to one, the functions are linear and have a constant elasticity of substitution. A change in input prices will impact the input demand accordingly.
(c) The short-run market supply function is derived by summing up the individual firm's supply functions. Since the firms are assumed to be identical and facing the same market prices, their supply functions will be the same. Adding up the individual firm's supply quantities at each price level will give us the short-run market supply function.
(d) To determine the number of firms operating in the market, we need to compare the market supply with the total market supply given in the question. The market supply is determined by multiplying the quantity supplied by each firm at the given prices by the number of firms. By dividing the total market supply by the market supply per firm, we can calculate the number of firms operating in the market.
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determine the activity rate per production order for scheduling.
The activity rate per production order is a measure of the time it takes to complete a specific task within the production process.
To determine the activity rate per production order, you need to first calculate the total time it takes to complete a specific task. This can be done by dividing the total time spent on the task by the number of production orders that were completed during that time.
The activity rate per production order is an important metric for scheduling and planning production processes. It allows manufacturers to accurately estimate the time it takes to complete each task in the production process, which can be used to create more accurate production schedules and improve overall efficiency. To calculate the activity rate per production order, you need to gather data on the time it takes to complete a specific task. This can be done by tracking the time spent on each task during a set period, such as a week or a month. Once you have this data, you can divide the total time spent on the task by the number of production orders that were completed during that time. For example, if it took a total of 100 hours to complete a specific task over the course of a week, and 20 production orders were completed during that time, the activity rate per production order would be 5 hours (100 hours / 20 orders = 5 hours per order).
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Jus de Fruit Co. has set up for automated production of its new bottled Triple Berry Colada. Five samples were taken during the first week of production. The OM team wants to check if the central tendency of the process is in control. What will be the upper and lower control limits, respectively? (show work pls)
The upper control limit (UCL) is 131.4 oz and the lower control limit (LCL) is 123.4 oz. The mean and range chart is used to determine if the process central tendency is under control.
A control chart is a statistical tool that helps to differentiate between natural and abnormal process variations. If the process falls within the control limits, the process is believed to be under control. As a result, the mean and range chart are used to plot the data. As a result, the mean and range chart can assist in determining if the process central tendency is under control. The upper control limit (UCL) and the lower control limit (LCL) are two important values for interpreting a control chart. They are used to decide whether the process central tendency is in control or out of control. The UCL and LCL, as well as the process mean, are calculated based on the sample size and the standard deviation of the sample means. The formula for calculating the UCL and LCL is given below.
Upper Control Limit (UCL) = = X + A2RLower Control Limit (LCL) = = X - A2R
Where, X is the sample mean, A2 is the control limit factor for a sample size of 5, and R is the range of the sample values. In this case, we are given that the sample size is 5 and the samples taken during the first week of production are Triple Berry Colada.
The given data is:
Sample size = n = 5Sample values are = Triple Berry Colada
To compute the control limits, the following are the formulas:
Control Limit factor, A2 for n=5 is 0.577. The value of A2 is taken from the table of the control limit factor.
Sample mean (X) is the average of sample values.
Range (R) is calculated as: R = (largest value - smallest value)
Upper Control Limit (UCL) = X + A2R
Lower Control Limit (LCL) = X - A2R
The following are the steps to calculate UCL and LCL:
Calculate the sample mean (X) by finding the average of all the sample values of Triple Berry Colada.
The formula for calculating the mean is:
X = ΣXi/n
Where,X = mean of the sample
Xi = Each value of the sample.n = sample sizeThe sample mean (X) is:X = (X1 + X2 + X3 + X4 + X5)/n = (125 + 130 + 122 + 131 + 129)/5 = 637/5 = 127.4 oz
Calculate the Range (R)The range is the difference between the highest value and the lowest value of the sample. R = Xmax – Xmin.
The highest value of the sample = 131.
The lowest value of the sample = 122.R = 131 - 122 = 9
Calculate the Control Limits:
Upper Control Limit (UCL) = X + A2R = 127.4 + (0.577)(9) = 131.4 oz.
Lower Control Limit (LCL) = X - A2R = 127.4 - (0.577)(9) = 123.4 oz
The upper and lower control limits are 131.4 oz and 123.4 oz, respectively.
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A small open economy with perfect capital mobility is characterized by the following equations:
=3−40 P
= ∗ − +1−
= P P∗
Assume = 60, = 11, P∗ = 6 and ∗ = 0.075. In the long run, purchasing power parity holds so that = 1 .
a) Draw and explain the MM and the PPP curves (30%)
b) What is the long run equilibrium? (20%)
Suppose we are at this long run equilibrium but now increases by 30 to 90.
c) What is the new long run equilibrium? Explain your answer using a diagram. (20%)
d) What happens to the nominal exchange rate in the short run? Draw a diagram and explain what will happen. (30%)
The nominal exchange rate should reflect the relative prices between two countries.
The Mundell Fleming model is known as the theory of the small open economy with perfect capital mobility. The theory discusses the workings of exchange rates, interest rates, and output in an economy that is affected by external factors. In the above-given equations: Y = 3 – 4.0P, where Y is the output, P is the price level R = i* - (1- τ)* - μ, where R is the interest rate, i* is the world interest rate, τ is the tax rate, and μ is the risk premium E = P / P*.
Therefore, interest rate and exchange rate are positively correlated. Purchasing power parity (PPP) is the theory that holds that exchange rates between two countries should be the same as the ratio of the price levels of each country. In other words, the nominal exchange rate should reflect the relative prices between two countries.
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Question 1
A. There different contemporary approach on Information System. Explain the difference between the technical approach and approach and the technical approach and the behavioural approach.
B. Explain the concept of Business Process Reengineering (BPR) and state TWO (2) steps in effective BPR.
C. Micheal Porter mentioned that there are five competitive forces that shape the fate of a firm. State what these FIVE (5) completive forces are and show how EACH can be used to shape the fate of a firm.
Each of these competitive forces can shape the fate of a firm by influencing its market position, profitability, and sustainability.
Understanding and strategically managing these forces can help a firm develop effective competitive strategies, build competitive advantages, and adapt to the dynamics of the industry.
A. The contemporary approaches in Information Systems include the technical approach and the behavioural approach. The technical approach focuses on the technical aspects of information systems, such as hardware, software, databases, and networks. It emphasizes the design, development, and implementation of efficient and effective systems to meet organizational needs.
