Managerial Finance

The MNC is a retail apparel store (shits, pants, dress) in BRAZIL exporting US apparel brands

International Financial Management BOOK is: Madura, J. (2015). International financial management (12th ed.). Cengage Learning

Using Currency Futures and Options

•How can you use currency futures to hedge the exchange rate risk of your MNC?

•How can you use currency options to hedge the exchange rate risk of your MNC?

Accessing Futures Quotes

•Go to the CME Group’s website. Determine the prevailing futures price of the main foreign currency for your business.

•Go to the Oanda Corporation’s website and determine the prevailing spot rate.

•What is the discount or premium of the futures price?

Determining Whether IFE Holds

•Use The Wall Street Journal or another data source to record the interest rate differential between the interest rate of the foreign country in which you plan to do business and the U.S. rate over the last five or so quarters.

•Then, review the exchange rate percentage change in the foreign currency of concern over each of those corresponding quarters to determine whether the international Fisher effect (IFE) appears to hold over those quarters for that currency.

Monitoring Exchange Rate Trends

•Use a business periodical or the Internet to determine how the value of the foreign currency of concern has changed in each of the last five weeks.

•Does it appear that there is a trend over the last five weeks?

•What is the mean percent-age change over these weeks?

•If you believed that the currency’s value would continue following the recent trend, would it appreciate or depreciate in the near future?

Writing Requirements (APA format)

•4-6 pages (approx. 300 words per page), not including title page or references page

 
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Chapter 2 Problems

2-1) An investor recently purchased a corporate bond that yields 9%. The investor is in the

36% combined federal and state tax bracket. What is the bond’s after-tax yield?

2-2) Corporate bonds issued by Johnson Corporation currently yield 8%. Municipal bonds of equal risk currently yield 6%. At what tax rate would an investor be indifferent between these two bonds?

2-7) The Talley Corporation had a taxable income of $365,000 from operations after all operating costs but before (1) interest charges of $50,000, (2) dividends received of $15,000, (3) dividends paid of $25,000, and (4) income taxes. What are the firm’s income tax liability and its after-tax income? What are the company’s marginal and average tax rates on taxable income?

2-9) The Shrieves Corporation has $10,000 that it plans to invest in marketable securities. It is

choosing among AT&T bonds, which yield 7.5%, state of Florida muni bonds, which yield 5% (but are not taxable), and AT&T preferred stock, with a dividend yield of 6%. Shrieves’s corporate tax rate is 35%, and 70% of the dividends received are tax exempt. Find the after-tax rates of return on all three securities.

2-13) The Bookbinder Company has made $150,000 before taxes during each of the last 15 years, and it expects to make $150,000 a year before taxes in the future. However, in 2013 the firm incurred a loss of $650,000. The firm will claim a tax credit at the time it files its 2013 income tax return, and it will receive a check from the U.S. Treasury. Show how it calculates this credit, and then indicate the firm’s tax liability for each of the next 5 years. Assume a 40% tax rate on all income to ease the calculations.

  1. Prepare an ending 1998 Income Statement and Balance Sheet from the following information:  Sales $800,000; Cost of Goods Sold $300,000; Accounts Receivables $20,000; Bonds Outstanding $160,000; Accounts Payable $20,000; Advertising Expense $1,000; Administrative Expenses $35,000; Interest Expense $24,000; Depreciation Expense $40,000; Dividends Paid $137,000; Rent Expense $5,000; Accruals $20,000; Common Stock $100,000; Retained Earnings $245,000 (Beginning 0f 1998); Cash $20,000; Inventory $45,000; Net Fixed Assets $600,000 (Beginning of 1998).  (Assume a 40% Tax Rate)
 
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Chapter 11 Questions 

(11-2)  Operating cash flows, rather than accounting profits, are used in project analysis. What is

the basis for this emphasis on cash flows as opposed to net income?

(11-4)  Explain why sunk costs should not be included in a capital budgeting analysis but

opportunity costs and externalities should be included.

(11-5)  Explain how net operating working capital is recovered at the end of a project’s life and

why it is included in a capital budgeting analysis.

(11-7)  Why are interest charges not deducted when a project’s cash flows are calculated for use in

a capital budgeting analysis?

