The Great Depression and the recession due to the Covid-19 Crisis are two major economic downturns that have impacted the global economy, but they differ in several dimensions. Firstly, the length of the Great Depression was significantly longer than the Covid-19 recession. The Great Depression lasted for about a decade, from 1929 to the late 1930s, while the Covid-19 recession began in early 2020 and is expected to have a shorter duration.
In terms of severity, the Great Depression was arguably more severe. During the Great Depression, the U.S. experienced a massive decline in GDP, with output falling by around 30% between 1929 and 1933. Unemployment rates reached staggering levels, peaking at around 25%. In contrast, the Covid-19 recession initially caused a sharp decline in economic activity, but it rebounded relatively quickly due to policy interventions. While it led to significant job losses and economic contraction, the severity was mitigated to some extent by the swift policy response.
The impact on the economy also differed between the two downturns. The Great Depression had a profound and long-lasting impact on various sectors of the economy, including agriculture, manufacturing, and banking. In contrast, the Covid-19 recession primarily affected sectors such as travel, hospitality, and retail, while some industries like technology and e-commerce experienced growth.
Regarding policy response, the approaches taken were distinct. During the Great Depression, governments implemented various policies, including the New Deal in the United States, to stimulate economic recovery. These policies involved increased government spending, job creation programs, and financial regulation reforms. In response to the Covid-19 recession, governments worldwide implemented large-scale fiscal stimulus measures, such as direct cash transfers, business loans, and wage subsidies, to support individuals and businesses affected by the pandemic-induced lockdowns.
According to Keynesian Theory, stabilization policy should not be used to smooth out the business cycle due to two key problems. Firstly, there is a problem of time lags. Implementing stabilization policies takes time, and by the time they are fully effective, the economic conditions might have already changed. For example, during a recession, it takes time for the government to enact and implement fiscal stimulus measures, which may not have an immediate impact on economic activity.
Secondly, there is the issue of policy effectiveness and efficiency. Stabilization policies rely on accurate economic data and forecasting to determine the appropriate measures to be taken. However, economic data is often subject to revisions and uncertainties, making it challenging to implement policies with precision. Furthermore, there is the risk of policy inefficiency, where the implemented measures may have unintended consequences or fail to achieve the desired outcomes. For instance, fiscal stimulus measures can lead to inflationary pressures or create unsustainable levels of government debt.
In conclusion, while the Great Depression and the recession due to the Covid-19 Crisis share some similarities as economic downturns, they differ in terms of length, severity, impact on the economy, policy response, and causes. The Great Depression was longer and more severe, impacting various sectors of the economy, while the Covid-19 recession was initially severe but rebounded relatively quickly. The policy response involved different approaches, with the Great Depression seeing the implementation of the New Deal and the Covid-19 recession witnessing large-scale fiscal stimulus measures. According to Keynesian Theory, stabilization policies face challenges due to time lags and issues of effectiveness and efficiency, making it difficult to smooth out the business cycle effectively.
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Identify the following as either an advantage (A) or a disadvantage (D) of bond financing for a company. a. Unlike equity, bonds do not affect ownership of a company. b. A company earns a higher return with borrowed funds than it pays in interest. c. Bonds require payment of periodic interest.
d. Interest on bonds is tax deductible. e. Bonds require payment of par value at maturity. f. Bonds do not affect owner control. Disadvantage/Advantage
The advantages of bond financing include maintaining ownership control, the potential for higher returns, and tax deductibility of interest payments. The disadvantages include the obligation to make periodic interest payments and the repayment of the full par value at maturity.
a. Advantage (A): Unlike equity, bonds do not affect ownership of a company. Bondholders do not have voting rights or ownership claims over the company's assets, allowing the company to maintain control.
b. Advantage (A): A company can earn a higher return on investment by using borrowed funds (through bonds) than the interest it pays on those bonds. This leverage can enhance profitability and shareholder returns.
c. Disadvantage (D): Bonds require payment of periodic interest. The company must make regular interest payments to bondholders, which can increase financial obligations and affect cash flow.
d. Advantage (A): Interest on bonds is tax deductible. This can provide a tax advantage for the company, reducing its overall tax liability and increasing its after-tax profitability.
e. Disadvantage (D): Bonds require payment of par value at maturity. When bonds reach maturity, the company must repay the bondholders the full par value of the bonds, which can be a significant financial obligation.
f. Advantage (A): Bonds do not affect owner control. Unlike issuing additional equity, issuing bonds does not dilute existing ownership or control of the company.
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Maria Sdn Bhd, had taxable income of RM325,850 for the year. The company's marginal tax rate was 26 percent and its average tax rate was 21 percent. How much did the company have to pay in taxes for the year?
Select one: A. RM45,335.21 B. RM53,235.45 C. RM68,428.50 D. RM32,356.34
To calculate the amount of taxes Maria Sdn Bhd had to pay for the year, we need to use both the marginal tax rate and the average tax rate.
The marginal tax rate refers to the tax rate applied to the last dollar of taxable income, while the average tax rate is the total tax paid divided by taxable income.To find the taxes paid, we can calculate the tax liability using the average tax rate and then adjust it based on the marginal tax rate for any additional income beyond the income threshold.To account for the additional income beyond the income threshold, we calculate the additional tax based on the marginal tax rate.
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Give the following information about the yields: • one year rate 2.96% • two year rate 3.07% • three year rate 3.58% Calculate the following: a. The one-year forward rate in year two is
b. The one-year forward rate in year three is
To calculate the one-year forward rate in year two, we can use the formula:
(1 + r2)^2 = (1 + r1) * (1 + f12)
The one-year forward rate in year two is approximately 3.09%. To calculate the one-year forward rate in year two, we use the formula (1 + r2)^2 = (1 + r1) * (1 + f12), where r1 is the one-year rate (2.96%), r2 is the two-year rate (3.07%), and f12 is the one-year forward rate in year two. Plugging in the values, we find that (1 + f12) is approximately 1.06118449 divided by 1.03037975, which equals 1.02907062. Subtracting 1 and converting to a percentage, the one-year forward rate in year two is approximately 3.09%. This means that the expected interest rate for a one-year investment starting in year two is around 3.09%.
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3. Warranties in the used car market ________ the problem of private information thereby causing the price of good and bad used cars to ________.
A. magnify; be the same
B. reduce; be the same
C. reduce; differ
D. magnify; differ
E. None of the above answers is correct because warranties have nothing to do with private information.
Warranties in the used car market reduce the problem of private information thereby causing the price of good and bad used cars to differ
Option C is correct.
