A) Relying STRICTLY on our classroom discussion: the US corporate tax rate was recently reduced from 35% to 21%. In the near future, would you expect the target (optimal) D/V ratios of US companies to increase or decrease as the result of this change? (2-3 sentences)

B) What LEGISLATIVE change (i.e. a law or a regulation), if adopted, would most likely cause the target (optimal) D/V ratios of US companies to move in the OPPOSITE direction compared to the one you predicted in part (A)? (2-3 sentences)

C) Relying STRICTLY on our classroom discussion: Assume US personal tax rates on capital gains will be reduced next month. In the near future, would you expect the propensity to pay dividends among US companies to increase or decrease as the result of this change? (2-3 sentences)

D) The need for financial flexibility is sometimes used as explanation for the tendency of US firms to utilize LOWER D/V ratios compared to the (optimal) target ratios based on the trade-off between tax benefits and distress- or agency-related drawbacks associated with debt financing. Give one argument for why the need for financial flexibility is likely NOT the reason for relatively low D/V ratio utilized by Walmart. (2-3 sentences)

Consider the following scenario:

The privately owned Baker Company was founded in 1960. The company manufactures kitchen cabinets and has been very successful, expanding from one facility to twelve facilities in the same and other states. All facilities but the original are located near interstate highways. The original facility, which is no longer the headquarters, is in a downtown area of a major city (which grew up around it) with relatively high real-estate taxes. It has had a negative contribution margin and a net loss for the last five years. The founder is retired and three of his children want to close the facility. The fourth does not, because it "was Dad's first place and I went there every day after school." She believes they can bring the facility back to profitability if the city's downtown revitalization project succeeds and they dedicate the first floor of the facility to retail.

Consider:

• Your definition for "negative contribution margin."
• Whether the fact that the facility is not near an interstate makes a difference in the decision.
• Would it make a difference if the company were publicly traded?
• Might there be additional costs, in addition to revenues, to convert the first floor of the facility to retail?
• What risks may be associated with leasing to retail stores?
• What is your recommendation? Close and sell the facility or modify the first floor to be able to lease to retail stores.

A study of fox rabies in a country gave the following information about different regions and the occurrence of rabies in each region. A random sample of

n₁ = 16

locations in region I gave the following information about the number of cases of fox rabies near that location.

x₁:

   Region I Data

A second random sample of

n₂ = 15

locations in region II gave the following information about the number of cases of fox rabies near that location.

x₂:

   Region II Data

(i) Use a calculator with sample mean and sample standard deviation keys to calculate x₁ and s₁ in region I, and x₂ and s₂ in region II. (Round your answers to two decimal places.)

(ii) Does this information indicate that there is a difference (either way) in the mean number of cases of fox rabies between the two regions? Use a 5% level of significance. (Assume the distribution of rabies cases in both regions is mound-shaped and approximately normal.)
(a) What is the level of significance?

Store Closing?

For this discussion, consider the following scenario:

The privately owned Baker Company was founded in 1960. The company manufactures kitchen cabinets and has been very successful, expanding from one facility to twelve facilities in the same and other states. All facilities but the original are located near interstate highways. The original facility, which is no longer the headquarters, is in a downtown area of a major city (which grew up around it) with relatively high real-estate taxes. It has had a negative contribution margin and a net loss for the last five years. The founder is retired and three of his children want to close the facility. The fourth does not, because it "was Dad's first place and I went there every day after school." She believes they can bring the facility back to profitability if the city's downtown revitalization project succeeds and they dedicate the first floor of the facility to retail.

• Your definition for "negative contribution margin."
• Whether the fact that the facility is not near an interstate makes a difference in the decision.
• Would it make a difference if the company were publicly traded?
• Might there be additional costs, in addition to revenues, to convert the first floor of the facility to retail?
• What risks may be associated with leasing to retail stores?
• What is your recommendation? Close and sell the facility or modify the first floor to be able to lease to retail stores.

