Discuss the assumptions that are inherent in production setup cost, ordering cost and carrying cost. How valid are they?

1. Graph the Average Cost and the Marginal Cost for three different levels of Fixed Cost: $0, $5,000, and $10,000.
2. Assuming that the firm is a Price Taker in the product market (that is, it can sell as many units as it wants without affecting the market price), compute the minimum price that would make production profitable when Fixed Costs are $0, $5,000, and $10,000.

Provide both your answer and a brief explanation.

Question No: 01

In line with the end result of the Kunt and Maks model, The Middle East Company (MEC) has estimated its financial needs in 2021. The EFN is anticipated to be $215,000,000 which will increase the total liabilities by 20% and the financial leverage will be 57%. The management is planning to raise 40,000,000 from the City Bank under nominal interest rate of 5%. To issue bonds, the MEC has given incentive to bond investors by giving 10% more on the prevailing RRR of 14%. The bond face value is $1,000 and it is projected that 50,000 will be purchased. The MEC Co. has maintained a retained earning ratio of 65% coming to the total of $76,000,000. MEC management opts for the option to invite Ramada Corporation as a preference shareholder under dividend per share of $200 and share value of 1,500 for 40,000 preference shares.

The RRR of the common shareholder is built around CAPM in the sense that the rf is projected to be 7% which equals 72% of the ERM under 1.62 Beta. The Co. will issue common shares for the remaining part of its financial needs under RRR of 10%. MEC is operating business in the tax-oriented economy with BPT of 16% and tax exemption of 40%.

Required:

1. Find out the WACOC of the MEC in securing its financial needs.

2. What would be the case if Ramada declines the offer and the common shareholders take the role under the same RRR of common shares?

3. What would be the WACOC if the EFN increased by 12% and the incremental fund will be secured by more bank borrowing under the 6% interest rate. Other things remain the same.

Question No: 02

2 (a). Omron Enterprise is planning to use trade credit as short-term finance. The owner has approached your company to buy goods on credit. The value of stock including the profit is around $920,000. Omron Enterprise records in 2019 were as follows:

1. The quick ratio deviated from the min and max rate by 35%.

2. The financial leverage equals the rate of the minimum under CART Model.

2. The Times-Interest-Earned (TIE) equals 5.4.

Required:

As a specialist, you have been requested to provide a reliable opinion on to give or not to give credit facilities to Omron Enterprise, bearing in mind that Omron Enterprise was established as active enterprise on 24 December 2011.

2 (b). Masen Enterprise is operating business in the gulf. To cope the competitiveness of the GCC’s market, Masen Enterprise is looking for optimal capital structure and good operational and financial indicators. The following information was derived from the enterprise records of 2019.

Required:

Compute DOL, DFL and DCL of the Masen Enterprise in 2019. Provide complete elaboration to the derived results of DFL, DOL and DCL.

Question No: 03

3 (a). The capital structure of Al Kawthar Corporation is built around the financial leverage of 35% against total capitalization of $140,000,000. The foxed asset intensity is around 46%. The corporation is planning to expand its total assets by 20% under the prevailing ROTA of 16%. Before the expansion policy the relationship between b and DPR was built around the ratio 4 to 5 respectively. Under the expansion plan the DPR will be reduced by 10%. Al Kawthar Corp. is operating business in a very short-term finance market in the sense that current liabilities represent 90% of the total liabilities before expansion.

Required:

1. Based on Kunt and Maks Model, develop the financing scenario and expected growth profile of Al Kawthar Corporation.

2. What would be the required external fund if shareholders forgo dividend for the coming five years.

3 (b). Cairo Corporation is facing financial difficulties in the light of devaluation of the Egyptian pound. The Board of Directors are targeting to maintain zero EPS to get out of the bottleneck. The Corp.’s obligations towards interest on bank borrowing was amounted to $14,500,000 and obligation of interest to bond holders amounted 140% of banking finance cost. Al MENA Corp. joined Cairo Corp. as preference shareholders with the dividend amount as obligation EP 10,500,000. The outstanding common shares are 190,000.

Required:

1. Find out the EBIT that will qualify the Corp. to maintain zero EPS.

2. What would be the EBIT if the obligation to bond holders reduced by 14%?

Question 1

A) Complete the missing data on the table

B) What is the selling price of a laptop case explain your answer

c) What is the profit maximizing level of output for this firm explain your answer

d) create a graph using three columns of data on the table to illustrate the profit maximizing level of output. insert a graph in your Microsoft word study exercise document for submission do not submit a separate file for the graph

Financial Planning Exercise 8 Calculating payments, interest, and APR on auto loan After careful comparison shopping, Isabella Green decides to buy a new Toyota Camry. With some options added, the car has a price of $22,500 - including plates and taxes. Because she can't afford to pay cash for the car, she will use some savings and her old car as a trade-in to put down $7,500. She plans to finance the rest with a $15,000, 60-month loan at a simple interest rate of 8.5 percent. What will her monthly payments be? Round the answer to the nearest cent.

