United Firm is planning to buy a new machine for $200,000. The firm’s tax rate is 40%, and its overall WACC is 10%. The new machine has an economic life of 4 years and the salvage value will be $25,000 after 4 years. United Firm is using MACRS 3-year class to depreciate its assets. (i.e. Year 1, depreciate rate is 33.33%, year 2 depreciate rate is 44.45%, year 3 depreciate rate is 14.81% and year 4 depreciation rate is 7.41%). It costs $40,000 for the shipping and installation. Each year, United Firm expects to get an incremental sale of 1,250 units from the new machine. Cost (excluding depreciation) will be $100 for each unit in the first year. It will then increase by 3% per year. Unit price starts at $200 per unit in the first year and will increase by 3% per year as well. In addition, net working capital would have to increase by an amount equal to 12% of sales revenues.

1. Calculate the annual sales revenues and costs (other than depreciation).
2. Construct annual incremental operating cash flow statements.
3. Estimate the required net working capital for each year, and the cash flow due to investments in net working capital.
4. Calculate the after-tax salvage cash flow.
5. Calculate the net cash flows for each year. Based on these cash flows, what are the project’s NPV, IRR, MIRR, PI, payback, and discounted payback? Do these indicators suggest the project should be undertaken?
6. What is the Equivalent Annual Cost of this project?

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.

The assistant portfolio manager made the following statement to a client after reviewing this bond issue. Comment on the statement. (When answering this question, remember that the assistant portfolio manager is responding to statements just before the bond is issued in 2017.)

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

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

Complete the steps below using cell references to given data or previous calculations. In some cases, a simple cell reference is all you need. To copy/paste a formula across a row or down a column, an absolute cell reference or a mixed cell reference may be preferred. If a specific Excel function is to be used, the directions will specify the use of that function. Do not type in numerical data into a cell or function. Instead, make a reference to the cell in which the data is found. Make your computations only in the blue cells highlighted below. In all cases, unless otherwise directed, use the earliest appearance of the data in your formulas, usually the Given Data section.

The table below summarizes prices (per $100 face value) of various default-free zero-coupon bonds (expressed as a percentage of face value):

a. Compute the yield to maturity for each bond.

b. Plot the zero-coupon yield curve (for the first five years).

c.Is the yield curve upward sloping, downward sloping, or flat?

Maturity (years)                Price                                 Face Value =$100.00

a. Compute the yield to maturity for each bond.

b. Plot the zero-coupon yield curve (for the first five years).

c.Is the yield curve upward sloping, downward sloping, or flat?

The yield curve is _________

Exercise 21-10 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 11,300 8,600 8,200 8,200 Sales price per unit $50.30 $48.10 $48.10 $48.10 $48.10 Direct labor hours per unit 2.4 2.4 1.5 1.5 1.5 Wage per direct labor hour $8.00 $8.00 $8.00 $9.00 $9.00 Lowell has a labor contract that calls for a wage increase to $9.00 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 18,610 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 : : LINK TO TEXT LINK TO TEXT 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 $ $ $ $ $ $ $

Managerial Economics (BUSS 330)


Section I: Circle the letter of the best response

1) If a firm sells its output in a market that is characterized by one sellers and difficult entry and exit, then the firm is a :
A) Monopolist.
B) Perfect Competitive.
C) Oligopoly.
D) Monopolistic Competitor.


2) If a firm sells its output on a market characterized by a many sellers and many buyers of a differentiated product, then the firm is a:
A)Monopolist.
B) Perfectly Competitive.
C) Monopolistic Competitor.
D) Oligopoly

3) A perfectly competitive firm in the long run:
A) Makes a loss.
B) Makes normal profit.
C) Earns positive economic profit.
D) None of the above.

4) A monopolist produces 14,000 units of output and charges $14 per unit. Its MR is $10, its MC is $10, its ATC is $12 and AVC is $9, then this firm
A) Is making economic loss.
B) Is making economic profit.
C) Should shut down.
D) Decrease output to reduce losses.