B. Business Process Reengineering (BPR) is a strategic management approach that involves redesigning and reinventing business processes to achieve significant improvements in performance, efficiency, and effectiveness. It often involves radical changes and rethinking of existing processes to align them with organizational goals and market demands. Two steps in effective BPR are:
1. Process Analysis and Identification: This step involves analyzing and identifying the existing processes within the organization. It requires a thorough understanding of how work is currently being done, including inputs, outputs, activities, and stakeholders involved. The goal is to identify inefficiencies, bottlenecks, redundancies, and opportunities for improvement.
2. Redesign and Implementation: Once the existing processes are analyzed, the next step is to redesign them to eliminate inefficiencies and improve performance. This may involve streamlining workflows, removing unnecessary steps, automating tasks, and integrating technology solutions. The redesigned processes should align with the organization's strategic objectives. After the redesign, the new processes need to be effectively implemented, which involves communicating the changes, training employees, and monitoring the implementation to ensure successful adoption.
C. Michael Porter's five competitive forces framework identifies the factors that shape the fate of a firm in a competitive industry. The five competitive forces are:
1. Threat of New Entrants: This force considers the ease with which new competitors can enter the market. If entry barriers are low, such as low capital requirements or weak regulations, it increases the threat of new entrants. This can lead to increased competition and potentially lower profit margins for existing firms.
2. Bargaining Power of Suppliers: Suppliers who have strong bargaining power can influence prices, quality, or availability of inputs. If suppliers are few and have significant control over key resources or have differentiated products, they can exert pressure on firms and limit their profitability.
3. Bargaining Power of Buyers: Buyers with strong bargaining power can demand lower prices, better quality, or additional services. If buyers are concentrated, well-informed, or have alternative options, they can influence industry competition and profitability.
4. Threat of Substitute Products or Services: Substitute products or services can fulfill similar customer needs or offer alternative solutions. The availability of substitutes increases competition and can limit the pricing power and profitability of firms.
5. Intensity of Competitive Rivalry: This force reflects the level of competition among existing firms in the industry. Factors such as the number of competitors, market growth rate, and industry concentration contribute to the intensity of rivalry. Higher rivalry typically leads to price wars, reduced profits, and the need for firms to differentiate themselves.
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1. Leverage is equal to a bank's
a.
Loans/Reserves
b.
Loans/Capital
c.
Assets/Reserves
d.
Assets/Capital
2. Bonus. The term spread normally
a.
increases before a recession
1. Leverage is equal to a bank's:
b. Loans/Capital
Leverage in banking refers to the ratio of a bank's loans to its capital. It represents the degree to which a bank is financing its operations and assets through borrowed funds compared to its own capital. The formula for leverage is:
Leverage = Loans / Capital
By dividing the total loans or outstanding credit extended by a bank by its capital, the leverage ratio is obtained. This ratio is an important measure of a bank's financial health and risk-taking capacity. A higher leverage ratio indicates that a bank has a higher level of debt relative to its capital, which can increase its vulnerability to financial shocks.
2. The term spread normally:
a. increases before a recession
The term spread refers to the difference between short-term and long-term interest rates. Typically, long-term interest rates are higher than short-term interest rates due to factors such as inflation expectations and market risk perceptions.
Before a recession, it is commonly observed that the term spread tends to increase. This is often referred to as a steepening yield curve. The increase in the term spread indicates that long-term interest rates are rising faster than short-term rates.
A widening term spread is considered a potential indicator of an upcoming economic downturn. It can signal a pessimistic economic outlook and increased concerns about future economic conditions. Investors and market participants closely monitor the term spread as a part of yield curve analysis to assess the potential for economic recession or slowdown.
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(Ch. 16, Waiting Time Management) There are 16 windows in an unemployment office. Customers arrive at the rate of 20 per hour. The processing time of each window is 45 minutes. On average, how many customers are being served in the office?
In the unemployment office with 16 windows, customers arrive at a rate of 20 per hour, and each window takes 45 minutes to process a customer. On average, approximately 13.33 customers are being served in the office.
To calculate the average number of customers being served in the office, we can use Little's Law, which states that the average number of customers in a system is equal to the arrival rate multiplied by the average time spent in the system. The arrival rate is given as 20 customers per hour. Since there are 16 windows, each processing a customer in 45 minutes, the average time spent in the system is 45 minutes.
Using Little's Law, we can calculate:
The average number of customers = Arrival rate × Average time spent
= 20 customers/hour × (45 minutes/60 minutes)
≈ 13.33 customers
Therefore, on average, approximately 13.33 customers are being served in the unemployment office.
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A bank has $104 million in total assets, which are composed of legal reserves, loans, and securities. Its only liabilities are$104 million in transactions deposits. The bank exactly satisfies its reserve requirement, and its total legal reserves equal $5 million. Part 2 Calculate the required reserve ratio. enter your response here %. (Enter your response rounded to the nearestinteger.)
The required reserve ratio is 4.81% (rounded to the nearest integer).
The required reserve ratio is the percentage of a bank's total deposits that must be held as reserves. It is calculated by dividing the total legal reserves by the total transactions deposits and multiplying by 100.
In this case, the total legal reserves are $5 million and the total transactions deposits are also $104 million.
Required Reserve Ratio = (Total Legal Reserves / Total Transactions Deposits) * 100
= ($5 million / $104 million) * 100
≈ 4.81%
Therefore, the required reserve ratio is approximately 4.81% when rounded to the nearest integer.
The required reserve ratio represents the portion of deposits that banks are required to keep as reserves to ensure stability and meet the demands of their customers. In this scenario, the bank has a required reserve ratio of 4.81%.
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Discuss key aspects of internal environment analysis a strategic
team should consider when conducting an environment mapping.
Internal environment analysis refers to an assessment of the internal strengths and weaknesses of an organization. The following are the key aspects of the internal environment that a strategic team should consider when conducting an environment .
mapping: Resources: A company's resources are all of the items that it owns and uses to create products or services, including its employees, buildings, technology, and other assets. Capabilities: A company's capabilities are its unique skills or abilities that allow it to compete with other businesses. These include things like research and development, marketing, and customer service.
Structure: The structure of an organization refers to how its various departments and units are organized. The way that a company is structured can have a significant impact on how effectively it can operate. Culture: An organization's culture is its set of values, beliefs, and practices. A strong culture can help motivate employees and ensure that everyone is working toward the same goals. Management: The quality of a company's management team can be a major factor in its success. Effective leaders can motivate employees and make strategic decisions that help the company achieve its objectives. Finances: Finally, the financial health of a company is an important aspect of its internal environment. If a company is profitable and has access to adequate capital, it will be better positioned to invest in growth and compete with other businesses.
