Question 1 Amber owned and operated a boutique chocolate shop in Sydney that she purchased for $240,000 in August 2010. The purchase price consisted of equipment and stock worth $110,000 and the balance being goodwill. Following the birth of her child, Amber decided to sell the shop in February 2018 for $440,000 of which $280,000 was attributed to goodwill. Amber was also required to sign a contract restricting her from opening another similar business within a 20km radius for the next 5 years. She received an additional sum of $50,000 for this contract. Due to their expanding family, Amber and her husband purchased a four bedroom home in the outer suburbs of Sydney in June 2018. The purchase was partly funded by the sale of the business but also by the sale of Amber’s one bedroom inner-city apartment. Amber had lived in the apartment since she inherited it from her Uncle in October 2013. He had purchased it in September 1992 for $180,000 and lived in it until he died. At the time of his death the apartment was valued at $390,000. Amber signed a contract for the sale of the apartment in May 2018 for $550,000 and settlement took place in July 2018. Required Advise Amber of the taxation consequences of these transactions. You are not required to calculate any capital gains or losses.

Forecasting Cash Flow and Burn Rate

1. Create a Cash Flow Forecast on Excel using the following assumptions:
   Forecast duration: Years 0 through 5, then Exit
   Unit Sales: Sell 2000 units your first year and increase 30% per year
   Price: $100/unit first year and increase 5% per year
   COGS: Calculate based on a 75% Gross Profit Margin
   NOTE: to complete the Operating Expense section, break it into two lines: Payroll and Other
   Payroll: Start with 2 employees in year 0 paid $50,000 each; add 1 employee with every additional year, at same pay
   Other Operating Expenses: $75,000 per year starting year 0, no change over the 5 years
   Capital Expenditures: $30,000 every other year starting year 0. Assume you pay in cash, no credit
   NOTE: to complete the Working Capital section, break it into 1 line for each of the 4 components
   Increase in Accounts Receivable: Based on giving customers 60 days of credit
   Increase in Inventory: Based on keeping 3 months of Inventory on hand
   Increase in Accounts Payable: Based on your vendors giving you 30 days of credit
   Increase in Accrued Payroll: Based on paying your employees every other week
   Exit Sell company for 5x Year 5 EBITDA

Financial institutions in the U.S. economy

Suppose Raphael would like to use $10,000 of his savings to make a financial investment.

One way of making a financial investment is to purchase stock or bonds from a private company.

Suppose RoboTroid, a robotics firm, is selling stocks to raise money for a new lab—a practice known as (equity, debt) finance. Buying a share of RoboTroid stock would (an IOU, or promise to pay, from, or a claim to partial ownership in) the firm. In the event that RoboTroid runs into financial difficulty, (Raphael and the other stockholders will be paid first, or, the bondholders) will be paid first.

Suppose Raphael decides to buy 100 shares of RoboTroid stock.

Which of the following statements are correct? Check all that apply.

The Dow Jones Industrial Average is an example of a stock exchange where he can purchase RoboTroid stock.

Expectations of a recession that will reduce economywide corporate profits will likely cause the value of Raphael's shares to decline.

The price of his shares will rise if RoboTroid issues additional shares of stock.

Alternatively, Raphael could make a financial investment by purchasing bonds issued by the U.S. government.

Assuming that everything else is equal, a U.S. government bond that matures 10 years from now most likely pays a (higher, lower) interest rate than a U.S. government bond that matures 30 years from now.