5) In Q4 above, in order to maximize its profit, the monopolist should produce where:

A) ATC equals price.
B) MR equals MC.
C) MC equals price.
D) AVC equals price.

6) In Q4 above, at the optimal level of output, average fixed cost equals:

A) $1.
B) $2.
C) $3.
D) $5.

7) Which of the following industries is most likely to be a perfect competitive?

A) The automobile industry.
B) A grocery shop.
C) A local telephone company.
D) A restaurant.

8) Which of the following is a form of non-price competition:

A) Advertising.
B) Quality of service.
C) Product quality.
D) All of the above.

9) According to the kinked demand curve model, a firm will assume that rival firms will:
A) Match price cuts but not price increases.
B) Keep their prices constant.
C) Keep their rates of production constant.
D) Match price increases but not price cuts.

10) In an monopolistic competitive industry, firms can earn positive economic profits
A) In the short run but not in the long run.
B) In the short run and in the long run.
C) In the long run but not in the short run.
D) None of the above.

11) IATA (the International Air Transport Association) is an example of :

A) Perfectly competitive firms.
B) An oligopoly.
C) Monopoly.
D) Price leadership model.

12) In which of the following markets a firm has full market power :
A) Monopoly.
B) Perfect competition.
C) Monopolistic competition.
D) Oligopoly.

13) Under price leadership model:

A) All firms but the dominant are price takers.
B) Other firms follow the price increase by the leader.
C) the dominant firm sets the price.
D) All of the above.

14) Which of the following constitute price discrimination

A) A department store has a 25% sale.
B) A Japanese car is sold in Saudi Arabia lower than in Jordan.
C) STC charges higher call rates during day time.
D) An Economic textbook is sold cheaper in USA than in Egypt.

Andrea’s Day Spa began to offer a relaxing aromatherapy treatment. The firm asks you how much to charge to maximize profits. The demand curve for the treatments is given by the first two columns in the following table; its total costs are given in the third column. Answer the following questions accordingly (Q15-Q18).
Price Quantity TC
$25.00 0 $100
$24.00 10 $250
$23.00 20 $420
$22.00 30 $600
$21.00 40 $780
$20.00 50 $970
$19.00 60 $1,170


15) Total fixed costs in the above table is:
A) Zero
B) $130
C) $100
D) $10

16) Total Revenue of producing 30 units of output is:
A) $435
B) $660
C) $600
D) $180

17) In order to maximize profit, the above firm should produce where:
A) Price = Marginal cost
B) Price = Average Total Cost
C) Marginal Revenue = Marginal Cost
D) Profit is zero.

18) The profit maximization price in the above table is:
A) $24
B) $21
C) $22
D) $25

Section II: True/ False Questions
Indicate whether each of the following statements is True or False

19) A competitive firm that is losing should immediately close out.
A) True
B) False

20) A pure monopoly does not have to worry about suffering losses because it has the power to set prices at any level it desires.
A) True
B) False

21) In the long run monopolistic competition like perfect competition, will earn zero economic profit.
A) True
B) False

22) In an oligopoly, the firm that has the largest market share will also be the price leader.
A) True
B) False

23) The Kinked demand curve means competitors will follow price decrease but not price increase.
A) True
B) False

24) In order to have a successful price discrimination, markets should have different elasticity and there must be market segmentation.
A) True
B) False

25) Cinemas by charging higher prices during weekends and lower rates during week days is practicing a first degree price discrimination.
A) True
B) False

26) Second degree price discrimination involves differential prices charged by blocks of services, like electricity companies who charge different unit price (per kilowatt of electricity) based on the rate of consumption.