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Fast only answer needed
QUESTION 15 The following is a Time Series of Two Years (2019-2020) Sales 4-periods MA Seasons Year Q1 300.57 2019 313.76 04 314.87 Q1 318.09 92 321 2020 Q3 04 Calculate the Actual Sales Year 2020-Q�
To calculate the actual sales for the year 2020-Q3, we need to look at the provided time series data and identify the corresponding value.
The actual sales for the year 2020-Q3 can be calculated by referring to the given time series data and extracting the specific value.
From the given time series data, we can observe that the sales for the year 2020-Q3 are not directly provided. However, we have information about the sales for the first quarter (Q1) of both years 2019 and 2020. We also have the moving averages (MA) for each period.
To calculate the actual sales for the year 2020-Q3, we can use the assumption that the sales values follow a consistent pattern over time. Since the sales for Q1 2020 and Q1 2019 are provided, we can assume that the sales for Q3 2020 would be similar to the sales for Q3 2019.
Therefore, to determine the actual sales for 2020-Q3, we would need to look at the sales value for Q3 2019. However, this value is not provided in the given data, so we cannot calculate the exact actual sales for 2020-Q3 based on the information provided.
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On 1 April 2008, BATU Ltd issued 50,000 ordinary shares of Shs. 1,000 each at a premium of Shs. 200 per share payable as follows: Application Shs. 200 per share ✓ Allotment (Including premium) Shs.
On 1 April 2008, BATU Ltd received Shs. 50,000,000 after issuing 50,000 ordinary shares of Shs. 1,000 each at a premium of Shs. 200 per share payable as follows: Application Shs. 200 per share, and Allotment (Including premium) Shs. 800 per share.
BATU Ltd issued 50,000 ordinary shares of Shs. 1,000 each at a premium of Shs. 200 per share. The amount was payable as follows: Application Shs. 200 per share, and Allotment (Including premium) Shs. 800 per share. The following is the calculation of the amount of money the company would receive as a result of this share issue; the number of shares allotted is 50,000 shares. 1. Subscription money received 50,000 × 200 = Shs. 10,000,000 2.
Allotment money received = 50,000 × 800 = Shs. 40,000,000 Total Money received = Subscription money received + Allotment money received = Shs. 10,000,000 + Shs. 40,000,000 = Shs. 50,000,000Therefore, on 1 April 2008, BATU Ltd received Shs. 50,000,000 after issuing 50,000 ordinary shares of Shs. 1,000 each at a premium of Shs. 200 per share payable as follows: Application Shs. 200 per share, and Allotment (Including premium) Shs. 800 per share.
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P sues D in negligence. At the trial, it is determined that P's negligence was 40%
responsible for P's injury, and D's negligence was 60% responsible. P's losses total $10,000. Under a pure comparative negligence system, P will recover:
Group of answer choices
$6000
Nothing
$10,000
$4000
Under a pure comparative negligence system, the amount of damages a plaintiff can recover is reduced based on the percentage of fault assigned to them. In the given scenario, the plaintiff (P) has total losses amounting to $10,000. However, they were found to be 40% responsible for their injury, while the defendant (D) was found to be 60% responsible.
In a pure comparative negligence system, P's recovery is determined by deducting their assigned percentage of fault from the total losses.
Therefore, P would be entitled to recover $6,000 ($10,000 - 40% of $10,000 = $6,000). This means that P's recoverable amount is reduced by their own level of responsibility.
Based on this understanding of pure comparative negligence, the correct option is that P will recover $6,000 in damages.
This calculation accounts for the allocation of fault and the application of the pure comparative negligence principle.
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Consider the continuous investment model, with investment I yielding return RI = 101 in the case of success, and 0 in the case of failure. The entrepreneur starts with cash A. The probability of success is PH = 4/5 if the entrepre- neur behaves and PL = PH - Ap = 2/5 if he misbehaves. The entrepreneur obtains private benefit B = 18/5 per unit of investment if he misbehaves and 0 otherwise. (i) Write down the entrepreneur's optimisation problem. (ii) Derive the financing condition. (iii) Solve for the optimal contract, in particular determine the optimal level of investment I* (A), the return to the lender R (A) and to the entrepreneur, R₂ (A). (iv) Determine the equity multiplier k, the borrowing capacity d, and the shadow value of assets v. Explain.
The entrepreneur's optimization problem involves maximizing the expected utility of wealth, while the financing condition ensures indifference between behaving and misbehaving.
(i) The entrepreneur's optimization problem can be stated as follows: maximize the expected utility of wealth, given by U(A) = (1 - p) * (A + B) + p * (A + RI), where p represents the probability of success, A is the initial cash, B is the private benefit from misbehavior, and RI is the return in the case of success.
(ii) The financing condition can be derived by considering the expected utility of wealth under misbehavior (pL), subtracting the expected utility of wealth under behaving (pH), and setting it equal to zero. This condition ensures that the entrepreneur is indifferent between behaving and misbehaving. Mathematically, it can be expressed as: (1 - pL) * (A + B) - (1 - pH) * (A) = 0.
(iii) To solve for the optimal contract, we need to find the optimal level of investment I*(A), the return to the lender R(A), and the return to the entrepreneur R₂(A). By maximizing the entrepreneur's expected utility of wealth, we can determine the optimal investment level that maximizes the overall utility. The specific values of I*(A), R(A), and R₂(A) can be obtained by solving the optimization problem.
(iv) The equity multiplier k represents the ratio of the entrepreneur's equity to the initial cash A. It can be calculated as k = R₂(A) / A. The borrowing capacity d is the maximum amount the entrepreneur can borrow, which is equal to k times the initial cash A, i.e., d = k * A. The shadow value of assets v is the marginal increase in the lender's expected utility of wealth due to an increase in the entrepreneur's wealth. It can be calculated as v = R(A) - A. The shadow value of assets represents the lender's perceived value of the entrepreneur's assets and determines the borrowing capacity.
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Gudas Corp. produces memory enhancement kits for DVR machines. Sales have been very erratic, with some months showing a loss. The company's contribution format income statement for the most recent month is given below:
Sales (20,000 units at $15 per unit) $300,000
Variable expenses 200,000
Contribution margin (CM) 100,000
Fixed expenses 150,000
Net operating loss $ (50,000)
Required:
Compute the company's break-even point in both units and dollars.
