Suppose that an oil well is expected to produce 12, 00,000 barrels of oil during its first production year However its subsequent production (yield) is expected to decrease by 9% over the previous year's production The oil well has a proven reserve of 10, 50 barrels. (a) Suppose that the price of oil is expected to be $120 per barrel for the next six years. What would be the present worth of the anticipated revenue trim at an interest rate of 10% compounded annually over the next six years? (b) Suppose that the price of oil is expected to start at $120 per barrel during the first year, but to increase at the rate of 3% over the previous year's price. What would be the present worth of the anticipated revenue stream at an interest rate of 10% compounded annually over the next seven years?

Part 1: Acquiring Assets

XYZ Corporation purchased the following assets during the year. Assist XYZ Corporation by determining the cost of each asset.

Land Costs:

Purchase price                                                              $119,520

Surveying fees                                                                   3,550

Title insurance                                                                   1,270

Excavating fees necessary to pass safety inspection           10,250

Building Costs:

Purchase price                                                              $425,000

Title fees                                                                             7,270

Legal fees                                                                               520

Realty fees                                                                         14,560

Interest charges from the first year of the mortgage            12,400

Renovation and repair to make the building usable             11,600

Equipment Costs:

Purchase price                                                              $21,000

Installation costs                                                                 1,200

Shipping charges                                                                     500

Taxes                                                                                   2,300

Maintenance and repair costs incurred in the first year          3,500

Calculate the acquisition cost that should be reported on the balance sheet for the:

1. Land

2. Building

3. Equipment

12. The spot price of an investment asset is $40 and the risk-free rate for all maturities is 8% with continuous compounding. The asset provides an income of $2 at the end of the first year and at the end of the second year. What is the three-year forward price?

A) $46.32 B) $41.23 C) $43.55 D) $47.31

Using a two year semiannual 8% coupon bond, 1000 par, with a 5% YTM. For this question find all answers to at least the 6th decimal place.

Calculate the price of this bond

Calculate duration and modified duration

Price the same bond with a YTM of 6% and 10% as you did in the first part

QUESTION 42

1. Wheel Company makes a product, K9. It has a production capacity of 1,000 units, and it can sell 900 units in the regular market. The regular selling price is $60 each. Wheel has received a request from Tom for a special order of 100 units of K9. This special order does not incur any variable selling cost.  The following is the per-unit cost information:

   Variable manufacturing	$18
   Fixed manufacturing	$20*
   Unit manufacturing cost	$38
   Variable selling	$4
   Fixed selling	$8*
   Unit selling cost	$12
   Total cost	$50

   * based on production and sales of 1,000 units

   Tom wants to buy 100 units at a special price of 35 per unit. If Wheel accepts this order, Wheel’s income will:

   	A.	increase by $900
   	B.	increase by $1,700
   	C.	decrease by $1,500
   	D.	decrease by $1,100
   	E.	increase by $1,300

2 points   

QUESTION 43

1. Use the information given in the previous question. But assume that Wheel can sell all of 10,000 units in the regular market. Wheel does not want the company's profit to decline by accepting the order from Tom. Then, Wheel has to charge at least _____ to Tom for each unit of K9.

   	A.	$46
   	B.	$60
   	C.	$18
   	D.	$24
   	E.	$56

2 points   

QUESTION 44

1. Faxaco has the following cost information regarding a component to be used in making its product, fax machine. The company has a capacity of manufacturing the component up to 900 units.  The manufacturing costs for making 100 units are:   

   Direct materials and labor     $1,800   

   Variable overhead $2,600  

   Fixed overhead                                       $9,000

   $13,400

   Of fixed overhead, 60% can be eliminated if the component is not manufactured. If the component is not manufactured, the facilities can be rented for $6,700.  