Warranties in the used car market do not directly address the problem of private information. Private information refers to the asymmetry of information between the buyer and the seller, where the seller possesses more information about the quality of the used car than the buyer. Warranties can provide some assurance to buyers about the condition of the car, but they do not eliminate the issue of private information entirely. Therefore, warranties do not have a direct impact on the pricing of good and bad used cars.
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Question 5. (a) Discuss four (4) main differences between the Going Rate and Balance Sheet Approaches to international compensation. (16 marks) (b) Explain any 2 objectives of a multinational firm with regard to its compensation policies? 4 (4 marks)
a) Differences between Going Rate and Balance Sheet Approaches to International Compensation are as follows:
Going Rate Approach: It is a process of developing pay structures that are competitive in the local labor market. It is based on paying host-country nationals and is the primary method used by most firms. It can be expensive, and host-country nationals may not view it as equitable when compared to what expatriates are paid in home country operations. There is little or no reliance on support programs, such as language training and orientation, with this approach.
Balance Sheet Approach: It is a process of developing pay structures that balance the cost of living differences between the host country and the home country. It is based on three components: base salary, cost of living, and additional premiums. Base salary is the amount of money earned by the employee in the home country. Cost of living is the difference between the cost of living in the home country and the host country. Additional premiums are the additional costs incurred by the employee in the host country. With this approach, the employee is generally better off than with the Going Rate approach. It is more expensive for the company than the Going Rate approach. There is more reliance on support programs, such as language training and orientation, with this approach.
b) Objectives of a Multinational Firm with regard to its compensation policies are as follows:
1. Equity: Equity is an objective that multinational corporations aim to achieve by paying their employees the same amount for comparable work, regardless of their location. They must consider the cost of living in each location and adjust wages accordingly to achieve equity in compensation.
2. Cost-effectiveness: Cost-effectiveness is an objective that multinational corporations aim to achieve by developing compensation packages that are affordable and effective. They aim to provide their employees with a package that is competitive in the local labor market while maintaining their overall budget.
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Manama Company had cash sales of $80,000, credit sales of $70,000, sales returns and allowances of $2,000, and sales discounts of $4,000. Manama's net sales for this period equal: O $152,000 O $80,000 O $144,000 O $156,000
Based on the given information, Manama Company's net sales for this period amount to $144,000.
To calculate the net sales, we need to subtract the sales returns and allowances and the sales discounts from the total sales.
Total Sales - Sales Returns and Allowances - Sales Discounts = Net Sales
$80,000 (cash sales) + $70,000 (credit sales) = $150,000 (total sales)
$150,000 - $2,000 (sales returns and allowances) - $4,000 (sales discounts) = $144,000
Therefore, Manama Company's net sales for this period equal $144,000.
In conclusion, based on the given information, Manama Company's net sales for this period amount to $144,000. Net sales represent the total sales revenue after subtracting sales returns and allowances as well as sales discounts.
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Assuming a 2 percent annual increase in the price of
automobiles, how much will a new BMW cost you 3 years from now if
today's price is $42000?
The new BMW will cost approximately $44,587.76 three years from now, assuming a 2 percent annual increase in the price of automobiles.
To calculate the future price of a BMW three years from now with a 2 percent annual increase, we can use the formula for compound interest:
Future Price = Present Price * (1 + Annual Increase Rate)^Number of Years
Substituting the given values:
Present Price = $42,000
Annual Increase Rate = 2% = 0.02
Number of Years = 3
Future Price = $42,000 * (1 + 0.02)^3
Calculating this expression:
Future Price = $42,000 * (1.02)^3
Future Price = $42,000 * 1.061208
Future Price = $44,587.76
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You are planning your retirement in 10 years. You currently have $612.000 in a stock account. The stock account will earn a return of 10.5 percent in each of the next 10 years. How much will you have when you retire? Do not round intermediate calculations and round your answers to 2 decimal places, enter values as 32.16, no dollar sign, or comma separator
To calculate the future value of your stock account after 10 years, we can use the formula for compound interest:
Future Value = Present Value × (1 + Interest Rate)^Number of Periods
If you have $612,000 in a stock account and it earns a return of 10.5 percent annually for the next 10 years, your total retirement savings would be approximately $1,640,682. Assuming an initial investment of $612,000 and a consistent annual return of 10.5 percent over a period of 10 years, the compounded growth would result in a retirement savings of approximately $1,640,682. Therefore, when you retire in 10 years, you can expect to have approximately $1,659,704.35 in your stock account.
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it is a group report assignment for marketing n we are on report 4 now on topic Financials and Forecast. so my topic is financial objectives for the new delivery service company what should I write on it
When discussing financial objectives for a new delivery service company, it is essential to focus on revenue growth, profitability, cash flow management, ROI, and cost efficiency.
When discussing financial objectives for a new delivery service company, several key points can be considered:
1. Revenue Growth: One important financial objective is to achieve consistent and sustainable revenue growth. This can be achieved by attracting a large customer base, increasing sales volume, and expanding into new markets.
Setting specific targets for revenue growth, such as a percentage increase over a specific period, will help guide the company's efforts.
2. Profitability: Another crucial financial objective is to ensure profitability. The company needs to generate sufficient revenue to cover costs, including operating expenses, overheads, and investments in technology and infrastructure.
Monitoring and improving profit margins through efficient operations, cost management, and pricing strategies will contribute to the company's long-term financial success.
3. Cash Flow Management: Maintaining positive cash flow is vital for the financial health of any business. The delivery service company should establish objectives to ensure that incoming cash from customers exceeds outgoing cash for expenses and investments.
Efficient billing and collection processes, managing payment terms, and minimizing inventory and supply chain costs are some strategies to maintain healthy cash flow.
4. Return on Investment (ROI): The company should set objectives to achieve a satisfactory return on investment. This means evaluating the profitability of investments made in equipment, vehicles, technology systems, and marketing initiatives.
Setting specific targets for ROI will help ensure that investment decisions contribute to the company's overall financial objectives.
5. Cost Efficiency: Controlling costs and improving operational efficiency is critical for financial success. The company should set objectives to reduce costs, eliminate waste, and optimize resource utilization.
This can involve initiatives such as streamlining delivery routes, leveraging technology for efficient order management and tracking, and negotiating favorable supplier contracts.
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Ninecent Corporation has a target capital structure of 70 percent common stock, 10 percent preferred stock, and 20 percent debt. Its cost of equity is 12 percent, the cost of preferred stock is 5 percent, and the pretax cost of debt is 6 percent. The relevant tax rate is 24 percent.
a. What is the company's WACC? (Do not round intermediate calculations and enter your answer as a percent. rounded to 2 decimal places, e.g., 32.16.) b. What is the aftertax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
The after-tax cost of debt is 6% multiplied by (1 - 0.24), which equals 4.56%.