(11-8)  Most firms generate cash inflows every day, not just once at the end of the year. In capital

budgeting, should we recognize this fact by estimating daily project cash flows and then

using them in the analysis? If we do not, will this bias our results? If it does, would the

NPV be biased up or down? Explain.

(11-11)  In theory, market risk should be the only “relevant” risk. However, companies focus as

much on stand-alone risk as on market risk. What are the reasons for the focus on stand-

alone risk?

Chapter 11 Problems

(11-3)  Allen Air Lines must liquidate some equipment that is being replaced. The equipment

originally cost $12 million, of which 75% has been depreciated. The used equipment can

be sold today for $4 million, and its tax rate is 40%. What is the equipment’s after-tax net

salvage value?

(11-4)  Although the Chen Company’s milling machine is old, it is still in relatively good working

order and would last for another 10 years. It is inefficient compared to modern standards,

though, and so the company is considering replacing it. The new milling machine, at a

cost of $110,000 delivered and installed, would also last for 10 years and would produce

after-tax cash flows (labor savings and depreciation tax savings) of $19,000 per year. It

would have zero salvage value at the end of its life. The firm’s WACC is 10%, and its

marginal tax rate is 35%. Should Chen buy the new machine?

(11-6)  The Campbell Company is considering adding a robotic paint sprayer to its

production line. The sprayer’s base price is $1,080,000, and it would cost another

$22,500 to install it. The machine falls into the MACRS 3-year class, and it would be

sold after 3 years for $605,000. The MACRS rates for the first three years are 0.3333,

0.4445, and 0.1481. The machine would require an increase in net working capital

(inventory) of $15,500. The sprayer would not change revenues, but it is expected to

save the firm $380,000 per year in before-tax operating costs, mainly labor.

Campbell’s marginal tax rate is 35%.

a. What is the Year 0 net cash flow?

b. What are the net operating cash flows in Years 1, 2, and 3?

c. What is the additional Year-3 cash flow (i.e., the after-tax salvage and the return of

working capital)?

d. Based on your IRR analysis, if the project’s cost of capital is 12%, should the machine be purchased?

Chapter 12 Problems

(12-1)  Broussard Skateboard’s sales are expected to increase by 15% from $8 million in

2013 to $9.2 million in 2014. Its assets totaled $5 million at the end of 2013.

Broussard is already at full capacity, so its assets must grow at the same rate as

projected sales. At the end of 2013, current liabilities were $1.4 million, consisting

of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of

accruals. The after-tax profit margin is forecasted to be 6%, and the forecasted

payout ratio is 40%. Use the AFN equation to forecast Broussard’s additional funds

needed for the coming year.

(12-8)  Stevens Textiles’s 2013 financial statements are shown here:

Balance Sheet as of December 31, 2013 (Thousands of Dollars)

Cash                                         $  1,080          Accounts payable                          $  4,320

Receivables                                 6,480          Accruals                                               2,880

Inventories                                  9,000          Line of credit                                             0

Total current assets               $16,560         Notes payable                                   2,100

Net fixed assets                         12,600        Total current liabilities                 $  9,300

                                                                          Mortgage bonds                               3,500

                                                                          Common stock                                  3,500

                                                   ______         Retained earnings                            12,860

   Total assets                           $29,160            Total liabilities and equity        $ 29,160

Income Statement for December 31, 2013 (Thousands of Dollars)

Sales                                                                $36,000

Operating costs                                               32,440

Earnings before interest and taxes           $  3,560

Interest                                                                   460

Pre-tax earnings                                              $ 3,100

Taxes (40%)                                                         1,240

Net income                                                       $ 1,860

Dividends (45%)                                                  $  837

Addition to retained earnings                       $ 1,023

a. Suppose 2014 sales are projected to increase by 15% over 2013 sales. Use the

forecasted financial statement method to forecast a balance sheet and income

statement for December 31, 2014. The interest rate on all debt is 10%, and cash

earns no interest income. Assume that all additional debt in the form of a line of

credit is added at the end of the year, which means that you should base the

forecasted interest expense on the balance of debt at the beginning of the year. Use

the forecasted income statement to determine the addition to retained earnings.