   An outside vendor, Fast Company has offered to provide Kappa with the component for $150 each. Faxaco is making a Make or Buy decision. Compared to "Make", "Buy" is:

   	A.	$3,300 better
   	B.	$1,500 better
   	C.	$4,900 worse
   	D.	$600 better
   	E.	$1,600 worse

2 points   

QUESTION 45

1. dKristen Company manufactures three products: X, Y, and Z. The demand for each product is 100 units. The selling price, variable expenses, and contribution margin for one unit of each product follow:

   	Product
   	X	Y	Z
   Selling price	$140	$300	$390
   Less variable expenses        (Only Special steel)	50	100	150
   Contribution margin	$90	$200	$240
   Steel need to make 1 unit	1 kg	2 kg	3 kg

   
   The same special steel is used for all three products. 1 kg of the steel costs $50. Kristen can buy up to 400 kgs.

   Assume that Kristen can also buy Product Y from an importer and resell it. The purchase price of Y would be $270 per unit. In this case, in what order does the company have to make the products?

   	A.	Y è Z è X
   	B.	X è Z è Y
   	C.	Z è X è Y
   	D.	X è Y è Z
   	E.	Y è X è Z

2 points   

QUESTION 46

1. Kristen Company manufactures three products: X, Y, and Z. The demand for each product is 100 units. The selling price, variable expenses, and contribution margin for one unit of each product follow:

   	Product
   	X	Y	Z
   Selling price	$140	$300	$390
   Less variable expenses        (Only Special steel)	50	100	150
   Contribution margin	$90	$200	$240
   Steel need to make 1 unit	1 kg	2 kg	3 kg

   
   The same special steel is used for all three products. 1 kg of the steel costs $50.

   Assume that the company has made all units required for X and Y. Now Kristen does not have enough steel remaining to make all 100 units demanded for Z. An outside vendor can furnish Kristen with additional steel at some price. How much is the highest price that Kristen is willing to pay per kg of additional steel?

   	A.	$100
   	B.	$50
   	C.	$150
   	D.	$80
   	E.	$130

2 points   

QUESTION 47

1. Royal Law is a law firm serving many clients. Each client has a unique case. Royal Law would use:

   	A.	variable costing
   	B.	job costing
   	C.	operations costing
   	D.	process costing
   	E.	target costing

2 points   

QUESTION 48

1. Which of the following approaches allocates overhead with the use of a predetermined overhead rate and standard level of activity?

   	A.	actual costing
   	B.	target costing
   	C.	standard costing
   	D.	process costing
   	E.	normal costing

the following inforomation about one of the items carried in the food inventory of the yellow dog restaurant is taken from inventory records for the month of january. as of january 31, a physical inventory shows 10 on the shelf.

1/1 opening inventory 9 units            $1.07

1/5 purchased           15 units          $ 1.20

1/12 purchased        15 units           $1.25

1/19 purchased       10 units           $1.35

1/26 purchased         6 units            $1.40

1) what is closing inventory unit?

2) determine value ($) of closing inventory for each method.

a) FIFO

b) latest purchase price method

c) weighted average price method.

d) last in, first out method.

3) calculate cost of units issued for each method.

a) FIFO

b) latest purchase price method

c) weighted average price method

d) last in, first out method

Case Study

Please consider the data presented above for the monthly sales of Ever-cool brand of refrigerators in 1,000s of dollars (Dependent Variable) and the four independent variables.

Independent variables are:

Price (in dollars); Promotional Expenditure (in 1,000s of dollars); Quality of service (scale of 1-100); location (categorical variable: city area: 1; suburban area: 0).

Develop a multiple linear regression equation using either Excel or Minitab and based on the relevant outputs please answer the following questions:

a. Based on the relevant residual and normality plots, do you see any evidence of violation of assumptions (Linearity, Normality, Equal variance)? You must attach the relevant plots as part of your report.

b. State the multiple regression equation and interpret the statistical meaning of the estimated slopes, b₁, b₂, b₃, and b₄ (corresponding to the four independent variables).

c. At the 0.05 level of significance, determine whether each independent variable makes a significant contribution to the regression model. Based on these results, indicate the independent variable(s) to include in this model. (Based on t - test results)

d. Construct a 95% confidence interval estimate of the population slope between the independent variable ‘Quality’ and the dependent variable ‘Monthly Sales’ (B3) (please note that Minitab can’t do this directly, however you may use the relevant information from Minitab output and then construct the confidence interval manually)

e. Perform the overall F- test and comment on the significance of the model.