The Weighted Average Cost of Capital (WACC) can be calculated by weighting the cost of each component of capital by its respective proportion in the company's capital structure. The cost of equity is 12%, which represents 70% of the capital structure. The cost of preferred stock is 5%, representing 10% of the capital structure. The pre-tax cost of debt is 6%, representing 20% of the capital structure. The relevant tax rate is 24%.To calculate the WACC, we multiply the cost of equity by the weight of equity, add the cost of preferred stock multiplied by the weight of preferred stock, and add the after-tax cost of debt multiplied by the weight of debt.
The aftertax cost of debt can be calculated by multiplying the pretax cost of debt by (1 - tax rate). In this case, the pre-tax cost of debt is 6% and the tax rate is 24%. Therefore, the after-tax cost of debt is 6% multiplied by (1 - 0.24), which equals 4.56%.
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1. 20% increase in dividend per share
II. Repurchase of 25% of the firm's outstanding shares using cash.
III. New common share offering that would increase shares outstanding by 30%.
IV. New issue of bonds that is sold at par and a coupon rate of 3%.
Which of the corporate actions will result in an INCREASE in FCFE:
The corporate action that will result in an increase in FCFE (Free cash flow to equity) is a new issue of bonds that is sold at par and a coupon rate of 3%. The correct option is (IV).
Free Cash Flow to Equity (FCFE) is the amount of cash a firm generates that is available to be distributed to its equity holders. It is determined by subtracting the investments in property, plant, and equipment (CapEx), net debt repayments, and preferred dividends from a company's cash flows from operations (CFO). When a company issues bonds and sells them at par, it generates cash inflow. This additional cash can be used for various purposes, such as funding investments, expanding operations, or paying off existing debt. Increasing the available cash positively impacts the FCFE.
The dividend per share is a distribution of a part of a company's net income that is paid to its shareholders. If the dividend per share is increased by 20%, the cash paid out as a dividend will increase by the same percentage. As a result, FCFE will decline since there will be less cash left after the dividend payments. A repurchase of 25% of the firm's outstanding shares using cash reduces the number of shares outstanding and hence, the equity, lowering the FCFE. A new common share offering that would increase shares outstanding by 30% would result in a lower FCFE since the new shares would reduce the earnings per share (EPS), as well as dilute the ownership and profits for existing shareholders.A new bond issuance that is sold at par and a coupon rate of 3% will raise additional funds without increasing the number of outstanding shares, lowering the equity, or increasing the dividend payments. As a result, the FCFE will increase. Therefore, a new bond issuance that is sold at par and a coupon rate of 3% is the corporate action that will result in an increase in FCFE. So, the correct option is (IV).
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Information technology are playing important role in the
performance improvement of logistics industry. List the major type
information technologies and describes it's role in the workflow of
port man
Information technologies play a crucial role in the performance improvement of the logistics industry, particularly in the workflow of port management.
Some major types of information technologies used in this context are: Transportation Management Systems (TMS): TMS software helps in optimizing and managing transportation activities, including route planning, load optimization, carrier selection, and freight tracking. It enables efficient coordination and execution of shipments, improving the overall workflow of port management.
Warehouse Management Systems (WMS): WMS software automates and streamlines warehouse operations, including inventory management, order fulfillment, and storage optimization. It provides real-time visibility into inventory levels, location tracking, and efficient order processing, enhancing the workflow within port warehouses.
Electronic Data Interchange (EDI): EDI facilitates the electronic exchange of business documents and information between trading partners. It enables seamless communication and data integration across different systems, reducing paperwork, minimizing errors, and speeding up information flow within port operations.
GPS and RFID Technologies: Global Positioning System (GPS) and Radio Frequency Identification (RFID) technologies provide real-time tracking and monitoring of shipments, containers, and vehicles. They enable accurate location tracking, inventory management, and enhance supply chain visibility, leading to improved workflow and operational efficiency at ports.
Cloud Computing: Cloud-based technologies offer scalable and flexible computing resources and storage capabilities. They enable port management to access and share information securely, collaborate with stakeholders, and leverage advanced analytics and data-driven insights to optimize operations and improve workflow efficiency.
These information technologies play a significant role in enhancing communication, automation, visibility, and data management within port management workflows, ultimately improving overall efficiency, reducing costs, and enhancing customer satisfaction.
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most of the information that flows downward in an organization is geared toward helping employees do their jobs.
Information flow refers to the transmission of data or communication from one individual or department to another. In an organization, information must flow smoothly from one level to another. Most of the information that flows downward in an organization is geared toward helping employees do their jobs.
The company’s management is responsible for the flow of information. They must ensure that all employees are informed of any developments or changes that affect their work. Managers provide direction and guidance for employees by passing down the information that employees require to do their jobs effectively. They ensure that workers are trained to handle their tasks, and the management team often provides feedback on their performance.
Most of the time, companies have information-sharing systems that aid in information flow. These systems may be manual, such as memos or face-to-face communication, or automated, such as email or other digital technologies. The flow of information in an organization is a crucial aspect of any successful business.
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One year ago, Carson Industries issued a 10-year, $1,000 PAR coupon bond at its PAR value. This Bond's annual coupon rate is 11%. Coupons are paid 2 times in a year. The Bond is currently trading at $900. However, this bond can be called in 6 years from today at a price of $1065 What is the capital gains yield on this Bond for the coming year? Enter your answer in the following format: + or -0.1234 Hint: Answer is between 0.0063 and 0.0077
The capital gains yield on the given bond for the coming year is -0.0070, which is rounded to four decimal places.Answer: -0.0070To calculate the capital gains yield, the formula is used:Capital gains yield = (P1 - P0 + D) / P0Where,P0 = The purchase price of the bondP1 = The expected price of the bond at the end of the holding periodD = The periodic income received from the bond (Annual coupon / Frequency)
The bond's current price is $900, and it was issued with a PAR value of $1000; hence, it is trading at a discount of $100 ($1000 - $900). Therefore, we can calculate the yield as follows:Capital gains yield = (-100 - (0.11 * 1000 / 2)) / 900= -0.0711The negative value of -0.0711 tells us that the bond's price has decreased. This implies that the capital gains yield is negative, which implies that there is a loss to the holder of the bond.
In one year, the new price of the bond will be (900 + 0.11 * 1000 / 2) = $955. Hence, the expected capital gains yield for the coming year is:Capital gains yield = (955 - 900 + (0.11 * 1000 / 2)) / 900= -0.0070Therefore, the capital gains yield on the given bond for the coming year is -0.0070.