Assume that the company was operating at full capacity in 2013, that it cannot sell

off any of its fixed assets, and that any required financing will be borrowed as

notes payable. Also, assume that assets, spontaneous liabilities, and operating costs

are expected to increase by the same percentage as sales. Determine the additional

funds needed.

b. What is the resulting total forecasted amount of the line of credit?

 
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Chapter 9 Problems

(9-1)  Calculate the after-tax cost of debt under each of the following conditions:

          a. rd of 13%, tax rate of 0%

          b. rd of 13%, tax rate of 20%

          c. rd of 13%, tax rate of 35%

(9-3)  Duggins Veterinary Supplies can issue perpetual preferred stock at a price of $50 a share

with an annual dividend of $4.50 a share. Ignoring flotation costs, what is the company’s

cost of preferred stock, rps?

(9-6)  Booher Book Stores has a beta of 0.8. The yield on a 3-month T-bill is 4%, and the yield

on a 10-year T-bond is 6%. The market risk premium is 5.5%, and the return on an

average stock in the market last year was 15%. What is the estimated cost of common

equity using the CAPM?

(9-8)  David Ortiz Motors has a target capital structure of 40% debt and 60% equity. The yield to

maturity on the company’s outstanding bonds is 9%, and the company’s tax rate is 40%.

Ortiz’s CFO has calculated the company’s WACC as 9.96%. What is the company’s cost of

equity capital?

(9-9)  A company’s 6% coupon rate, semiannual payment, $1,000 par value bond that matures

in 30 years sells at a price of $515.16. The company’s federal-plus-state tax rate is 40%.

What is the firm’s after-tax component cost of debt for purposes of calculating the

WACC? (Hint: Base your answer on the nominal rate.)

Chapter 10 Questions

(10-2)  What types of projects require the least detailed and the most detailed analysis in the

capital budgeting process?

(10-4)  When two mutually exclusive projects are being compared, explain why the short-term

project might be ranked higher under the NPV criterion if the cost of capital is high

whereas the long-term project might be deemed better if the cost of capital is low. Would

changes in the cost of capital ever cause a change in the IRR ranking of two such projects?

Why or why not?

Chapter 10 Problems

(10-7)  Your division is considering two investment projects, each of which requires an up-front

expenditure of $15 million. You estimate that the investments will produce the following

net cash flows:

             Year                                       Project A                            Project B

                1                                         $5,000,000                         $20,000,000

                2                                         10,000,000                           10,000,000

                3                                         20,000,000                             6,000,000

a. What are the two projects’ net present values, assuming the cost of capital is 5%?

    10%? 15%?

b. What are the two projects’ IRRs at these same costs of capital?

(10-9)  Davis Industries must choose between a gas-powered and an electric-powered forklift

truck for moving materials in its factory. Because both forklifts perform the same

function, the firm will choose only one. (They are mutually exclusive investments.) The

electric-powered truck will cost more, but it will be less expensive to operate; it will cost

$22,000, whereas the gas-powered truck will cost $17,500. The cost of capital that applies

to both investments is 12%. The life for both types of truck is estimated to be 6 years,

during which time the net cash flows for the electric-powered truck will be $6,290 per year

and those for the gas-powered truck will be $5,000 per year. Annual net cash flows include

depreciation expenses. Calculate the NPV and IRR for each type of truck, and decide

which to recommend.

(10-12)  After discovering a new gold vein in the Colorado mountains, CTC Mining Corporation

must decide whether to go ahead and develop the deposit. The most cost-effective method of

mining gold is sulfuric acid extraction, a process that could result in environmental damage.

Before proceeding with the extraction, CTC must spend $900,000 for new mining equipment

and pay $165,000 for its installation. The gold mined will net the firm an estimated $350,000

each year for the 5-year life of the vein. CTC’s cost of capital is 14%. For the purposes of this

problem, assume that the cash inflows occur at the end of the year.

              a. What are the project’s NPV and IRR?

              b. Should this project be undertaken if environmental impacts were not a consideration?

              c. How should environmental effects be considered when evaluating this, or any other,

                  project? How might these concepts affect the decision in part b?