On plant Mercury there is a special lake with two layers: dH2O and dHg (liquid mercury). The liquid water layer floats on top of the liquid mercury layer. Let ρH2O and ρHg denote the densities of water and mercury respectively. The gravitational field near the planet’s surface is gy, and the the atmospheric pressure near the surface of the lake P0.

a.Determine an expression in terms of the gi variables for the pressure in the lake as a function of depth all the way to the bottom of the layer of mercury. Graph this function.

b. Suppose an object density ρ is dropped into the lake. Assume ρH2O < ρ < ρHg. What fraction of the object you think will be submerged in the mercury after the object comes to rest in static equilibrium in the limit ρ → ρH2O .What fraction of the object you think will be submerged in the mercury after the object comes to rest in static equilibrium in the limit ρ → ρHg?

c.Determine an expression for ρ in terms of ρH 2O and ρHg that you believe would result in the object being half-submerged in the mercury layer and half-submerged in the water layer?Assume ρH2O < ρ < ρHg

d. Consider the general case where the density of the object is simply the unknown variable p. Determine an expression for the fraction of the object that will be submerged in the mercury when the object comes to rest in static equilibrium?

1) Which of the following statements are true regarding the event horizon of a black hole? (Select all that apply.)

1. The event horizon is the location that marks the "point of no return" for a black hole. Anything that crosses the event horizon can never escape.

2. The Schwarzschild radius specifies the location of the event horizon.

3. The event horizon is the location where the escape velocity is equal to the speed of light.

4. Inside the event horizon, the escape velocity is less than the speed of light.

5. The event horizon specifies the maximum mass that a star can have before collapsing into a black hole.

2) Which of the following statements are true regarding how black holes are formed? (Select all that apply.)

1. All stars eventually produce black holes at the end of their lives, because white dwarfs are unstable and will collapse into black holes.

2. Stars with masses that are eight times as large as our sun's or more will produce a black hole when they collapse and explode in a supernova.

3. Two white dwarfs or neutron stars can produce a black hole if they collide.

4. If a white dwarf accretes material from a companion star in a binary system, it will eventually collapse into a black hole.

3) Which of the following answers is the best response to the statement: "everything near a black hole will be sucked in."

1. True, the gravity of a black hole is so strong that it is impossible to escape no matter where you are.

2. False, the presence of accretion disks shows us that nothing that falls near a black hole is absorbed.

3. True, black holes are large, and it is unlikely that an object will not fall into a black hole once the black hole's gravity begins to pull on it.

4. False, black holes are relatively tiny compared to other objects with similar mass, so material that falls near a black hole will orbit it rather than fall directly in.

4) Calculate the Schwarzschild radius that Jupiter would have if it were to turn into a black hole.

Hint: Jupiter's mass is 1.9 x 10²⁷ kg.

Hint: the gravitational constant is 6.67 x 10^-11.

5) As a black hole gains mass via accretion, its radius will...

1. Remain the same

2. Increase

3. Decrease

A power plant is planning construction of a new plant to generate electricity four years hence and must decide now between a small, medium, or large-sized plant. The exact size needed is uncertain because future demands can only be estimated. Forecasters have estimated future demands and their likelihoods as follows:

            In the following, all the future costs and earnings have been adjusted to their present worth:

1. The capacity of a small plant would limit its NPV to $60 million regardless of demand. If demand is medium, a small plant can be enlarged a moderate amount at a cost of $20 million. Its NPV would then be $110 million less the cost of $20 million for the expansion. If demand is high, a small plant can be enlarged greatly in size at a cost of $80 million. Its NPV would then be $170 million less the cost of $80 million for the expansion. On the contrary, if demand is high, a small plant can be enlarged a moderate amount to increase its NPV to $140 million less the cost of $40 million for the expansion.
2. A medium-sized plant will have an NPV of $120 million if demand is high or medium and a loss of $5 million if demand is low. If demand is high, a medium-sized plant can be enlarged at a cost of $40 million to generate an additional $80 million in earnings.
3. If a large plant is built and demand is high, the plant’s net present value (NPV) is estimated to be $180 million. If the demand is medium, however, the NPV of a large plant will drop to $100 million. If the demand is low the NPV will be loss of $200 million.