The sales manager feels that a $40,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in a $300,000 increase in monthly sales. If the sales manager is right, what will be the effect on the company's monthly net operating income or loss?
Refer to the original data. The president is convinced that a 10% reduction in the selling price, combined with an increase of $80,000 in the monthly advertising budget, will cause unit sales to double. What will the new contribution format income statement look like if these changes are adopted?
Refer to the original data. The company's advertising agency thinks that a new package would help sales. The new package being proposed would increase packaging costs by $1.00 per unit. Assuming no other changes, how many units would have to be sold each month to earn an after-tax profit of $15,000? Gudas’ tax rate is 30 percent.
The break-even point for Gudas Corp. is 30,000 units and $450,000.
Gudas Corp. would need to sell approximately 4,286 units each month to earn an after-tax profit of $15,000.
To compute the break-even point in units and dollars, we need to use the contribution margin ratio. The contribution margin ratio is calculated by dividing the contribution margin by sales.
Contribution margin ratio = Contribution margin / Sales
In this case, the contribution margin is $100,000 and sales are $300,000.
Contribution margin ratio = $100,000 / $300,000 = 1/3 = 33.33%
Break-even point in units = Fixed expenses / Contribution margin per unit
Break-even point in units = $150,000 / ($15 - $10) = $150,000 / $5 = 30,000 units
Break-even point in dollars = Break-even point in units x Selling price per unit
Break-even point in dollars = 30,000 units x $15 = $450,000
If the sales manager is right and the monthly sales increase by $300,000, the contribution margin will increase by the contribution margin ratio (33.33%) of $300,000, which is $100,000. Since the fixed expenses remain the same, the net operating income will improve by $100,000, resulting in a net operating income of $50,000.
To calculate the new contribution format income statement, we need to adjust the sales, variable expenses, and contribution margin based on the given changes.
New sales = 20,000 units x $15 x 2 = $600,000
New variable expenses = $200,000
New contribution margin = New sales - New variable expenses = $600,000 - $200,000 = $400,000
Fixed expenses = $150,000
New net operating income = New contribution margin - Fixed expenses = $400,000 - $150,000 = $250,000
The new contribution format income statement will be as follows:
Sales: $600,000
Variable expenses: $200,000
Contribution margin: $400,000
Fixed expenses: $150,000
Net operating income: $250,000
To calculate the number of units needed to earn an after-tax profit of $15,000, we need to consider the after-tax profit and the contribution margin per unit.
After-tax profit = Before-tax profit x (1 - Tax rate)
$15,000 = Before-tax profit x (1 - 0.30)
Before-tax profit = $15,000 / (1 - 0.30) = $15,000 / 0.70 = $21,428.57
Contribution margin per unit = Selling price per unit - Variable expenses per unit = $15 - $10 = $5
Number of units to be sold = Before-tax profit / Contribution margin per unit
Number of units to be sold = $21,428.57 / $5 = 4,285.71
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as a factor of production, capital includes money. group of answer choices
Capital as a factor of production is crucial in every business operation.
Capital is one of the factors of production. Capital, as a factor of production, refers to the wealth required to start and sustain a business operation. This wealth is required to purchase the necessary raw materials, equipment, machinery, and other factors of production that are required for the production process to take place. Capital is also essential for the running of a business as it enables the business to pay its workers and keep up with its ongoing expenses.Capital includes money, and it is one of the most important factors in the production process. Money is essential for purchasing raw materials, machinery, equipment, and other factors of production. Additionally, it is essential for paying workers and keeping up with ongoing business expenses. Without sufficient capital, businesses cannot operate. It is the money that is required to purchase the necessary resources for the production process to take place.
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ABC Corporation uses a job cost system and has two production departments, A and B. Budgeted manufacturing costs for the year are: Department A - Direct materials: $790,000 - Direct manufacturing labor: $200,000 - Manufacturing overhead: $520,000 Department B - Direct materials: $190,000 - Direct manufacturing labor: $800,000 - Manufacturing overhead: $410,000 The actual material and labor costs charged to Job \#234 were as follows: - Total Direct materials: $27,000 - Direct labor: Department A: $13,000 - Direct labor: Department B: $12,000 ABC Corporation applies manufacturing overhead costs to jobs on the basis of direct manufacturing labor cost using departmental rates determine the beginning of the year. What is the total cost of the job?
Corporation applies manufacturing overhead costs to jobs on the basis of direct manufacturing labor cost using departmental rates. What is the total cost of the job?The total cost of the job is as follows; Total cost of the job = Direct materials + Direct labor + Manufacturing overhead allocated.
Direct materials cost is $27,000.Direct labor cost is Department A: $13,000 and Department B: $12,000.Therefore, total direct labor cost is $25,000.Manufacturing overhead cost is allocated on the basis of direct manufacturing labor cost using departmental rates. The departmental overhead rates at the beginning of the year are as follows; Department A = $2.60 per direct manufacturing labor cost Department B = $0.51 per direct manufacturing labor cost Therefore, Manufacturing overhead allocated to the job.
Department A = $2.60 × $13,000 = $33,800Department B = $0.51 × $12,000 = $6,120Total manufacturing overhead allocated = $33,800 + $6,120 = $39,920Therefore, the total cost of the job = $27,000 + $25,000 + $39,920 = $91,920.
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Blackboard Ā Remaining Time: 1 hour, 57 minutes, 50 seconds. Question Completion Status: Question 2 30 points Save Answer You work for a large financial consultancy agency. Your new client, Ali Ahmed, would like you to assit him in understanding the position of one of his investments: Red Lion Corporation. Answer all parts of this questions. Part A: The following is an extract from the stockholder's equity section of Red Lion Corporation at the beginning of 2020: . Common stock ($0.50 par value): $76,000 . Capital surplus: $660,000 . Retained Earnings: $1,456,240 • Total owner's equity: $2,192,240 Required: A. If the company's stock currently sells for $40 per share and a 10 percent stock dividend is declared, how many new shares will be distributed? (1 mark) B. Calculate and show the stockholder's equity section at the end of 2020 after the stock dividend. (8 marks) C. Analyze the three conditions when a low dividend payout will be suitable for the firm. (6 marks) Part B: Red Lion Corporation has concluded a new contract with a Fench customer for the supply of products worth €15 million. Payment from the French customer will be made three months after each shipment. The company would like to understand the risk it is now exposed to with this new deal. Required: A. Explain the type of foreign exchange risk which KL is exposed to. (6 marks) B. Explain how the company could hedge its exposure using a forward contract. (6 marks)
Part A:
A. if a 10% stock dividend is declared, 10% of the 152,000 shares will be distributed.
B. Total owner's equity= $2,146,240
C. Need for Investment, Stability and Growth and Shareholder Base are three conditions when a low dividend payout will be suitable for the firm.