 
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Chapter 5 Questions

(5-2)  “Short-term interest rates are more volatile than long-term interest rates, so short-term

bond prices are more sensitive to interest rate changes than are long-term bond prices.”

Is this statement true or false? Explain.

(5-3)  The rate of return on a bond held to its maturity date is called the bond’s yield to maturity.

If interest rates in the economy rise after a bond has been issued, what will happen to the

bond’s price and to its YTM? Does the length of time to maturity affect the extent to which

a given change in interest rates will affect the bond’s price? Why or why not?

(5-4)  If you buy a callable bond and interest rates decline, will the value of your bond rise by as

much as it would have risen if the bond had not been callable? Explain.

(5-5)  A sinking fund can be set up in one of two ways. Discuss the advantages and

disadvantages of each procedure from the viewpoint of both the firm and its bondholders.

Chapter 5 Problems

(5-1)  Jackson Corporation’s bonds have 12 years remaining to maturity. Interest is paid

annually, the bonds have a $1,000 par value, and the coupon interest rate is 8%. The

bonds have a yield to maturity of 9%. What is the current market price of these bonds?

(5-2)  Wilson Wonders’s bonds have 12 years remaining to maturity. Interest is paid annually,

the bonds have a $1,000 par value, and the coupon interest rate is 10%. The bonds sell at a

price of $850. What is their yield to maturity?

(5-5)  A Treasury bond that matures in 10 years has a yield of 6%. A 10-year corporate bond has

a yield of 9%. Assume that the liquidity premium on the corporate bond is 0.5%. What is

the default risk premium on the corporate bond?

(5-6)  The real risk-free rate is 3%, and inflation is expected to be 3% for the next 2 years. A 2-year

Treasury security yields 6.3%. What is the maturity risk premium for the 2-year security?

(5-7)  Renfro Rentals has issued bonds that have a 10% coupon rate, payable semiannually.

The bonds mature in 8 years, have a face value of $1,000, and a yield to maturity of 8.5%.

What is the price of the bonds?

(5-8)  Thatcher Corporation’s bonds will mature in 10 years. The bonds have a face value of

$1,000 and an 8% coupon rate, paid semiannually. The price of the bonds is $1,100.

The bonds are callable in 5 years at a call price of $1,050. What is their yield to maturity?

What is their yield to call?

(5-10) The Brownstone Corporation’s bonds have 5 years remaining to maturity.

Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest

rate is 9%.

            a. What is the yield to maturity at a current market price of (1) $829 or (2) $1,104?

            b. Would you pay $829 for one of these bonds if you thought that the appropriate rate

                 of interest was 12%—that is, if rd = 12%? Explain your answer.

 (5-14)  A bond that matures in 7 years sells for $1,020. The bond has a face value of $1,000 and a

yield to maturity of 10.5883%. The bond pays coupons semiannually. What is the bond’s

current yield?

(5-18)  The real risk-free rate is 2%. Inflation is expected to be 3% this year, 4% next year, and

then 3.5% thereafter. The maturity risk premium is estimated to be 0.0005 × (t − 1), where

t = number of years to maturity. What is the nominal interest rate on a 7-year Treasury

security?

(5-21)  Suppose Hillard Manufacturing sold an issue of bonds with a 10-year maturity, a $1,000

par value, a 10% coupon rate, and semiannual interest payments.

            a. Two years after the bonds were issued, the going rate of interest on bonds such as

                 these fell to 6%. At what price would the bonds sell?

            b. Suppose that 2 years after the initial offering, the going interest rate had risen to 12%.

                 At what price would the bonds sell?

            c. Suppose that 2 years after the issue date (as in part a) interest rates fell to 6%.

                Suppose further that the interest rate remained at 6% for the next 8 years. What

                would happen to the price of the bonds over time?

 
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Chapter 4 Questions

(4-2)  What is an opportunity cost rate? How is this rate used in discounted cash flow analysis,

and where is it shown on a time line? Is the opportunity rate a single number that is used

to evaluate all potential investments?

(4-5)  Would you rather have a savings account that pays 5% interest compounded semiannually or

one that pays 5% interest compounded daily? Explain.