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Cove's Cakes is a local bakery. Price and cost information follows:
Price per cake $13,51
Variable cost per cake
Ingredients 2,30
Direct labor 1,13
Overhead (box, etc.) 0,23
Fixed cost per month $3,940.00
Required: 1. Calculate Cove's new break-even point under each of the following independent scenarios: a. Sales price increases by $1.10 per cake. b. Fixed costs increase by $465 per month. c. Variable costs decrease by $0.30 per cake. d. Sales price decreases by $0.30 per cake. 2. Assume that Cove sold 415 cakes last month. Calculate the company's degree of operating leverage. 3. Using the degree of operating leverage, calculate the change in profit caused by a 9 percent increase in sales revenue
Degree of Operating Leverage is Approximately 13.52 and Change in Profit caused by a 9 percent increase in sales revenue is Approximately $1.22 increase in profit.
To calculate Cove's new break-even point and the degree of operating leverage, we'll need to use the provided information. Let's go through each scenario step by step:
1. New Break-Even Point:
a. Sales price increases by $1.10 per cake:
New Sales Price per Cake = $13.51 + $1.10 = $14.61
Contribution Margin per Cake = Sales Price per Cake - Variable Cost per Cake
Contribution Margin per Cake = $14.61 - ($2.30 + $1.13 + $0.23) = $10.95
New Break-Even Point = Fixed Costs / Contribution Margin per Cake
b. Fixed costs increase by $465 per month:
New Fixed Costs = $3,940 + $465
New Break-Even Point = New Fixed Costs / Contribution Margin per Cake
c. Variable costs decrease by $0.30 per cake:
New Variable Cost per Cake = Ingredients - $0.30 + Direct Labor - $0.30 + Overhead - $0.30
New Break-Even Point = Fixed Costs / (Sales Price per Cake - New Variable Cost per Cake)
d. Sales price decreases by $0.30 per cake:
New Sales Price per Cake = $13.51 - $0.30
New Break-Even Point = Fixed Costs / (New Sales Price per Cake - Variable Cost per Cake)
2. Degree of Operating Leverage:
Degree of Operating Leverage (DOL) = Contribution Margin / Net Operating Income
Contribution Margin = Sales Revenue - Variable Costs
Net Operating Income = Sales Revenue - Variable Costs - Fixed Costs
To calculate the degree of operating leverage, we need the sales revenue and variable costs for the given sales volume of 415 cakes.
3. Change in Profit caused by a 9 percent increase in sales revenue:
Change in Profit = Degree of Operating Leverage * Percent Change in Sales Revenue
Let's perform the calculations using the provided information:
Sales Price per Cake: $13.51
Variable Cost per Cake
Ingredients: $2.30
Direct Labor: $1.13
Overhead: $0.23
Fixed Costs per Month: $3,940.00
Sales Volume: 415 cakes
1. New Break-Even Point:
a. Sales price increases by $1.10 per cake:
New Sales Price per Cake: $14.61
Contribution Margin per Cake: $10.95
New Break-Even Point: $3,940.00 / $10.95 = 359.82 cakes (approximately 360 cakes)
b. Fixed costs increase by $465 per month:
New Fixed Costs: $3,940.00 + $465 = $4,405.00
New Break-Even Point: $4,405.00 / $10.95 = 402.28 cakes (approximately 403 cakes)
c. Variable costs decrease by $0.30 per cake:
New Variable Cost per Cake: $2.30 - $0.30 + $1.13 - $0.30 + $0.23 - $0.30 = $2.16
New Break-Even Point: $3,940.00 / ($13.51 - $2.16) = 336.50 cakes (approximately 337 cakes)
d. Sales price decreases by $0.30 per cake:
New Sales Price per Cake: $13.51 - $0.30 = $13.21
New Break-Even Point: $3,940.00 / ($13.21 - $2.30 - $1.13 - $0.23) = 369.04 cakes (approximately 369 cakes)
2. Degree of Operating Leverage:
Sales Revenue = Sales Price per Cake x Sales Volume = $13.51 x 415 = $5,609.65
Variable Costs = (Ingredients + Direct Labor + Overhead) x Sales Volume = ($2.30 + $1.13 + $0.23) x 415 = $1,354.80
Net Operating Income = Sales Revenue - Variable Costs - Fixed Costs = $5,609.65 - $1,354.80 - $3,940.00 = $314.85
Degree of Operating Leverage (DOL) = Contribution Margin / Net Operating Income
Contribution Margin = Sales Revenue - Variable Costs = $5,609.65 - $1,354.80 = $4,254.85
DOL = $4,254.85 / $314.85 ≈ 13.52
3. Change in Profit caused by a 9 percent increase in sales revenue:
Change in Profit = DOL x Percent Change in Sales Revenue
Change in Profit = 13.52 x 0.09 = $1.22 (approximately $1.22 increase in profit)
Therefore, based on the provided data and calculations:
1. a) New Break-Even Point: Approximately 360 cakes
b) New Break-Even Point: Approximately 403 cakes
c) New Break-Even Point: Approximately 337 cakes
d) New Break-Even Point: Approximately 369 cakes
2. Degree of Operating Leverage: Approximately 13.52
3. Change in Profit caused by a 9 percent increase in sales revenue: Approximately $1.22 increase in profit.
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Smith is determining the viability of a new product line. The new product will require a $360,000 piece of equipment. Shipping and installation will cost $40,000. The equipment has a 3-year tax life, and the allowed depreciation for such property are 33%, 45%, 15%, and 7% for Years 1 through 4. Inventory will increase by $15,000, account payable increasing by $8,000 and account receivables increasing by $10,000. The product line is expected to generate annual revenue (sales) of $126,000 per year, with cost of goods sold being $56,000 per year and other costs (excluding depreciation) of $12,000 per year. The tax rate is 30 percent, annual interest expense is $11,000 per year, and the required return for this project is 12 percent. a. Find depreciation for years 1, 2, 3, and 4. Find year 2 EBIT. b. C. Find the year 2 cash flow, FCF2
The FCF for year two is $52,400. Earnings before interest and taxes is $58,000
Depreciation for year 1:
Depreciation expense = 33% × ($360,000 + $40,000) = $136,800
Depreciation for year 2:
Depreciation expense = 45% × ($360,000 + $40,000) = $183,600
Depreciation for year 3:
Depreciation expense = 15% × ($360,000 + $40,000) = $72,000
Depreciation for year 4:
Depreciation expense = 7% × ($360,000 + $40,000) = $37,800
Year 2 EBIT (Earnings before interest and taxes)
Year 2 EBIT = Sales - Cost of goods sold - Other costs (excluding depreciation) = $126,000 - $56,000 - $12,000 = $58,000
The formula to calculate free cash flows is FCF = EBIT (1 - T) + Depreciation - Capital expenditures - Increases in net working capital
Year 2 capital expenditure = cost of equipment + shipping and installation costs = $360,000 + $40,000 = $400,000
Year 2 increase in net working capital = increase in inventory + increase in accounts receivable - increase in accounts payable = $15,000 + $10,000 - $8,000 = $17,000
Tax rate (T) = 30%
Year 2 FCF = Year 2 EBIT (1 - T) + Depreciation - Capital expenditures - Increases in net working capital= $58,000 (1 - 0.3) + $183,600 - $400,000 - $17,000= -$52,400
Therefore, the year 2 FCF is -$52,400.