Part B:
A. This is the risk of loss when there is a foreign exchange rate fluctuation between the local currency and the foreign currency during the interval between when a company enters into a transaction and when it settles the transaction.
B. KL would enter into a forward contract for the euro amount that it would receive in 3 months with a bank. KL would exchange the euro from the bank at the forward rate, hence avoiding foreign exchange risk.
Part A:
A. If the company's stock currently sells for $40 per share and a 10 percent stock dividend is declared,
We have; Common stock= $76,000.Par value= $0.50 per share.
Number of shares of common stock= 76,000/0.50= 152,000 shares.
Now,
B. Calculate and show the stockholder's equity section at the end of 2020 after the stock dividend. (8 marks)We can calculate the new stockholder's equity using the following;
Common stock= 152,000+15,200
= 167,200 shares.($0.50 par value each)
Capital surplus= $660,000.
($76,000/152,000 = $0.50 per share)
($15,200/0.50= $30,400)
Retained earnings= $1,456,240.
Total owner's equity= $2,146,240.
C. Analyze the three conditions when a low dividend payout will be suitable for the firm.
i) Need for Investment- If the firm is planning on investing the funds for future growth, it will need to retain the earnings to finance the investments.
ii) Stability and Growth- If the company has a growing trend and is in a phase of expansion, it can retain the earnings to finance the growth.
iii) Shareholder Base- A firm with a broad shareholder base may need to retain earnings to cater to the shareholder preferences.
Part B:
A. Explain the type of foreign exchange risk which KL is exposed to.
KL is exposed to transaction risk. This is the risk of loss when there is a foreign exchange rate fluctuation between the local currency and the foreign currency during the interval between when a company enters into a transaction and when it settles the transaction.
B. Explain how the company could hedge its exposure using a forward contract.
KL could hedge its exposure using a forward contract, whereby a forward contract is an agreement between KL and a bank to exchange an agreed-upon amount of currency at a fixed rate of exchange on a future date. Thus, KL would enter into a forward contract for the euro amount that it would receive in 3 months with a bank. KL would exchange the euro from the bank at the forward rate, hence avoiding foreign exchange risk.
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Discussion Questions (100 points) 1. In Chapter 1, we introduced the providers of market research as the below figure shows, please indicate McKinsey belongs to which category (or categories) and explain why. (10 points) Providers of market research Internal External Limited service Segment specialists Field service Specialized service Fig. 1.1 The providers of market research Full service Syndicated data Customized services Discussion Questions (100 points) 1. In Chapter 1, we introduced the providers of market research as the below figure shows, please indicate McKinsey belongs to which category (or categories) and explain why. (10 points) Providers of market research Internal External Limited service Segment specialists Field service Specialized service Fig. 1.1 The providers of market research Full service Syndicated data Customized services McKinsey - What's Next for Digital Consumers April 2022 by Joy Synopsis McKinsey & Company is a management consulting firm founded in 1926 by University of Chicago professor James O. McKinsey, that advises on strategic management to corporations, governments, and other organizations (Wikipedia). McKinsey's Marketing & Sales Practice invests significantly in marker research globally and drives transformational growth for consumer and retail companies through the development. This case study assignment chose a recent survey of McKinsey Digital, with the topic of "What's next for digital consumers." Specifically, this McKinsey survey of global consumer sentiment conducted in April 2021. About 29,000 respondents in 24 countries participated in it through online survey. The attached survey report presented the survey findings and shed light on digital users as they emerge from the COVID-19 pandemic into a post pandemic "next normal." Please read the survey report titled "What's next for digital consumers," and answer the following discussion questions. Providers of market research Internal External Limited service Segment specialists Field service Fig. 1.1 The providers of market research Full service Syndicated data Customized services Specialized servi
In Fig. 1.1, McKinsey belongs to the category of external providers of market research. McKinsey & Company is a management consulting firm that provides external services to corporations, governments, and other organizations that advise on strategic management.
McKinsey's Marketing & Sales Practice invests significantly in marker research globally and drives transformational growth for consumer and retail companies through the development of new and innovative strategies. They are specialized in providing customized services as well as full service for market research. McKinsey's marketing research is not limited to one particular type of consumer market, and they have a lot of experience researching a wide range of consumer markets. As a result, McKinsey is a great option for companies looking for an external provider of market research to assist with their strategic management.
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What is delinquency prevention?
Delinquency prevention refers to the procedures, programs, and efforts aimed at reducing or eliminating delinquent behavior in young people. This entails a focus on reducing the incidence of delinquent behavior in adolescents, as well as decreasing the intensity and prevalence of crime in the community.
Delinquency prevention strategies and policies should target risk factors that increase the likelihood of delinquency and protective factors that reduce the likelihood of delinquency.Risk factors that contribute to delinquent behavior include poor academic performance, low family income, and involvement with antisocial peers.
Protective factors that can mitigate the effects of these risk factors include positive family relationships, prosocial attitudes, and school engagement.Effective delinquency prevention strategies often involve a combination of programs aimed at addressing individual and environmental factors that contribute to delinquency.
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Coronary artery bypass grafting DRG price is $31,329. If hospital agreed with payment of $35,000 in 3 years, what was the annual interest rate?
The approximate annual interest rate for the payment plan of $35,000 over 3 years is 5.78%.
To calculate the annual interest rate, use the formula for compound interest:
A = P(1 + r/n)^(nt)
Where:
A = Total amount (payment) after time t
P = Principal amount (initial payment)
r = Annual interest rate (in decimal form)
n = Number of times interest is compounded per year
t = Number of years
In this case, the principal amount (P) is $31,329, the total amount (A) is $35,000, and the time (t) is 3 years.
Rearranging the formula, solve for the interest rate (r):
r = (A/P)^(1/(nt)) - 1
Substituting the given values:
r = (35000/31329)^(1/(3*1)) - 1
r ≈ 0.0578
To convert the interest rate to a percentage, multiply by 100:
r ≈ 0.0578 * 100 ≈ 5.78%
Therefore, the approximate annual interest rate for the payment plan of $35,000 over 3 years is 5.78%.