Chapter 4 Problems

(4-1)  If you deposit $10,000 in a bank account that pays 10% interest annually, how much will

be in your account after 5 years?

(4-2)  What is the present value of a security that will pay $5,000 in 20 years if securities of equal

risk pay 7% annually?

(4-6)  What is the future value of a 7%, 5-year ordinary annuity that pays $300 each year? If this

were an annuity due, what would its future value be?

(4-7)  An investment will pay $100 at the end of each of the next 3 years, $200 at the end of Year

4, $300 at the end of Year 5, and $500 at the end of Year 6. If other investments of equal

risk earn 8% annually, what is this investment’s present value? Its future value?

(4-8)  You want to buy a car, and a local bank will lend you $20,000. The loan would be fully

amortized over 5 years (60 months), and the nominal interest rate would be 12%, with

interest paid monthly. What is the monthly loan payment? What is the loan’s EFF%?

(4-16)  Find the amount to which $500 will grow under each of the following conditions.

             a. 12% compounded annually for 5 years

             b. 12% compounded semiannually for 5 years

             c. 12% compounded quarterly for 5 years

             d. 12% compounded monthly for 5 years

(4-17)  Find the present value of $500 due in the future under each of the following conditions.

            a. 12% nominal rate, semiannual compounding, discounted back 5 years

            b. 12% nominal rate, quarterly compounding, discounted back 5 years

            c. 12% nominal rate, monthly compounding, discounted back 1 year

(4-18)  Find the future values of the following ordinary annuities.

            a. FV of $400 each 6 months for 5 years at a nominal rate of 12%, compounded

                semiannually

            b. FV of $200 each 3 months for 5 years at a nominal rate of 12%, compounded quarterly

            c. The annuities described in parts a and b have the same total amount of money paid

                into them during the 5-year period, and both earn interest at the same nominal rate,

                yet the annuity in part b earns $101.75 more than the one in part a over the 5 years.

                Why does this occur?

(4-19)  Universal Bank pays 7% interest, compounded annually, on time deposits. Regional Bank

pays 6% interest, compounded quarterly.

          a. Based on effective interest rates, in which bank would you prefer to deposit your money?

          b. Could your choice of banks be influenced by the fact that you might want to

               withdraw your funds during the year as opposed to at the end of the year? In

               answering this question, assume that funds must be left on deposit during an entire

               compounding period in order for you to receive any interest.

(4-22)  Washington-Pacific invested $4 million to buy a tract of land and plant some young pine

trees. The trees can be harvested in 10 years, at which time W-P plans to sell the forest at

an expected price of $8 million. What is W-P’s expected rate of return?

(4-25)  While Mary Corens was a student at the University of Tennessee, she borrowed $12,000

in student loans at an annual interest rate of 9%. If Mary repays $1,500 per year, then how

long (to the nearest year) will it take her to repay the loan?

(4-28)  Assume that you inherited some money. A friend of yours is working as an unpaid intern at a

local brokerage firm, and her boss is selling securities that call for 4 payments of $50 (1

payment at the end of each of the next 4 years) plus an extra payment of $1,000 at the end of

Year 4. Your friend says she can get you some of these securities at a cost of $900 each. Your

money is now invested in a bank that pays an 8% nominal (quoted) interest rate but with

quarterly compounding. You regard the securities as being just as safe, and as liquid, as your

bank deposit, so your required effective annual rate of return on the securities is the same as

that on your bank deposit. You must calculate the value of the securities to decide whether

they are a good investment. What is their present value to you?

 
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Chapter 3 Questions

(3-3)  Over the past year, M. D. Ryngaert & Co. has realized an increase in its current ratio and a

drop in its total assets turnover ratio. However, the company’s sales, quick ratio, and fixed

assets turnover ratio have remained constant. What explains these changes?

(3-5)  How might (a) seasonal factors and (b) different growth rates distort a comparative ratio

analysis? Give some examples. How might these problems be alleviated?

(3-6)  Why is it sometimes misleading to compare a company’s financial ratios with those of

other firms that operate in the same industry?