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Suppose that stock price of a stock is $15, the exercise price is $18, the risk-free interest rate is 8% per annum, the price of a three-month European call option on the stock is $1.5. What will be the price of a three-month European put option on the stock if put-call parity holds?
the price of a three-month European put option on the stock, if put-call parity holds, is approximately $3.11.
Put-call parity is a fundamental relationship between the prices of European call and put options. It states that the difference between the prices of a call option and a put option is equal to the difference between the stock price and the exercise price, discounted at the risk-free interest rate.
According to put-call parity:
Call price - Put price = Stock price - Exercise price * e^(-r * t)
where:
Call price = Price of the European call option
Put price = Price of the European put option
Stock price = Current price of the stock
Exercise price = Strike price of the options
r = Risk-free interest rate
t = Time to expiration in years
Given the information:
Call price = $1.5
Stock price = $15
Exercise price = $18
r = 8% per annum (0.08)
t = 3 months (0.25 years)
We can rearrange the put-call parity equation to solve for the put price:
Put price = Call price - (Stock price - Exercise price * e²(-r * t))
Put price = $1.5 - ($15 - $18 * e²(-0.08 * 0.25))
Calculating this expression, the price of a three-month European put option on the stock, if put-call parity holds, is approximately $3.11.
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While travelling to Dammam, you involved in a car accident. Your maximum out-of-pocket is SR15, 000. In your health insurance policy stated the following clause on coinsurance and deductible. Calendar year Deductible is equivalent to SR5, 000 and Coinsurance is 25%. The total damage is SR50,000. Calculate: 1. deductible 2. coinsurance 3. out of pocket amount
The calculations are as follows:
1. Deductible: SR5,000
2. Coinsurance: SR11,250
3. Out-of-pocket amount: SR15,000
1. Deductible:
The deductible is the amount that you must pay out of pocket before your insurance coverage kicks in. In this case, the deductible is stated as SR5,000.
2. Coinsurance:
Coinsurance is the percentage of the covered expenses that you are responsible for paying after meeting the deductible. In this case, the coinsurance is stated as 25%.
To calculate the coinsurance amount, determine the covered expenses after the deductible has been met:
Covered expenses = Total damage - Deductible
Covered expenses = SR50,000 - SR5,000 = SR45,000
Coinsurance amount = Covered expenses * Coinsurance rate
Coinsurance amount = SR45,000 * 0.25 = SR11,250
3. Out-of-pocket amount:
The out-of-pocket amount is the total amount you have to pay, including the deductible and coinsurance.
Out-of-pocket amount = Deductible + Coinsurance amount
Out-of-pocket amount = SR5,000 + SR11,250 = SR16,250
However, since your maximum out-of-pocket is stated as SR15,000, the maximum limit applies. Therefore, your out-of-pocket amount would be SR15,000.
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duncan: no more that thane of cawdor shall deceive our bosom interest: go pronounce his present death, and with his former title greet macbeth.
In this line from Shakespeare's play Macbeth, Duncan instructs someone to announce the death of the current Thane of Cawdor and to greet Macbeth with his new title, expressing his trust in Macbeth's loyalty.
In this line from Shakespeare's play Macbeth, King Duncan is addressing someone, most likely a messenger or an attendant, giving them specific instructions. He declares that the current Thane of Cawdor, who has betrayed their trust, should no longer deceive them. Duncan orders the messenger to announce the immediate death of the traitorous thane and simultaneously bestow his former title upon Macbeth. By doing so, Duncan is demonstrating his confidence in Macbeth's loyalty and rewarding him for his bravery and service. This line reflects the political dynamics and power struggles within the play, as well as the theme of deception and trust.
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What is The carrier’s obligations to provide a seaworthy vessel
under the common law and statutes (Hague and Hague Visby
rules).
Under common law and statutes such as the Hague and Hague-Visby Rules, the carrier has specific obligations to provide a seaworthy vessel when it comes to maritime transportation.
Common Law: Under common law, the carrier has a duty to exercise due diligence to make the vessel seaworthy before the voyage commences. This duty includes ensuring that the vessel is reasonably fit for its intended purpose, properly equipped, manned by a competent crew, and in a condition to withstand the ordinary perils of the sea. Failure to provide a seaworthy vessel can result in the carrier being held liable for any losses or damages that may occur during the voyage.
Hague and Hague-Visby Rules: The Hague and Hague-Visby Rules are international conventions that regulate the liability of carriers in international maritime transportation. These rules impose obligations on the carrier regarding the seaworthiness of the vessel. According to these rules, the carrier is obligated to exercise due diligence to make the vessel seaworthy before and at the beginning of the voyage. The carrier must ensure that the vessel is reasonably fit to carry the cargo and properly manned, equipped, and supplied.
It's important to note that the extent of the carrier's obligations may vary depending on the specific terms and provisions of the contract of carriage and applicable laws. However, the carrier's general obligation remains to provide a seaworthy vessel to ensure the safe and secure transportation of goods and passengers.
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Feather Friends, Incorporated, distributes a high-quality wooden birdhouse that sells for $120 per unit. Variable expenses are $60.00 per unit, and fixed expenses total $200,000 per year. Its operatin
1. The product's CM ratio is 50%, indicating that 50% of each sales dollar contributes towards covering fixed expenses and generating profit.
2. The break-even point in dollar sales is $320,000, which is the level of sales needed to cover all expenses and result in zero net operating income.
3. If this year's sales increase by $55,000 with no change in fixed expenses, the net operating income will increase by $27,500, calculated based on the CM ratio.
4. The degree of operating leverage based on last year's sales is 1.11. Assuming a 15% increase in sales, the net operating income is expected to increase by 16.65% based on the degree of operating leverage.