Lowell Company makes and sells artistic frames for pictures. The controller is responsible for preparing the master budget and has accumulated the following information for 2017. January February March April May Estimated unit sales 10,700 11,000 9,000 8,700 8,900 Sales price per unit $50.60 $47.90 $47.90 $47.90 $47.90 Direct labor hours per unit 2.1 2.1 1.5 1.5 1.5 Wage per direct labor hour $7.00 $7.00 $7.00 $8.00 $8.00 Lowell has a labor contract that calls for a wage increase to $8.00 per hour on April 1. New labor-saving machinery has been installed and will be fully operational by March 1. Lowell expects to begin the year with 18,400 frames on hand and has a policy of carrying an end-of-month inventory of 100% of the following month’s sales, plus 70% of the second following month’s sales. Prepare a production budget for Lowell Company by month and for the first quarter of the year. LOWELL COMPANY Production Budget Jan Feb Mar Total : : Prepare a direct labor budget for Lowell Company by month and for the first quarter of the year. The direct labor budget should include direct labor hours. (Round Direct labor hours per unit answers to 1 decimal place, e.g. 52.7.) LOWELL COMPANY Direct Labor Budget Jan Feb Mar Total $ $ $ $ $ $ $

Use the following information to answer question 1) A-F. Assume today is 12/27/2016. An assistant portfolio manager reviewed the prospectus of a General Electric Corporate (US) bond that will be issued on January 15 of 2017. The Offering Price is 104.50. The call schedule for this $200 million, 5.75% coupon 20-year issue specifies the following:

The Bonds will be redeemable at the option of the Company at any time in whole or in part, upon not fewer than 30 nor more than 60 days’ notice, at the following redemption prices (which are expressed in percentages of principal amount) in each case together with accrued interest to the date fixed for redemption:

If redeemed January 15,

Sinking Fund: The prospectus further specifies that:

The Company will provide for the retirement by redemption of $40 million of the principal amount of the Bonds each January 15th of the years 2032 to and including 2036 at the principal amount thereof (100%), together with accrued interest to the date of redemption.

Your comment on this statement:

Answer the following as of issue date: 1/15/2017.

1. What is the bond’s current yield?
2. What is the bond’s yield to maturity?
3. What is bond’s yield to first call?
4. What is bond’s yield to first sink?
5. What is yield to the 2031 call?

Assume a Cobb-douglas utility function of 2 goods x and y given by U = x 0.5y 0.5 and an initial income I of 100. Let initial price be px = 4 and py = 1. Now vary the price of x from 1 to 7 in steps of 1. So you have 7 prices for x. px = {1, 2, 3, 4, 5, 6, 7} For each of these px, py REMAINS the SAME at 1. In the excel sheet fill columns F (demand for x), G(demand for y), H(utility from x, y), K (marshallian demand x), L (hicksian demand x, xh), M (Income for hicksian demand), N (demand for y under hicksian case yh) and O (utility from xh, yh) For x

(a) compute and plot the Marshallian Demand

(b) compute and plot the Hicksian Demand assuming the base price of x, px = 4. or ensuring that utility is computed and kept constant when initial prices were px = 4, py = 1 and Income I = 100 Fill

Part B. Price Indexes and Inflation

The CPI (consumer price index) and PGDP (GDP Deflator, GDP price index) have the following values.

The CPI figures are for the month of June. The GDP Deflator figures are for the second quarter of the year.

B1. Why is the level of the CPI higher than that of the GDP deflator, that is, in the 250s rather than only in the 110s?

B2. What is CPI inflation in 2020? What is GDP inflation in 2020? Carry the answers to two decimal places. Show your computations.

B3. What is the explanation for the difference in the inflation rates, even though the years involved are the same?

B4. (i) What are the uses of the CPI? What are the uses of the GDP Deflator? (ii) What are the advantages of the CPI? What are the advantages of the GDP Deflator?

B5. Suppose that inflation of three percent is expected (anticipated) in 2021? How do financial markets ensure that neither borrowers nor lenders suffer as a consequence? [Hint: Assume that the "real interest rate" is unchanged.]

You purchased 100 shares of a company for $76.03, and borrowed $5,000 of the original purchase from your broker on margin. Since then, the stock price has increased by 14.6%. If your broker charges a 4.5% interest rate on margin accounts, what is your overall return?

A stock that does not pay a dividend is trading at $73.50. A riskless bond that will pay $100 after a year is trading at $97. A European call option on the stock with strike price of $65 and one year to maturity is trading at $5.00. Propose an arbitrage strategy and prove that it is an arbitrage strategy.