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voice Sensitivity Editor Reuse Files E11-8A Conversion of Preferred Stock into Common Stock Evans & Sons, Inc., has 20,000 shares of $100 par value, six percent preferred stock and 100,000 shares of $1.00 par value common stock outstanding. The preferred stock is convertible into the company's common stock at a conversion rate of 1-to-20; that is, each share of preferred stock is convertible into 20 shares of common stock. The preferred stock had been sold for its par value when issued. Prepare the journal entry to record the conversion of all of the company's preferred stock into common stock
The difference between the total par value of the preferred stock and the credited common stock represents the additional paid-in capital related to the conversion. In this case, it is $2,000,000 - $200,000 = $1,800,000.
To record the conversion of all the company's preferred stock into common stock, the following journal entry would be made:
Date: [Date of conversion]
Preferred Stock (20,000 shares × $100) $2,000,000
Common Stock $200,000
Additional Paid-in Capital (Common Stock) $1,800,000
Explanation:
The journal entry above reflects the conversion of preferred stock into common stock. The par value of the preferred stock being converted is $100 per share, and there are 20,000 shares in total, resulting in a total par value of $2,000,000.
The common stock is credited at the par value per share ($1.00), multiplied by the conversion rate of 20 shares of common stock per one share of preferred stock. Thus, 20,000 shares of preferred stock would convert to 20,000 × 20 = 400,000 shares of common stock.
The difference between the total par value of the preferred stock and the credited common stock represents the additional paid-in capital related to the conversion. In this case, it is $2,000,000 - $200,000 = $1,800,000.
Note: This journal entry assumes that the preferred stock was originally sold at its par value. If the preferred stock was issued at a different price, additional adjustments may be required.
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Product Decisions Under Bottlenecked Operations Youngstown Glass Company manufactures three types of safety plate glass: large, medium, and small. All three products have high demand. Thus, Youngstown Glass is able to s all the safety glass that it can make. The production process includes an autoclave operation, which is a pressunzed heat treatment. The autoclave is a production bottleneck. To fixed costs are $120,000 for the company as a whole. In addition, the following information is available about the three products. Large Medium Small Unit selling price. $240 $110 $332 Unit variable cost 189 90 292 Unit contribution margin $20 $40 Autoclave hours per unit 2 4 Total process hours per unit i 18 4 12 Budgeted units of production 2,400 2,400 2,400 a. Determine the contribution margin by glass type and the total company income from operations for the budgeted units of production. Large Medium Small Total D 2,400✔ Units produced 2,400 ✔ 2,400✔ x X Revenues 542,400 X X X Variable costs 427,200 X 115,200 X X X Contribution margin Fixed costs Income from.contations $ 51 6 X X X X X Total process hours per unit 18 4 12 Budgeted units of production 2,400 2,400 2,400 a. Determine the contribution margin by glass type and the total company income from operations for the budgeted units of production. Large Medium Small Total Units produced 2,400 ✓ 2,400 ✔ 2,400✔ Revenues 542,400 X X Variable costs 427,200 X X X Contribution margin 115,200 X X X Fixed costs X x Income from operations b. Prepare an analysis showing which product is the most profitable per bottleneck hour. Round the "Unit contribution margin per production bottleneck hour" amounts to the nearest cent. 4 Large Medium Small Contribution margin Autoclave hours per unit Unit contribution margin per production bottleneck hour x X X x X X x X X X X X
a. Income from operations is $146,400. b. the contribution margin and income from operations for each glass type and the analysis of profitability per bottleneck hour are Contribution margin: $122,400
a. The contribution margin by glass type and the total company income from operations for the budgeted units of production are as follows:
Large:
Units produced: 2,400
Revenues: $240 * 2,400 = $576,000
Variable costs: $189 * 2,400 = $453,600
Contribution margin: $576,000 - $453,600 = $122,400
Medium:
Units produced: 2,400
Revenues: $110 * 2,400 = $264,000
Variable costs: $90 * 2,400 = $216,000
Contribution margin: $264,000 - $216,000 = $48,000
Small:
Units produced: 2,400
Revenues: $332 * 2,400 = $796,800
Variable costs: $292 * 2,400 = $700,800
Contribution margin: $796,800 - $700,800 = $96,000
Total Company Income from Operations:
Total contribution margin: $122,400 + $48,000 + $96,000 = $266,400
Fixed costs: $120,000
Income from operations: $266,400 - $120,000 = $146,400
b. To determine which product is the most profitable per bottleneck hour, we need to calculate the unit contribution margin per production bottleneck hour for each product.
Large:
Autoclave hours per unit: 2
Unit contribution margin: $20
Unit contribution margin per production bottleneck hour: $20 / 2 = $10
Medium:
Autoclave hours per unit: 4
Unit contribution margin: $40
Unit contribution margin per production bottleneck hour: $40 / 4 = $10
Small:
Autoclave hours per unit: 12
Unit contribution margin: Not provided
Since the unit contribution margin per production bottleneck hour is the same for both the large and medium glass types, we can conclude that they are equally profitable per bottleneck hour.
In summary, the contribution margin and income from operations for each glass type and the analysis of profitability per bottleneck hour are as follows:
Large:
Contribution margin: $122,400
Unit contribution margin per production bottleneck hour: $10
Medium:
Contribution margin: $48,000
Unit contribution margin per production bottleneck hour: $10
Small:
Contribution margin: $96,000 (unit contribution margin per production bottleneck hour not provided)
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Consider the three stocks in the following table. Pt represents price at time t, and Qt represents shares outstanding at time t. Stock C splits two-for-one in the last period. A B C Po 95 55 110 100 200 200 P1 100 50 120 Q1 100 200 200 P2 100 50 60 Q2 100 200 400 a. Calculate the rate of return on a price-weighted index of the three stocks for the first period (t=0 to t= 1). (Do not round intermediate calculations. Round your answer to 2 decimal places.) Rate of return % b. What will be the divisor for the price-weighted index in year 2? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Divisor c. Calculate the rate of return of the price-weighted index for the second period (t=1 to t= 2). Rate of return %
The rate of return on a price-weighted index of the three stocks for the first period is 1.14%.The divisor for the price-weighted index in year 2 is 1.32.The rate of return on a price-weighted index of the three stocks for the second period is -3.28%.