Use decision-tree analysis in MS Excel to determine the size of the power-generating plant the company should build now. (Please show the formulas in the cells)

Questions:

1. What size of the power-generating plant the company should build now?

2. Will the answer be the same if you will change the forecasters estimated demands and their likelihoods to:

Decide on the two grocery stores to use in this activity

Decide on the 15 products you want to compare.

The brand name, product, and size have to be exactly the same at each store. Therefore, do not compare generic brands as they have different names at different stores.

You may have to wait until your visit to the first store to determine the “size” as you may not be aware of the different size packages for different products.

Use a variety of products to get a good representation of all items at the stores.

At each store, record the price of each product on your list. (A question always comes up whether to use a sales prices or a club card price. You should use the price of the item that you’d pay on the particular day you visit the store.)

If you didn’t record the prices in an electronic spreadsheet (such as an Excel spreadsheet) at each store, do so after you collect all your data.

Questions to answer after collecting your data

The question of interest is, “Are the items at one of the two grocery stores in your study more expensive, on average, than the other store?”

Answer these questions to answer the question of interest. (R tutorial 2 may be helpful in answering some of these questions.)

1.   (1 point) Give the two stores you are comparing and a personal motivation on why you chose those two stores.

2.   (2 points) Give a brief summary of how you chose the 15 items you used in the study. Do you feel these items are representative of all items at the store? (In other words, do you feel that you’ll be able to answer the question of interest based the items in your sample?) Why or why not?

3.   (3 points) What method of inference you used and why? (Include a check of the conditions to use that particular method. If you use a graph to assess any condition, include the graph) (Hint: think about the samples you took – are the samples independent or dependent?)

4.   (3 points) State the null and alternative hypotheses in statistical notation. Define any parameters used.

5.   (2 points) Obtain and include an appropriate graphical display that will allow you to make an initial guess as to whether you feel the null hypothesis will be rejected or not. (Hint: think about what method you will be using to perform the hypothesis test.) Comment on whether or not you feel the null hypothesis will be rejected and why or why not.

6.   (1 point) Perform the analysis in R. Report the test-statistic (with degrees of freedom) and p-value.

7.   (3 points) State a conclusion in the context of the problem that answers the question of interest supported with the p-value obtained in #6.

8.   (3 points) Use R to construct a 95% confidence interval for the average difference in prices between the two stores. Include and interpret the confidence interval in the context of the problem. (3 pts)

9.   (2 points) Which store would you shop at? Why?

10. (2 points) Provide a copy of your data.

DATA:

Vons:

Almond Milk                                       3.49

Strawberry pop tarts                           2.59

1 lb Bananas                                        .69

Head lettuce                                         1.69

Pace Salsa                                             3.39

Ball park beef franks                          4.49

Ball park buns                                      2.49

Kraft American Cheese                     5.99

Crest toothpaste                                  4.00

Strawberries                                          3.50

Special K                                               4.99

Hidden Valley Ranch                         3.99

Core Water                                           1.99

Jif Peanut Butter                                  3.09

Egglands best                                       3.99

Smiths:                 

Almond Milk                                        3.19

Strawberry pop tarts                            2.29

1 lb Bananas                                        .59

Pace Salsa                                             3.29

Head lettuce                                         .99

Ball Park Beef Franks                        4.99

Ball Park Buns                                     2.99

Kraft American Cheese                      3.19

Crest toothpaste                                  2.99

Strawberries                                          2.50

Special K                                               2.49

Core Water                                           1.50

Jif Peanut Butter                                  2.79

Hidden Valley Ranch                         3.29

Egglands Best                                      2.89

Problem 6-19 Break-Even Analysis; Pricing [LO6-1, LO6-4, LO6-5]

Minden Company introduced a new product last year for which it is trying to find an optimal selling price. Marketing studies suggest that the company can increase sales by 5,000 units for each $2 reduction in the selling price. The company’s present selling price is $98 per unit, and variable expenses are $68 per unit. Fixed expenses are $834,600 per year. The present annual sales volume (at the $98 selling price) is 26,000 units.