5. Implementing the sales manager's suggestions would require further analysis considering the potential increase in unit sales, the impact on net operating income, and other factors such as market conditions and profitability.
6. To maintain the same net operating income as last year, the president can increase advertising expenses by $108,571.43 while increasing the sales commission by $2.20 per unit and assuming a 25% increase in sales.
1. The product's CM ratio is 50%. (Contribution Margin / Sales = $1,620,000 / $3,240,000 = 0.5)
2. The break-even point in dollar sales can be calculated by dividing the fixed expenses by the CM ratio. ($160,000 / 0.5 = $320,000)
3. If this year's sales increase by $55,000 and fixed expenses remain the same, the net operating income will increase by $27,500. (CM ratio x Increase in Sales = 0.5 x $55,000 = $27,500)
4-a. The degree of operating leverage based on last year's sales can be calculated by dividing the contribution margin by the net operating income. ($1,620,000 / $1,460,000 = 1.11)
4-b. Assuming a 15% increase in sales, the percentage increase in net operating income can be calculated by multiplying the degree of operating leverage by the percentage increase in sales. (1.11 x 15% = 16.65%)
5. a. If the sales manager's suggestions are implemented, the net operating income can be calculated by adjusting the unit sales, selling price, and advertising expenses accordingly based on the given information.
b. The recommendation to implement the sales manager's suggestions would depend on the analysis of the potential increase in unit sales and the impact on net operating income. Other factors such as market conditions, competitors' actions, and overall profitability should also be considered.
6. To maintain the same net operating income of $1,460,000 as last year, the president can increase advertising expenses by $108,571.43 while increasing the sales commission by $2.20 per unit and assuming a 25% increase in sales. This can be calculated by dividing the increase in net operating income ($27,500) by the CM ratio (0.5) minus the increase in the sales commission ($2.20) per unit. ($27,500 / (0.5 - $2.20) = $108,571.43)
The complete question must be:
Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $120 per unit. Variable expenses are $60.00 per unit, and fixed expenses total $160,000 per year. Its operating results for last year were as follows:
Sales $ 3,240,000
Variable expenses 1,620,000
Contribution margin 1,620,000
Fixed expenses 160,000
Net operating income $ 1,460,000
Required:
Answer each question independently based on the original data:
1. What is the product's CM ratio?
2. Use the CM ratio to determine the break-even point in dollar sales.
3. If this year's sales increase by $55,000 and fixed expenses do not change, how much will net operating income increase?
4-a. What is the degree of operating leverage based on last year's sales?
4-b. Assume the president expects this year's sales to increase by 15%. Using the degree of operating leverage from last year, what percentage increase in net operating income will the company realize this year?
5. The sales manager is convinced that a 11% reduction in the selling price, combined with a $64,000 increase in advertising, would increase this year's unit sales by 25%.
a. If the sales manager is right, what would be this year's net operating income if his ideas are implemented?
b. Do you recommend implementing the sales manager's suggestions?
6. The president does not want to change the selling price. Instead, he wants to increase the sales commission by $2.20 per unit. He thinks that this move, combined with some increase in advertising, would increase this year's sales by 25%. How much could the president increase this year's advertising expense and still earn the same $1,460,000 net operating income as last year?
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In their contract of sale of Dr Sage's Special Powders, AWLS (Melbourne distributor of health supplements and natural remedies) and Happy Herbs Ltd (US manufacturer and distributor of natural and herbal remedies) agreed that payment would be by a commercial letter of credit. When Happy Herbs informed the purchaser, AWLS, that the powders were ready for delivery, AWLS opened a letter of credit with the National Wealth Bank (NWB) and the Bank of Los Angeles (BLA) was named as the advising bank. The letter of credit specified that it incorporated the UCP600 rules, and that presentation must be "made within 10 calendar days of the shipment or before 15 July 2018, which is when the credit expires."
AWLS organised for transport of the goods by air with Los Angeles Airways. On 10 June, after being advised that the credit was opened by the Bank of Los Angeles, HH shipped to the goods to Los Angeles Airport, and Los Angeles Airways took delivery of the goods, issuing an Air Waybill.
However, HH has encountered a problem in obtaining payment under its letter of credit. After shipping the goods on 10 June, a HH representative presented documents and a request for payment on Friday, 21 June 2018. On the following Wednesday the manager of the Bank of Los Angeles contacted HH and advised HH that the Bank was refusing payment on the following grounds:
- The letter of credit described the goods as "100,000 units Dr Sage’s Special Powders." However, the invoice presented describes the goods as 100,000 units Dr Sage’s Special Remedy Powders– lavender, sage, corn flour not more than 30%"
- The presentation is too late
Discuss whether HH has made a complying presentation with reference to any relevant UCP600 Rules and any relevant cases.
Based on the provided information, we can analyze whether Happy Herbs (HH) has made a complying presentation under the UCP600 rules.
1. Description of the Goods:
The discrepancy between the description of the goods in the letter of credit and the invoice may be considered a deviation. According to UCP600 Article 14(a), the documents must be in strict compliance with the terms and conditions of the credit. If the letter of credit specifies "Dr Sage’s Special Powders" while the invoice describes the goods as "Dr Sage’s Special Remedy Powders – lavender, sage, corn flour not more than 30%," it could be considered a discrepancy. However, the significance of this discrepancy depends on whether it can be deemed a "minor discrepancy" or a "discrepancy." Further evaluation of the UCP600 rules and case law would be necessary to determine the impact of this discrepancy on the compliance of the presentation.
2. Timing of Presentation:
The letter of credit stipulated that the presentation must be made within 10 calendar days of shipment or before 15 July 2018, which is when the credit expires. HH presented the documents and the payment request on Friday, 21 June 2018, which is within the 10-day period from the shipment date of 10 June. However, it is unclear whether the Bank of Los Angeles is considering the presentation as late due to the specific time of day when the presentation was made. The exact time requirements for the presentation and the operating hours of the advising bank should be assessed to determine if the presentation was timely.
To provide a definitive analysis, it would be necessary to consult the specific provisions of UCP600, the terms and conditions of the letter of credit, and any relevant case law to ascertain the impact of the discrepancies and the timeliness of the presentation.
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All of the following are other than primary sources of GAAP in Canada except:
a) the CPA Handbook.
b) guidance given on specific topics in textbooks, journals and articles.
c) pronouncements of other standard setting bodies.
d) accounting literature and accepted industry practices
e) accounting literature and accepted industry practices.
All of the following are other than primary sources of GAAP in Canada except accounting literature and accepted industry practices. Accounting literature and accepted industry practices are primary sources of GAAP in Canada.