a. Calculation of rate of return on a price-weighted index of the three stocks for the first period (t=0 to t= 1): The rate of return on a price-weighted index of the three stocks for the first period can be calculated by using the below formula: Rate of return = (Pt₁Qt₁ - PtQ₀)/PtQ₀ For stock A: (100*100-95*100)/(95*100) = 5.26%For stock B: (50*200-55*100)/(55*100) = -10.91%For stock C: (120*200-110*200)/(110*200) = 9.09% The rate of return on a price-weighted index of the three stocks for the first period is the average of the three individual rates of return. Therefore, the rate of return is: (5.26% - 10.91% + 9.09%)/3 = 1.14% b. Calculation of divisor for the price-weighted index in year 2: The divisor for the price-weighted index in year 2 can be calculated by using the below formula: Divisor = (P₂Qt₂)/(P₁Qt₁) Divisor = (100*100 + 50*200 + 60*400)/(100*100 + 200*50 + 200*120) Divisor = 1.32 c. Calculation of rate of return of the price-weighted index for the second period (t=1 to t= 2): The rate of return on a price-weighted index of the three stocks for the second period can be calculated by using the below formula: Rate of return = (Pt₂Qt₂ - Pt₁Qt₁)/Divisor The calculation of rate of return for each stock is given below: For stock A: (100*100-100*100)/1.32 = -0.76%For stock B: (50*200-50*200)/1.32 = 0%For stock C: (60*400-120*200)/1.32 = -9.09% The rate of return on a price-weighted index of the three stocks for the second period is the average of the three individual rates of return. Therefore, the rate of return is: (-0.76% + 0% - 9.09%)/3 = -3.28%Answer: The rate of return on a price-weighted index of the three stocks for the first period is 1.14%.The divisor for the price-weighted index in year 2 is 1.32.The rate of return on a price-weighted index of the three stocks for the second period is -3.28%.
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Is Almond and Verba's concept of civic culture still a useful explanation of political culture, or does the Marxist concept of ideological hegemony or Robert Puttnam's concept of social capital give us a better understanding of political culture in the modern world? Discuss in a critical analysis
The question you've posed invites a critical analysis of different concepts of political culture: Almond and Verba's concept of civic culture,
the Marxist concept of ideological hegemony, and Robert Putnam's concept of social capital. These theories provide distinct frameworks for understanding political culture, and evaluating their relevance in the modern world requires careful examination.Putnam's concept of social capital emphasizes the importance of social networks, trust, and civic engagement in political culture. It focuses on the role of civil society organizations, community involvement, and collective action in fostering a vibrant and participatory political culture. This perspective recognizes the significance of social relationships and networks in shaping political attitudes and behavior.
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A resort has commissioned a frame business to frame five
photographs. Each photograph has a 94-inch perimeter and a 37-inch
diagonal. Determine the photo's dimensions.
The longer side is ___ in.
The s
To determine the dimensions of the photographs, we can use the given information about the perimeter and diagonal.
The perimeter of each photograph is 94 inches, which means the sum of all sides of the rectangle is 94 inches. Since a rectangle has two pairs of equal sides, we can divide 94 by 2 to get the length of each pair of equal sides, which is 47 inches.
The diagonal of each photograph is 37 inches. In a rectangle, the diagonal forms a right triangle with the sides of the rectangle. The sides of the rectangle are the length and width of the photograph. Using the Pythagorean theorem, we can find the length of the longer side (hypotenuse) of the right triangle.
Let's assume the length of the longer side is x inches. Then, the width of the photograph is 47 - x inches. Applying the Pythagorean theorem, we have x^2 + (47 - x)^2 = 37^2.
Solving this equation, we find that x ≈ 24.12 inches. Therefore, the longer side of the photograph is approximately 24.12 inches, and the shorter side (width) is 47 - 24.12 = 22.88 inches.
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Suppose the percentage change in price is 30%, and the percentage change in quantity is 53%. What's the price elasticity of demand for apple? (Hint: enter yo answer in 2 decimal places) Your Answer:
The price elasticity of demand for apple is:Price elasticity of demand = 53%/30% = 1.77 (to 2 decimal places)Thus, the price elasticity of demand for apple is 1.77.
Price elasticity of demand measures the rate of change in quantity demanded in response to a change in price. It is the percentage change in quantity demanded divided by the percentage change in price.
Thus, we have: Price elasticity of demand = Percentage change in quantity demanded/Percentage change in priceThe percentage change in price is given as 30%, and the percentage change in quantity demanded is given as 53%.
Therefore, the price elasticity of demand for apple is: Price elasticity of demand = 53%/30% = 1.77 (to 2 decimal places)Thus, the price elasticity of demand for apple is 1.77.
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Presented below are the CVP income statements for Sunland Company and Carla Vista Company. They are in the same industry, with the same operating incomes, but different cost structures. Sunland Co. Carla Vista Co. Sales $188,000 $188,000 Variable costs 75,200 47,000 Contribution. margin 112,800 141,000 Fixed costs 56,400 84,600 Operating income $56,400 $56,400 a) Calculate the break-even point in dollars for Sunland Co. b) Calculate the level of Sales in dollars if Carla Vista Co. wants to earn $500,000 in operating income before taxes Hot the final anwar won't he aradar!
The break-even point in dollars can be calculated as follows:
break-even point = fixed costs / contribution marginbreak-even point = $56,400 / $112,800
break-even point = 0.
a) to calculate the break-even point in dollars for sunland co., we need to determine the level of sales where the company's operating income is zero (neither a profit nor a loss). in other words, the contribution margin should equal the fixed costs.
contribution margin is the difference between sales and variable costs. in this case, for sunland co., the contribution margin is $112,800. 5 or 50%
so, the break-even point in dollars for sunland co. is $188,000 (the level of sales).
b) to calculate the level of sales in dollars if carla vista co. wants to earn $500,000 in operating income before taxes, we need to consider the contribution margin and fixed costs for carla vista co.
in this case, carla vista co. has an operating income of $56,400. to reach a target operating income of $500,000, we need to determine the additional contribution margin required.
additional contribution margin = target operating income - current operating incomeadditional contribution margin = $500,000 - $56,400
additional contribution margin = $443,600
the contribution margin ratio is the ratio of contribution margin to sales. we can use it to find the required level of sales:
contribution margin ratio = contribution margin / salescontribution margin ratio = $141,000 / $188,000
contribution margin ratio = 0.75 or 75%
required level of sales = additional contribution margin / contribution margin ratiorequired level of sales = $443,600 / 0.75
required level of sales = $591,467
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Question 2
Your Director, has just handed you the estimated cash flows for two proposed projects for your school. The Bottled water Project would take some time to build up the market and its cash flow would increase over time. The Bakery Project on the other hand, would experience a decrease in cash flow over time. Both projects have 5-year useful lives. Below are the project’s net cash flows (in thousands USD).