$____ per month

How much total interest will Isabella pay in the first year of the loan? Round the answer to the nearest cent.

$________

How much interest will Isabella pay over the full (60-month) life of the loan? Round the answer to the nearest cent.

$_______

What is the APR on this loan? Round the answer to 1 decimal place.

_______%

Because of a job change, Finn McBryde has just relocated to the southeastern United States. He sold his furniture before he moved, so he's now shopping for new furnishings. At a local furniture store, he's found an assortment of couches, chairs, tables, and beds that he thinks would look great in his new, two-bedroom apartment; the total cost for everything is $5,000. Because of moving costs, Finn is a bit short of cash right now, so he's decided to take out an installment loan for $5,000 to pay for the furniture. The furniture store offers to lend him the money for 48 months at an add-on interest rate of 9 percent. The credit union at Finn's firm offers to lend him the money - they'll give him the loan at a simple interest rate of 11.5 percent, but only for a term of 18 months.

Compute the monthly payments for the loan from the credit union. Round the answer to the nearest cent.
$_____ per month

Determine the APR for the loan from the credit union. Round the answer to 2 decimal places.
______%

Compute the monthly payments for the loan from the furniture store. Round the answer to the nearest cent.
$____ per month

Determine the APR for the loan from the furniture store. Round the answer to 2 decimal places.
____ %

Which is more important: low payments or a low APR?

Jimmy Buffet, Warren's more famous brother, is considering manufacturing a new, super-tough flipflop that is both strong enough to survive piercing by small metal objects, thereby preventing its wearers from cutting their heels, and heat-resistant to protect its wearers from super-high pavement and sand temperatures. Manufacturing equipment and the initial licenses for manufacturing cost $200,000. Success of the new product depends crucially on whether global warming is accelerating (40% probability) or simply increasing at its past rate (60% probability). If global warming accelerates, then temperatures will be much higher and more people will live in tropical climates will want the shoes, and cash flows will be $50,000 per year for 10 years. If global warming continues at its most recent rate, then about the same number of people will be near beaches and there won't be a need for heat-resistant shoes, and cash flows will be $20,000 for 10 years. Buffet's cost of capital is 10%  

Suppose that Buffet can wait a year and find out whether global warming is accelerating or progressing at the current rate before deciding to invest. If he waits, the initial cost will still be the same as above (this is known with certainty) and he will know whether the up cash flows will occur or the down cash flows will occur before deciding whether to invest. The risk-free rate is 4% and this is the discount rate for the initial investment.       

7. Using a decision tree analysis, find the expected NPV of the project if Buffet waits to invest and only invests if it is optimal to do so.         

a.           26,143

b.           28,757

c.           31,633

d.           34,796

e.           38,276

8. Buffet would like to use a financial option to value the embedded real option. Identify the value today of the underlying asset. That is, calculate P that would be used in the option pricing model.

a.           162,132

b.           170,239

c.           178,751

d.           187,689

e.           197,073

The answers are in bold, but I do not understand how to get these answers.

Northern Illinois Manufacturing prepared the balance sheet and income statement for this year. Now the company needs to prepare its statement of cash flows. The comparative balance sheets for Northern Illinois Manufacturing for this year and last year and the income statement for this year are presented below. (Note: Work in Process is a current asset and should be treated as any other current asset.

Additional information:

1. Norther Illinois Manufacturing sold a piece of company equipment for $30,000. The equipment had been used for six years. It had cost $100,000 when purchases and had a 10-years life and a $10,000 salvage value. Straight-line depreciation was used.

2. Northern Illinois manufacturing purchased new equipment costing $200,000.

3. The company paid $100,000 in dividends.

Instructions:

This assignment must be completed in an Excel spreadsheet and include the following:

a. Prepare a statement of cash flows using the indirect method for this year.

b. Determine free cash flow.