Required:

1. What is the present yearly net operating income or loss?

2. What is the present break-even point in unit sales and in dollar sales?

3. Assuming that the marketing studies are correct, what is the maximum annual profit that the company can earn? At how many units and at what selling price per unit would the company generate this profit?

4. What would be the break-even point in unit sales and in dollar sales using the selling price you determined in (3) above (e.g., the selling price at the level of maximum profits)?

Problem 6-20 CVP Applications: Break-Even Analysis; Cost Structure; Target Sales [LO6-1, LO6-3, LO6-4, LO6-5, LO6-6, LO6-8]

Northwood Company manufactures basketballs. The company has a ball that sells for $25. At present, the ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable expenses are high, totaling $15.00 per ball, of which 60% is direct labor cost.

Last year, the company sold 38,500 of these balls, with the following results:

Required:

1. Compute (a) last year's CM ratio and the break-even point in balls, and (b) the degree of operating leverage at last year’s sales level.

2. Due to an increase in labor rates, the company estimates that next year's variable expenses will increase by $3.00 per ball. If this change takes place and the selling price per ball remains constant at $25.00, what will be next year's CM ratio and the break-even point in balls?

3. Refer to the data in (2) above. If the expected change in variable expenses takes place, how many balls will have to be sold next year to earn the same net operating income, $226,000, as last year?

4. Refer again to the data in (2) above. The president feels that the company must raise the selling price of its basketballs. If Northwood Company wants to maintain the same CM ratio as last year (as computed in requirement 1a), what selling price per ball must it charge next year to cover the increased labor costs?

5. Refer to the original data. The company is discussing the construction of a new, automated manufacturing plant. The new plant would slash variable expenses per ball by 40.00%, but it would cause fixed expenses per year to double. If the new plant is built, what would be the company’s new CM ratio and new break-even point in balls?

6. Refer to the data in (5) above.

a. If the new plant is built, how many balls will have to be sold next year to earn the same net operating income, $226,000, as last year?

b. Assume the new plant is built and that next year the company manufactures and sells 38,500 balls (the same number as sold last year). Prepare a contribution format income statement and compute the degree of operating leverage.

8.4 An airline is choosing between two engine systems for its planes. Each has the same useful life and the same repair record and maintenance costs.

? System A costs US$2 million and uses 30,000 gallons per 1,000 hours of operation at the average load of passenger service.

? System B costs US$3 million and uses 20,000 gallons per 1,000 hours of operation at the same level of passenger service.

In addition, the following information is relevant to both engine systems:

? Both systems have four-year lives before any major overhaul is required. At the end of the fourth year, each system has a salvage value equal to 10% of its initial investment.

? The fuel consumption of both systems is expected to increase at a rate of 5% per year because of degrading engine efficiency.

? The price of jet fuel on 31 March 2017 was US$15 per gallon. The airline will use this price to evaluate the two systems.

? The airline will assume 2,000 hours of operation per year and use a MARR of 10%.

Use the annual worth (AW) method to compare the two engine systems. Which one should the airline choose? Explain your answers in the following steps:

a) Calculate the annual equivalent cost of fuel (AWA(10%)fuel) for System A.

b) Calculate the total annual equivalent cost (AWA(10%)) of System A.

c) Calculate the annual equivalent cost of fuel (AWB(10%)fuel) for System B.

d) Calculate the total annual equivalent cost (AWB(10%)) of System B.

e) State your conclusion.

f) If the airline expects the price of jet fuel to rise significantly in the near future, will it make the same choice? Explain your answer briefly without any calculation.