Chapter 3 Problems

(3-1)  Greene Sisters has a DSO of 20 days. The company’s average daily sales are $20,000. What

is the level of its accounts receivable? Assume there are 365 days in a year.

(3-2)  Vigo Vacations has $200 million in total assets, $5 million in notes payable, and $25

million in long-term debt. What is the debt ratio?

(3-3)  Winston Washers’s stock price is $75 per share. Winston has $10 billion in total assets. Its

balance sheet shows $1 billion in current liabilities, $3 billion in long-term debt, and

$6 billion in common equity. It has 800 million shares of common stock outstanding.

What is Winston’s market/book ratio?

(3-7)  Ace Industries has current assets equal to $3 million. The company’s current ratio is 1.5,

and its quick ratio is 1.0. What is the firm’s level of current liabilities? What is the firm’s

level of inventories?

(3-11)  Complete the balance sheet and sales information in the table that follows for J. White

Industries using the following financial data:

Total assets turnover: 1.5

Gross profit margin on sales: (Sales – Cost of goods sold)/Sales = 25%

Total liabilities-to-assets ratio: 40%

Quick ratio: 0.80

Days sales outstanding (based on 365-day year): 36.5 days

Inventory turnover ratio: 3.75

Partial Income Statement Information

Sales                                    _______

Cost of goods sold            _______

Balance Sheet

Cash                                    _______       Accounts payable                  ______

Accounts receivable        _______       Long-term debt                       50,000

Inventories                        _______        Common stock                        ______

Fixed assets        _______                     Retained earnings                    100,000

Total assets        $400,000                   Total liabilities and equity       ______

(3-13)  Data for Lozano Chip Company and its industry averages follow.

a. Calculate the indicated ratios for Lozano.

b. Construct the extended Du Pont equation for both Lozano and the industry.

c. Outline Lozano’s strengths and weaknesses as revealed by your analysis.

Lozano Chip Company: Balance Sheet as of December 31, 2013 (Thousands

of Dollars)

Cash                                  $  225,000       Accounts payable                 $  601,866

Receivables                       1,575,000       Notes payable                           326,634

Inventories                       1,125,000       Other current liabilities           525,000

Total current assets       $2,950,000            Total current liabilities   $1,453,500

Net fixed assets                1,350,000       Long-term debt                     1,068,750

                                      __________          Common equity                   1,752,750

Total assets                     $4,275,000       Total liabilities and equity  $4,275,000

Lozano Chip Company: Income Statement for Year Ended December 31, 2013

(Thousands of Dollars)

Sales                                                                            $  7,500,000

Cost of goods sold                                                          6,375,000

Selling, general, and administrative expenses             825,000

Earnings before interest and taxes (EBIT)                  $  300,000

Interest expense                                                                111,631

Earnings before taxes (EBT)                                          $  188,369

Federal and state income taxes (40%)                            75,348

Net income                                                                      $  113,022

Ratio                                                                       Lozano                    Industry Average

Current assets/Current liabilities               __________                          2.0

Days sales outstanding (365-day year)    __________                         35.0 days

COGS/Inventory                                             __________                           6.7

Sales/Fixed assets                                         __________                         12.1

Sales/Total assets                                          __________                          3.0

Net income/Sales                                          __________                          1.2%

Net income/Total assets                               __________                          3.6%

Net income/Common equity                      __________                          9.0%

Total debt/Total assets                                __________                       30.0%

Total liabilities/Total assets                          __________                       60.0%

 
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Managerial Economics

Economics Lecture: Chapter 21, 22, 23

Read the following scenarios and complete the corresponding questions. Please remember to answer in complete and grammatically correct sentences.  I am looking for your thought process in the answers to the questions, so be complete in your answers and use the opportunity to clearly demonstrate your newly acquired knowledge.

Scenario 1 (length: 0.5 – 1 page)

Part of a worker’s pay on an automobile assembly line is based on the number of cars in a pay period that come off the worker’s line and pass inspection. The remaining portion of the worker’s pay is an hourly wage that is fixed and only depends on the number of hours the employee works.

1. How does this incentive plan align the employee’s incentives with the firm’s? Is the inspection necessary?

2. What would you recommend to management if they asked you if they should inspect each individual employee’s work and pay based on the individual’s work rather than whether the car passed the final inspection (that is, what are the benefits and costs of paying, for instance, the windshield installer for the number of correctly installed windshields).