British Columbia Research Associates Incorporated (BCRA), a dynamic and thriving research company, has an opportunity to land a lucrative federal government contract in which they would analyze census data. The project would last four years. BCRA has already spent $150,000 lobbying the appropriate people in the Department of Vital Statistics as well as the Minister in charge of the Department in order to try to land this contract. The project would start on January 1, 2021. BCRA currently owns the building where it conducts its other research activities. However, some of the office space in the building is unoccupied. BCRA intends to lease the unused office space to the British Columbia Department of Agriculture for four years starting January 1, 2021. The expected lease payments would be $10,000 per year payable at the start of each year. If the census project is accepted, BCRA would have to forego the lease as it would have to use the unoccupied office space in order to analyze the census data. Assume for convenience that all “up-front” costs of the project (office space improvements, furnishings, computers, etc.) will total $250,000 and that all the new assets will be placed in a CCA class with a rate of 25%. At the end of the project, BCRA believes that it can dispose of these new assets for $75,000. Since BCRA has many assets in this CCA class, neither terminal loss nor recaptured depreciation will be an issue. The contract would result in revenues of $175,000 in the first year of the project, and to combat inflation, these revenues would grow at 2% per year for the remaining years of the project. Incremental expenses associated with the project are projected to be $60,000 in the first year of the project and are projected to decline at 2% for the remainder of the project as operational efficiencies occur. Although additional employees will be hired, it is expected that some of BCRA’s “regular” staff will have to put in overtime. It is expected that this overtime cost will be $25,000 per year for the duration of the project. Assume that all these cash flows occur at the end of each year of the project. You are a recent new employee in the finance department of BCRA, and you have been given the task of determining if the contract should be accepted. Naturally, your future with the company is highly dependent on your recommendation. You have been informed that BCRA’s tax rate is 35% and that the cost of capital to be applied to projects such as this is 12%. Perform an NPV analysis to determine if the company should accept or reject the proposed contract. Solution (show all your work): i) Sunk Costs: ii) Initial Investment: iii) Opportunity Costs: iv) Incremental Revenues: v) Incremental Expenses: vi) PV of CCA tax shield: vii) PV of salvage: viii) Side effects: ix) NPV: x) Should the project be rejected or not, and why (two to three lines, maximum)?

Waterways prepared the balance sheet and income statement for the irrigation installation division for last year. Now the company needs to prepare a cash flow statement for the same division. The comparative balance sheets for Waterways Corporation’s Irrigation Installation Division for last year and the prior year and the income statement for last year are presented below. (Note: Work in Process is a current asset and should be treated as any other current asset.)

Additional information:

1. Waterways sold a piece of company equipment for $30,000. The equipment had been used for six years. It had cost $100,000 when purchases and had a 10-years life and a $10,000 salvage value. Straight-line depreciation was used.

2. Waterways purchased new equipment costing $200,000.

3. The division paid $100,000 in dividends.

Instructions:

For last year:

a. Prepare a statement of cash flow using the indirect method.

b. Determine free cash flow.

15) Which of the following statements is correct regarding depreciation?  

A. Depreciation expense should be recorded in the appropriate governmental funds and recorded in the governmental activities accounts.

B.   Depreciation expense must be recorded in the governmental fund, but no depreciation expense is recorded in the governmental activities accounts.

C.    No depreciation can be recorded in any governmental fund, but depreciation expense must be recorded in the governmental activities accounts.

D. No depreciation can be recorded in any governmental fund, nor is it permissible to

         record depreciation expense in the governmental activities accounts.

            16) Which of the following statements is correct concerning interest expenditures incurred during the period of construction of capital projects?  

A. Interest expenditures may not be capitalized as part of the cost of general capital assets reported in governmental activities.

B. Interest expenditures may be capitalized as part of the cost of general capital assets reported in the governmental activities accounts at the government-wide level.

C. Interest expenditures must be capitalized as part of the cost of general capital assets reported in the capital projects fund.

D. The capitalization of interest expenditures as part of the cost of general capital assets reported in the capital projects fund is optional.

            17) When part of a progress payment for construction is withheld until final settlement of the contract, what account is credited?

A. Encumbrances.

B. Appropriations.

C. Contracts Payable—Retained Percentage.

D. Construction Expenditures.

            18) Which of the following activities or transactions would normally not be accounted for in a capital projects fund?

A. Construction of a new city jail.

B. Construction of airport runways financed by revenue bonds and to be repaid from the revenues of the city airport, an enterprise fund.

C. Lease of a building to be used as a city office building.

D. Construction of a new city park to be maintained primarily from General Fund revenues.

            19) Which of the following statements regarding debt service funds is true?

A.   Debt service funds are always accounted for on the accrual basis of accounting.

B.   GASB standards require a separate debt service fund to be established for each issuance of tax-supported or special assessment debt.

C.   A debt service fund is used only for debt service activities related to general long-term liabilities.

D.   GASB requires that annual budgets must be prepared for all debt service funds.

            20) When the City of Delray makes its annual lease payment on an unpaid capital lease obligation, the journal entry for the debt service fund accounts will include:

A. A debit to Capital Lease Obligation Payable.

B. A credit to Capital Lease Obligation Payable.

C. A debit to Capital Lease Expense.

D. A debit to Expenditures—Principal of Capital Lease Obligation.