Please follow the following instructions:

• Use Excel/ or Minitab to run the analysis.
• Copy/Paste Excel/ or Minitab results to justify your answers.
• submit original Excel/or minitab results along with your answers

Forward prices of a generic asset The purpose of these problem is to guide you and introduce you the “no-arbitrage” condition required to compute forward prices. For the following problems, assume the following information: There is an asset A. The price of the asset today, denoted by ?0, is ?0 = $100. The CCIR (yearly) is 6%.

Problem 3: No storage cost, and a convenience yield. Assume that asset A has no storage cost and there is a convenience yield. Every 9 months, the holder of the asset receives $13 dollars (you can call that a dividend). Suppose that someone is willing to enter a forward contract of Asset A for delivery in one year from now at ?0,1 = $115

a. We don't know a priori if there is a mispricing. Compute an arbitrage portfolio to exploit the potential mispricing. Hint: start by borrowing today $100

b. Now suppose that someone is willing to enter a forward contract of Asset A for delivery in one year from now at ?0,1 = $80 . Compute an arbitrage portfolio to exploit the potential mispricing. Hint: start by short-selling the asset

c. What would be the forward price that makes the profit in a) and b) zero?

d. Now try to find the general pricing formula. Suppose that the rate is ?, the spot price is ?0 and someone is willing to enter a forward at a forward price of ?0,? for delivery at time t=T. Replicate your portfolio/strategy in a) using this new information. What is the no-arbitrage forward price? Assume that a dividend $? is paid at ?1,?2,?3, … ,?? < �

Forward prices of a generic asset The purpose of these problem is to guide you and introduce you the “no-arbitrage” condition required to compute forward prices. For the following problems, assume the following information: There is an asset A. The price of the asset today, denoted by ?0, is ?0 = $100. The CCIR (yearly) is 6%.

Problem 2: Storage cost, and no convenience yield. Assume that asset A has a storage cost and there is no convenience yield. Every 7 months, the holder of the asset needs to pay $10 dollars for storage. Suppose that someone is willing to enter a forward contract of Asset A for delivery in one year from now at ?0,1 = $120

a. We don’t know a priori if there is a mispricing. Compute an arbitrage portfolio to exploit the potential mispricing. Hint: start by borrowing today $100

b. Now suppose that someone is willing to enter a forward contract of Asset A for delivery in one year from now at ?0,1 = $103 . Compute an arbitrage portfolio to exploit the potential mispricing. Hint: start by short-selling the asset

c. What would be the forward price that makes the profit in a) and b) zero?

d. Now try to find the general pricing formula. Suppose that the rate is ?, the spot price is ?0 and someone is willing to enter a forward at a forward price of ?0,? for delivery at time t=T. Replicate your portfolio/strategy in a) using this new information. What is the no-arbitrage forward price? Assume that a storage cost $? has to be paid ?1,?2,?3, … ,?? < �

​As the CFO of Dragon Airways (ticker symbol: DRAG) you decide to sell 100,000 shares in a ​secondary offering to raise additional capital for an expansion. Your shares currently trade ​at $100/share and have a beta of 1.25. It will take several weeks to complete the ​registration process through the SEC and you are concerned that the overall stock market ​will fall in the interim. So you decide to hedge the stock sale by selling short the shares of ​another airline, LAND. Its shares trade at $75/share and have a beta of 0.95.

​These are the relevant prices today:

​​DRAG: ​Beta: 1.25; share price $100/share.

​​LAND:​Beta: 0.95; share price $75/share​

​Five weeks later, you issue the shares and simultaneously cover your hedge position. Prices ​then are:

​​DRAG:​Share price $107.50/share

​​LAND:​Share price $79.50/share​​

​

​a.​What is the anticipated transaction?

​b. ​What can be done to hedge this risk? (i.e. buy/sell? what? how many shares, how ​​​much in value?)

​c.​How much does the firm pay/receive when it carries out the anticipated transaction?

​d.​What does the firm do to cover the hedge position? Did the hedge transaction produce ​​a profit or a loss, and how much?

​e.​Combining the results of the anticipated transaction and the hedge, what is the ​​​effective price of the overall transaction?