3. What decision making ability should the worker have in order to maximize the effectiveness of the incentive plans?

Scenario 2 (length: 0.5 – 1 page)

A large electronics company is organized into mainly profit-center divisions. The components division and the consumer electronics division are profit-center divisions of the company. The components division produces individual chips and other electronic components. The components division supplies outside vendors in addition to the consumer electronics division. The consumer electronics division assembles components into devices sold to consumers.

Recently, there has been a dispute between the two divisions over a particular chip used in the production of a smart phone. The consumer electronics division argues that they are being overcharged because the transfer price they are being charged is significantly higher than the marginal cost of producing the chip. The transfer price includes a charge to recover fixed overhead costs as well as a mark-up to provide a profit margin for the components division. The components division argues that they need to charge a price commensurate with all their costs and that allows them to earn a reasonable profit for their output. Compounding the issue, the particular chip under dispute is available from other vendors at a price less than the transfer price but higher than the marginal cost of production.

You have been hired to suggest a solution to this problem. What would you recommend the electronics company do?

Scenario 3 (length: 0.5 – 1 page)

Suppose you are the main negotiator between your company and retailers carrying your company’s line of dairy products.  Your company is attempting to introduce a new brand of Greek yogurt, and it is your responsibility to negotiate agreement between your company and retailers to ensure as much support for the launch as possible.  The advertising team has designed several in-store displays that your company would like the retailers to use, but those carry a cost to the retailers to set up in terms of employee time and shelf space.  The marketing team has developed a strategy that primarily revolves around an introductory price that is significantly lower than existing brands of Greek yogurt.  Your company has agreed to give some financial support that you can use in whatever way you see fit or necessary to carry out the goal of a successful product launch.  You are tasked to negotiate agreements with the retailers that address the plans of the advertising and marketing teams and to address any other foreseeable issues.

Briefly discuss the contractual clauses that you would offer retailers–and to which the retailers would agree–in order to accomplish your goals.

Writing Requirements

•1-inch margins

•Double spaced

•12-point Times New Roman font

Grading and Assessment

This activity will be graded based on thoroughness and correctness of responses. For the numerical and graphical questions, to achieve full marks you must also show your work.

1. Master the basic techniques of microeconomic analysis such as demand, supply and equilibrium; production and cost theory; and market structure and pricing.

2. Apply economic reasoning to understand and improve managerial decision-making and grasp the analytical foundations underlying a firm’s competitive strategy.

 
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Managerial Economics

Activity Instructions

Read the following scenarios and complete the corresponding questions. Please remember to answer in complete and grammatically correct sentences.  I am looking for your thought process in the answers to the questions, so be complete in your answers and clearly demonstrate your acquired knowledge.

Scenario 1 (length: 0.5 page)

Some recent Super Bowl advertisements have spent very little time mentioning anything about their product–or even the name of the company. For example, the two-minute long Ram Trucks “Farmer” commercial ( http://www.youtube.com/watch?v=AMpZ0TGjbWE ) had only a few brief and almost unidentifiable views of their product until the last ten seconds of the commercial. Further, the name of the company was only mentioned in the last five seconds of that commercial. Explain how commercials of this type demonstrate the concept of signaling. In other words, why should consumers be convinced that the product being “advertised” is of high quality because of the airing of that commercial during the Super Bowl?

Scenario 2 (length: as needed)

Suppose there are two types of people who need health insurance; high-risk and low-risk consumers. High-risk consumers have a relatively high probability of needing expensive medical care and on average incur $2,000 of medical expenses per year. The high-risk consumers would be willing to pay up to $2,500 for insurance that covers all their medical bills. Low-risk consumers would be willing to pay up to $1,400 for full-coverage insurance and on average would incur on average $1,200 in medical bills.  Assume 1/3 of all consumers are high-risk and the remaining 2/3 of consumers are low-risk. Consumers know whether they are high-risk or low-risk. The insurance company knows 2/3 of all consumers are low-risk but cannot identify which consumers are low-risk.