GAAP stands for Generally Accepted Accounting Principles, which is a collection of guidelines, standards, procedures, and rules that organizations use to prepare and present their financial statements. Canadian GAAP is a collection of conventions, principles, and practices that accountants use to compile and analyze financial data in Canada.
These are both established conventions and procedures that accountants use to analyze financial data and present it to stakeholders. They are influenced by the Canadian Accounting Standards Board (AcSB), which oversees Canadian GAAP development. The CPA Handbook, guidance on particular subjects in textbooks, journals, and articles, and pronouncements from other standard-setting bodies are all considered secondary sources of GAAP. These sources supplement or explain primary sources of GAAP but are not the primary sources themselves. The accounting literature refers to a collection of books, articles, and other written materials that accountants use to supplement their knowledge and understanding of accounting standards and procedures. It provides practical examples and guidance for dealing with complicated accounting issues. Accepted industry practices refer to conventions and customs that are unique to particular industries. These conventions are widely accepted within the industry and are often followed by most businesses in that industry. In conclusion, accounting literature and accepted industry practices are primary sources of GAAP in Canada.
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Two shares of stock are purchased for $100 each at the beginning of a year. The expected val- ues of Stock A and Stock B one year from now are $120 and $150, respectively. The market is in equilibrium, and the riskless interest rate is 5%. The market portfolio's mean race of return is 15%. SML a. Calculate the beta of each of these two stocks. b. Assume that R, given by Equation 95 is the cost of equity which is the expected rate of return by stockholders. What is the ev of the investment in each of these two stocks? What is the NPV? c. Suppose you hold a portfolio composed of one share of each stock. Calculate your portfolio's beta. Calculate this portfolio's PV and NPV.
a. Stock A's beta is 1.4 and Stock B's beta is 2.1.
b. The expected value of the investment in Stock A is $110 and the NPV is $10.
c. The portfolio's beta is 1.75. The portfolio's PV is $220 and the NPV is $20.
How to solveI have used the following formulas:
Beta = (Expected return on stock - Risk-free rate) / (Market return - Risk-free rate)
Expected value = (Expected return on stock * Initial investment) + (Risk-free rate * Initial investment)
NPV = Expected value - Initial investment
Portfolio beta = (Weight of Stock A * Beta of Stock A) + (Weight of Stock B * Beta of Stock B)
Portfolio PV = (Weight of Stock A * PV of Stock A) + (Weight of Stock B * PV of Stock B)
Portfolio NPV = (Weight of Stock A * NPV of Stock A) + (Weight of Stock B * NPV of Stock B)
The expected value of the investment in Stock B is $135 and the NPV is $35.
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Which of the following statements are true regarding dividends? (You may select more than one answer.)
1.A stock dividend increases the number of outstanding shares.
2.A stock dividend commonly indicates management's confidence that the company is doing well.
3.A large stock dividend is recorded with an increase to retained earnings.
4.Stock dividends are sometimes referred to as cazingreained earnings.
The following statements are true regarding dividends:1. A stock dividend increases the number of outstanding shares.2. A stock dividend commonly indicates management's confidence that the company is doing well.
3. A large stock dividend is recorded with an increase to retained earnings. Therefore, the correct options are: A, B and C.Option A is true because a stock dividend increases the number of outstanding shares. Outstanding shares are shares that have been issued by a corporation that have not been repurchased or retired.Option B is true because a stock dividend commonly indicates management's confidence that the company is doing well. When a company pays a stock dividend, it is indicating that it believes it will have enough cash to continue to pay its regular cash dividend in the future.Option C is true because a large stock dividend is recorded with an increase to retained earnings. When a company issues a large stock dividend, it is usually because it wants to conserve cash and therefore is paying its shareholders in stock instead.
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The aggregate supply -- aggregate demand model discussed in class implies that fiscal policy and monetary policy usually work by shifting aggregate demand, not aggregate supply. O the government can cause a permanent increase in real GDP by using the right policies. O if a policy change causes aggregate demand to shift in the short run, it will shift back in the long run.
The aggregate supply--aggregate demand model suggests that fiscal and monetary policies primarily affect aggregate demand and can lead to temporary shifts in the short run, but they do not directly cause permanent changes in aggregate supply.
In the aggregate supply--aggregate demand model, fiscal policy refers to government spending and taxation decisions, while monetary policy involves the control of interest rates and the money supply by the central bank. These policies are designed to influence aggregate demand, which represents the total demand for goods and services in an economy.
Fiscal policy works by adjusting government spending and taxes to stimulate or dampen aggregate demand. For example, during an economic downturn, the government may increase spending or reduce taxes to boost aggregate demand and stimulate economic activity. Similarly, monetary policy aims to influence aggregate demand by adjusting interest rates or the money supply. By lowering interest rates or increasing the money supply, the central bank encourages borrowing and spending, thereby stimulating aggregate demand.
While fiscal and monetary policies can have short-term effects on aggregate demand, they do not directly impact aggregate supply, which represents the total amount of goods and services that an economy can produce. Factors such as technological progress, labor force participation, and productivity determine the long-term growth potential of an economy's aggregate supply.
The aggregate supply--aggregate demand model suggests that fiscal and monetary policies primarily affect aggregate demand, leading to short-term shifts in the economy. However, to achieve a permanent increase in real GDP, policies that focus on long-term factors influencing aggregate supply, such as investments in education, infrastructure, and innovation, are crucial. It is important for policymakers to consider both demand-side and supply-side factors when formulating effective economic policies.
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Explain how trading systems known as ""cap & trade"" work and their potential benefits. What are the benefits and costs of carbon taxes? How do revenue neutral carbon taxes work and are they preferable?
(a) Cap and trade is a market-based approach used to control and reduce emissions of pollutants, particularly greenhouse gases. It involves setting a limit or cap on the total amount of emissions that can be released by regulated entities, such as industries or power plants. The total allowable emissions are divided into permits or allowances, each representing a specific amount of emissions. These allowances are either allocated or auctioned to the regulated entities.
The potential benefits of cap and trade include:
Environmental effectivenessEconomic efficiencyInnovation and technological development(b) The main benefits of carbon taxes include:
SimplicityRevenue generationMarket Stability(c) Revenue-neutral carbon taxes refer to the approach where the revenue generated from carbon taxes is offset by reducing other taxes, such as income taxes or corporate taxes.
Under cap and trade, regulated entities can buy, sell, or trade these allowances. If a company emits less than its allocated allowances, it can sell the surplus allowances to other companies. Conversely, if a company exceeds its allowances, it must purchase additional allowances from the market. This creates a market for emissions allowances, with the price of allowances being determined by supply and demand.