A) True
B) False

27) The monopolist can earn profit in the long run due to high barriers to entry.
A) True B) False

28) Perfect competitive firm is a price maker.
A) True B) False

29 ) The three telecommunication companies in Saudi Arabiacan be described as oligopoly.
A) True B) False
30 ) Cheating can threaten formal or informal agreements of cartel.
A) True B) False










.

1. Consider a wholesaler and a retailer selling designer handbags. Each has market power. The wholesaler sells designer hadbags to the retailer, which then sells the handbags to consumers. The demand for handbags is captured by P = 24-Q. Assume that the marginal cost of producing a handbag is constant (MC=$8). Consider the following scenarios:

a) Suppose that the retailer is the only firm and that it can produce the handbags it sells (there is no wholesaler here). How many handbags will be produced and what price will be charged? Draw a graph and show these points on the diagram.

b) Now suppose that the retailer cannot produce handbags and must instead buy them from the wholesaler. The wholesaler charges the downstream firm $16 per handbag. How many handbags will the retailer purchase and sell, and what price will the retailer charge?

2. If the wholesaler and retailer in problem 1 merged, what would be the effect on overall social surplus?

3. Discuss the problem of double marginalization. What is it? What causes it? How is it mitigated by a vertical merger?

4. Define first degree price discrimination, second degree price discrimination, and third degree price discrimination. Provide an example of each.

5. We have seen how monopolistic industries can result in a deadweight loss relevant to the competitive outcome. Consider the case of a monopolist engaging in first degree (perfect) price discrimination. How do you think the profits of the monopolist and overall social welfare are affected compared to the case where the monopolist sets a single monopoly price? (Hint: try drawing a simple diagram in both cases).

According to the Wall Street Journal, merger and acquisition activity in the first quarter rose to $5.3 billion. Approximately three-fourths of the 78 first-quarter deals occurred between information technology (IT) companies. The largest IT transaction of the quarter was EMC’s $625 million acquisition of VMWare. The VMWare acquisition broadened EMC’s core data storage device business to include software technology enabling multiple operating systems – such as Microsoft’s Windows, Linux, and OS X – to simultaneously and independently run on the same Intel-based server or workstation. Suppose that at the time of the acquisition a weak economy led many analysts to project that VMWare’s profits would grow at a constant rate of 2 percent for the foreseeable future, and that the company’s annual net income was $39.60 million.

If EMC’s estimated opportunity cost of funds is 9 percent, as an analyst, how would you view the acquisition?

a. Favorably - the price is less than the company is worth.

b. Indifferent - the price is equal to the company's worth.

c. Unfavorably - the price is more than the company is worth.

Would your conclusion change if you knew that EMC had credible information that the economy was on the verge of an expansion period that would boost VMWare’s projected annual growth rate to 4 percent for the foreseeable future?

a. No - the company is still worth more than the price.

b. Yes - the company is now worth less than the price.

c. Yes - the company is now worth more than the price.

d. No - the company is still worth less than the price.

There are only two firms in the market for airplanes, A and B. The cost functions are C(qa) = 12qa and C(qb) = 6qb. The inverse demand function is p = 36 ? qa ? qb.

(a) Under Cournot competition, what are the best response functions for the two firms?

(b) Under Cournot competition, what is the market price?

(c) If firm A moves first, and firm B can observe it, what is the Stackelberg equilibrium price?

Assume that there are 10 risk-neutral bidders participating in an independent private value auction. The bidders assume that item’s value is normally distributed between $10,000 and $30,000. Determine the optimal bidding strategy for each of the following options if you value the item at $20000.

3.1 First-price, sealed-bid auction

3.2 Dutch auction

3.3 Second-price, sealed-bid auction

3.4 English auction

A stock pays a dividend of $50 at the end of the first year, with each subsequent annual dividend being 5% greater than the preceding one. Mandy buys the stock at a price to earn effective annual yield of 10%. Immediately after receiving the 10th dividend, Mandy sells the stock for a price of P. Her effective annual yield over the 10-year period was 8%. Calculate P. (Answer $1,275.54)