1. If all consumers bought insurance, what price must the insurance company charge to break even in expectation?  That is, what price must the insurance company charge so that the expected payments equals the premium?

2. Which consumers would purchase insurance at that price?

3. Are there wealth-creating transactions that are not consummated because of the information asymmetry?

4. If the low-risk consumers were willing to pay $1,500 for the insurance, how would your answers to questions 2 and 3 change?

Scenario 3 (length: 0.5 – 1 page)

A struggling company currently has a total value of $700,000. It owes $500,000 from debt financing (assume these are loans from the bank if you wish). The value of the company to the owners is the difference between the total value and the amount owed to the debt holders. What is the current value of the firm to the owners?

Now assume that a project is presented to the owners that results in a loss of the entire value of the company with a probability of 50% and results in a gain in value of $500,000 with probability 50% (resulting in a total value of $1,200,000). Show that this in expectation decreases the firm’s value, and explain why, in spite of that, the owners of the company would want to undertake the project.

Writing Requirements

•Length: as needed (Show your calculations where appropriate)

•1-inch margins

•Double spaced

•12-point Times New Roman font

Grading and Assessment

This activity will be graded based on thoroughness and correctness of responses. For the numerical and graphical questions, to achieve full marks you must also show your work.

1. Master the basic techniques of microeconomic analysis such as demand, supply and equilibrium; production and cost theory; and market structure and pricing.

2. Apply economic reasoning to understand and improve managerial decision-making and grasp the analytical foundations underlying a firm’s competitive strategy.

 
"Looking for a Similar Assignment? Order now and Get 10% Discount! Use Code "GET10" in your order"

Managerial Economics

Read the following scenarios and complete the corresponding questions. Please remember to answer in complete and grammatically correct sentences.  I am looking for your thought process in the answers to the questions, so be complete in your answers and use the opportunity to clearly demonstrate your newly acquired knowledge.

Scenario 1 (length: as needed) Show your calculations

Suppose the hotel in the lecture example raised its price from $30 to $30.50. With the new price, the hotel expects 96 guests to arrive 5% of the time, 97 guests 10% of the time, 98 guests 20% of the time, 99 guests 30% of the time, 100 guests 25% of the time and 101 guests 10% of the time. The variable costs per occupied room and overbooking costs are the same as in the lecture.

1. Calculate the expected revenue, expected variable costs and expected costs from overbooking.

2. Using marginal analysis, should the hotel raise its price?  Explain your answer.

Scenario 2 (length: as needed)

You are considering auctioning a Leonardo Da Vinci original sketch. You entice four bidders to come to your auction. The bidders’ valuations of the sketch in decreasing order are $3.0, $2.2, $2.0, and $1.5 (in millions).

  1. If you used a second-price sealed bid auction, who would win and what would the winning price be?
  2. If you used a first-price sealed bid auction and the optimal strategy for the participants was to shade their bid by 20% and the participants used this strategy, who would win and what would the winning price be?
  3. Which auction should you choose to maximize your profit?
  4. How would your answers change to the above questions if the valuations of the sketch are $3.0, $2.7, $2.0 and $1.5?

Scenario 3 (length: 0.5 page)

In the auction described above, suppose that you could entice additional bidders to attend your auction. However, none of the new bidders would have a valuation greater than $3.0 million. Despite that fact, you expect the amount that the winning bidder must pay to increase regardless of the type of auction you use (first- or second-price sealed bid). For each auction, explain why you would expect the auction price to increase. If you want, you may assume the valuations of the original four participants are $3.0, $2.2, $2.0 and $1.5 million.

Writing Requirements

•1-inch margins

•Double spaced

•12-point Times New Roman font

Grading and Assessment

This activity will be graded based on thoroughness and correctness of responses. For the numerical and graphical questions, to achieve full marks you must also show your work.

1. Master the basic techniques of microeconomic analysis such as demand, supply and equilibrium; production and cost theory; and market structure and pricing.

2. Apply economic reasoning to understand and improve managerial decision-making and grasp the analytical foundations underlying a firm’s competitive strategy.

 
"Looking for a Similar Assignment? Order now and Get 10% Discount! Use Code "GET10" in your order"