The potential benefits of cap and trade include:
Environmental effectiveness: By setting a cap on emissions, the total level of pollution can be controlled and reduced over time. The market allows for flexibility, as companies can choose to reduce emissions or purchase allowances to comply with the cap.
Economic efficiency: Cap and trade systems create incentives for companies to find the most cost-effective ways to reduce emissions. Companies with lower costs of emission reduction can sell their allowances to those with higher costs, leading to overall lower compliance costs.
Innovation and technological development: The financial incentives provided by the market encourage companies to invest in research and development of cleaner technologies and practices to reduce emissions.
On the other hand, carbon taxes work by directly imposing a tax on the carbon content of fossil fuels or the amount of greenhouse gas emissions produced. The tax is levied on the entities that produce or import fossil fuels. The main benefits of carbon taxes include:
Simplicity: Carbon taxes provide a straightforward and transparent mechanism to price carbon emissions. The tax is levied per unit of emissions, making it easy to understand and administer.
Revenue generation: Carbon taxes can generate significant revenue for governments, which can be used for various purposes such as funding renewable energy projects, investing in infrastructure, or providing rebates to low-income households.
Market stability: Carbon taxes provide a stable and predictable price signal for carbon emissions, which can incentivize long-term investments in low-carbon technologies and infrastructure.
Revenue-neutral carbon taxes refer to the approach where the revenue generated from carbon taxes is offset by reducing other taxes, such as income taxes or corporate taxes. This ensures that the overall tax burden on the economy remains the same. Revenue neutrality can help address concerns about the economic impact of carbon taxes and mitigate potential negative effects on competitiveness.
Whether revenue-neutral carbon taxes are preferable depends on various factors, including the specific context and priorities of a country or region. They can be attractive as they provide an opportunity to reduce other taxes and potentially promote economic growth. However, the effectiveness and desirability of revenue neutrality depend on the design and implementation of the tax and the distributional impacts on different sectors and income groups. It is important to carefully consider the trade-offs and potential impacts when evaluating the suitability of revenue-neutral carbon taxes as a policy instrument.
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Project cash flows where there is an investment today followed by future cash flows, all of which are positive, are defined as: O A. Independent B. Mutually exclusive O C. Conventional O D. Random
Project cash flows where there is an investment today followed by future cash flows, all of which are positive, are defined as C. Conventional
Conventional cash flows are project cash flows when there is an investment today followed by future positive cash flows.
The first investment in a typical cash flow pattern is negative (an outflow) at time 0, while the successive cash flows are positive (inflows) in the succeeding periods.
These cash flows follow a typical pattern where a project begins with an initial investment or cost and then over time as the business moves forward, positive cash flows are produced.
Traditional cash flow examples include capital investments, where a one-time investment is made to purchase assets or build a project, and positive cash flows are then produced by the use of or sale of those assets in the future.
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Consider a simple economy with two consumers (con- sumer a and b; I = 2), a single consumption good x (corn), and two time periods (L = 2). Con- sumption of the good in period t is denoted by x₁ for t = 1,2. Intertemporal utility functions for the two consumers are u² (x₁, x₂) = a log x₁ + log x₂, i = a, b, where a > 1 is an exogenous variable. Endowments are wa = (50,0) and wb = (125,0). The good can be perfectly stored at no physical cost, so what is not consumed in period 1 can be saved and consumed in period 2. Furthermore, each consumer produces the good for consumption in the second period, and the production function is given by q² = 6√z², i = a,b, where z denotes the amount of the consumption good, not consumed in period 1 but used as input for production by consumer i. Apart from production, the two consumer can trade their endowments with one another at the price of 1 +r, where r> 0 indicates the interest rate. (a) Suppose that the two consumers cannot trade with one another. How much does each consume in each period? How well off is each consumer? (b) Now suppose that there are competitive "spot" and "futures" markets for this good. Write the Walrasian equilibrium conditions. (c) Compute a Walrasian equilibrium, and explain how the equilibrium responds to a change in a.
In the absence of trade, consumer a consumes 50 units in period 1 and consumer b consumes 125 units in period 2, resulting in undefined utility for both. In a Walrasian equilibrium with trade, the equilibrium outcome depends on specific values and equations.
(a) In the absence of trade, consumer a consumes the entire endowment in both periods: x₁a = 50 and x₂a = 0. Consumer b, on the other hand, consumes nothing in period 1 and consumes the entire endowment in period 2: x₁b = 0 and x₂b = 125. The utility for consumer a is u₁a = a log(50) + log(0), which is undefined since log(0) is not defined. The utility for consumer b is u₁b = a log(0) + log(125), which is also undefined. Therefore, neither consumer is well-off in this scenario.
(b) In a competitive equilibrium, the Walrasian equilibrium conditions state that total demand equals total supply for each period. This can be expressed as follows:
Demand: x₁a + x₁b = wa₁ + wb₁
Demand: x₂a + x₂b = wa₂ + wb₂
Supply: q₁a + q₁b = z₁
Supply: q₂a + q₂b = z₂
(c) To compute a Walrasian equilibrium, we need to solve the system of equations from the Walrasian equilibrium conditions. The equilibrium outcome will depend on the specific values of a, the interest rate r, and the initial endowments. Changes in a will affect the consumer's preferences, potentially altering their demand for consumption in each period and their willingness to trade. The equilibrium response to a change in a will depend on how it impacts the utility functions and, consequently, the consumers' consumption decisions. The specific calculations to determine the equilibrium and its response to a change in a require solving the equations and substituting the given values.
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Consider the 110 Sep EUR European put, which has a current premium of 3.5 cents per EUR. The contract size is 10,000 Euros. If at maturity the exchange rate is $1.09/€, the profit of the put for the long is -$450 None of the options -$250 Would not exercise. The loss is $350. -$100
The correct option is -$250. Consider the 110 Sep EUR European put, which has a current premium of 3.5 cents per EUR. The contract size is 10,000 Euros.
The premium for 1 Euro = 0.035 USD.Total premium paid by the long = 10,000 * 0.035 = 350 USD. If at maturity the exchange rate is $1.09/€, the profit of the put for the long is =$450.Hence, the net profit = profit – premium = 450 – 350 = 100 USD.Therefore, the option that matches the net profit is -$100, which is not one of the options given in the question.
When the exchange rate is $1.09/€, the option will only be profitable if the rate drops below $1.10/€. Since the rate is higher than the strike price, the put option is out of the money and exercising it would result in a loss of $250 (the premium paid). Therefore, the correct answer is that the long would not exercise the option, resulting in a loss of -$250.
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