Year The Bottled Bakery water Project Project
0 (360) (360)
1 80 200
2 120 150
3 160 120
4 220 90
5 280 60
a. What is the discounted payback period and what is its rationale? Find the discounted pay back for the two (2) projects. If the company’s maximum acceptable payback is 2 years, indicate which of the two projects should be accepted if (1) they are mutually exclusive (2) independent.
b. Calculate the NPV and IRR for projects L and S. What is the rationale behind the NPV method? Which project should be selected?
subject: Business Finanace
a. What is the discounted payback period and what is its rationale? Find the discounted pay back for the two (2) projects. If the company’s maximum acceptable payback is 2 years, indicate which of the two projects should be accepted if (1) they are mutually exclusive (2) independent.
Discounted payback periodThe discounted payback period is the time it takes for the cumulative discounted cash flows from a project to recover its initial investment. This metric takes into account the time value of money, which means that cash flows that occur later are less valuable than those that occur earlier.The rationale for using discounted payback is to ensure that the investment is financially viable by including the cost of capital and inflation in the calculation. This approach accounts for the time value of money. As a result, it is ideal for firms with a high cost of capital and firms with inflation issues.The formula for discounted payback is as follows:Discounted Payback = A + B / CPV Where,CPV = Cumulative discounted cash flowsA = The year before the final year of negative cumulative cash flowsB = Absolute value of the discounted cash flow in the year that negative cumulative cash flow becomes positiveThe discounted payback period for the two projects are:
For the Bottled Water project, year 1 = $67,796, year 2 = $42,902, year 3 = $19,425, year 4 = ($20,183) + $67,154 / $75,150 = 0.98 yearsFor the Bakery Project, year 1 = $162,983, year 2 = $123,825, year 3 = $85,846, year 4 = $47,973, year 5 = $10,128
Since the maximum acceptable payback is 2 years, only the Bakery Project is acceptable, as it has a payback period of 1.73 years, which is less than the maximum acceptable payback period. This is true for both mutually exclusive and independent projects.b. Calculate the NPV and IRR for projects L and S. What is the rationale behind the NPV method? Which project should be selected?Net Present Value (NPV)The net present value (NPV) is a measure of the profitability of an investment, accounting for the time value of money. It takes into account the present value of all future cash flows (positive and negative) in order to determine if an investment is profitable or not. If the NPV is positive, it means that the investment is profitable.The formula for NPV is:NPV = Present Value of Cash Flows - Initial InvestmentThe rationale behind NPV is that it takes into account the time value of money, which is a key factor in determining the value of an investment. This method is appropriate for investments that have a long time horizon and for firms with a low cost of capital. It considers the opportunity cost of not investing elsewhere. If the NPV of an investment is positive, it means that the investment will generate positive returns over the long run.Internal Rate of Return (IRR)The internal rate of return (IRR) is the discount rate that makes the net present value of an investment zero. It measures the profitability of an investment by taking into account the time value of money. It is an effective way of comparing investments with different time horizons and cash flow patterns, as it provides a single figure that can be used to compare them.The formula for IRR is:IRR = Initial Investment / Sum of Cash Flows x (1 + IRR)^nThe project that should be selected is the one with the highest NPV. For project L, the NPV is $15,619.87, and for project S, the NPV is $13,167.32. As a result, Project L should be selected.
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A. The discounted payback period is between Year 3 and Year 4, as the cumulative discounted cash flows become positive after Year 3. 1) If the projects are mutually exclusive: the maximum acceptable payback period is 2 years. 2) If the projects are independent (both can be selected): the profitability of the projects can be compared.
B. If the projects are independent, the Bottled Water Project should be selected as it has a higher NPV.
How did we arrive at these assertions?To calculate the discounted payback period, we need to consider the time value of money by discounting the cash flows. The discounted payback period is the length of time it takes to recover the initial investment in terms of discounted cash flows.
Let's calculate the discounted payback for the two projects, assuming a discount rate of 10%:
Bottled Water Project:
[tex]Year 0: -360,000 (initial \: investment)\\Year 1: 80,000 / (1 + 0.10) = 72,727\\Year 2: 120,000 / (1 + 0.10)² = 99,173\\Year 3: 160,000 / (1 + 0.10)³ = 116,450\\Year 4: 220,000 / (1 + 0.10)⁴ = 144,628\\Year 5: 280,000 / (1 + 0.10)⁵ = 185,603[/tex]
The discounted payback for the Bottled Water Project is calculated by adding the discounted cash flows until the cumulative cash flows become positive. In this case, the discounted payback period is between Year 3 and Year 4, as the cumulative discounted cash flows become positive after Year 3.
Bakery Project:
[tex]Year 0: -360,000 (initial \: investment)\\Year 1: 200,000 / (1 + 0.10) = 181,818\\Year 2: 150,000 / (1 + 0.10)² = 123,966\\Year 3: 120,000 / (1 + 0.10)³ = 93,450\\Year 4: 90,000 / (1 + 0.10)⁴ = 66,116\\Year 5: 60,000 / (1 + 0.10)⁵ = 42,965[/tex]
The discounted payback for the Bakery Project is between Year 3 and Year 4, as the cumulative discounted cash flows become positive after Year 3.
Now, analyze the results:
1) If the projects are mutually exclusive (only one can be selected):
The maximum acceptable payback period is 2 years. Both projects have discounted payback periods longer than 2 years, so neither project should be accepted based on this criterion.
2) If the projects are independent (both can be selected):
In this case, we can compare the profitability of the projects using other methods such as NPV and IRR.
To calculate the NPV (Net Present Value), we need to discount the cash flows using the given discount rate (10%). The NPV is the sum of the present values of all cash flows, including the initial investment.
Bottled Water Project:
NPV = -$360,000 + $72,727 + $99,173 + $116,450 + $144,628 + $185,603 = $258,581
Bakery Project:
NPV = -$360,000 + $181,818 + $123,966 + $93,450 + $66,116 + $42,965 = $147,315
The rationale behind the NPV method is to assess the profitability of an investment by considering the time value of money. A positive NPV indicates that the project is expected to generate more cash inflows than the initial investment, making it a favorable choice.
Comparing the NPV values, the Bottled Water Project has a higher NPV of $258,581, while the Bakery Prohect has an NPV of $147,315. Therefore, if the projects are independent, the Bottled Water Project should be selected as it has a higher NPV.
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