Geralt Technologies is considering a major expansion program that has been proposed by the company’s information technology group. Before proceeding with the expansion, the company need to develop an estimate of its cost of capital. Assume that you are an assistant to Henry Cavill, the financial vice-president. Your first task is to estimate Geralt’s cost of capital. Henry has provided you with the following data, which he believes may be relevant to your task:

(i) The firm’s tax rate is 40%.

(ii) The current market price of Geralt’s $1,000 par value, 12 percent coupon, semi-annual payment, non-callable bonds with 15 years remaining to maturity is $1,153.72. Geralt does not use short-term interest-bearing debt on a permanent basis.

(iii) The current price of the firm’s 10%, $100 par value, annual dividend, perpetual preferred stock is $111.10. The company would incur a issuing cost of 6%.

(iv) Geralt’s common stock is currently selling at $50 per share. Its last dividend was $4.19, and dividends are expected to grow at a constant rate of 5% in the foreseeable future. Geralt’s beta is 1.2, the yield on T-bonds is 7%, and the market risk premium is estimated to be 6%. For the bond-yield-plus-risk-premium approach, the firm uses a 4% point risk premium.

(v) Geralt’s target capital structure is 30% long-term debt, 10% preferred stock, and 60% common equity.

To structure the task somewhat, Henry has asked you to answer the following questions:

1. a) What is the market interest rate on Geralt’s debt? What is its component After-tax cost of debt?

b) What is the firm’s cost of preferred stock?

Consider an economy that produces and consumes coffee, bread and auto- mobiles. In the following table, we have data for two different years. The first 2 questions refer to this table.

1) Using the year 2017 as the base year, compute the following statistics for each year: nominal GDP, real GDP, the GDP deflator (a Paasche price index) and the CPI (a Laspeyres price index. For the CPI, assume that the representative basket of goods is exactly the one produced in the year 2017

2) How high was the inflation rate between 2017 and 2018, based on the GDP deflator, and based on the CPI?

Problem A,

A bond matures in 26 years, has an annual coupon rate of 8% on a face of $1000, yields an annual rate of 10%, and its first annual coupon will be paid a year from now. The following information applies to the above bond:

      YTM                                 $-Price

      10.2%                              801.5761

      10.0%   (presently)   P₀ = 816.7811

        9.8%                              832.4845

At the present price (P=816.7811), the annualized Modified Duration is

a. 19.02

b. 19.98

c. 9.46

d. 9.51

At the present price (P₀), the measure of Convexity is equal to

a. 261.31

b. 152.55

c. 184.18

d. 154.34

Assuming that the YTM changes by 200 Basis Points (i.e., 10% ± 2%), then the above Modified Duration suggests a price change of ($)

a. 154.535

b. 176.170

c. 155.170

d. 146.175

The combined effect of Duration and Convexity – when the YTM increases by 200 BPs – is to reduce the above bond price by ($)

a. 128.995

b. 180.355

c. 155.175

d. 129.615

1. Duopoly quantity-setting firms face the market demand:

P = 600–(1/2)Q

where Q = Q1 + Q2. Each firm has a marginal cost of $60 per unit and zero fixed costs.

(a) What are the quantities chosen by each firm in the Cournot equilibrium? What is the market price?

(b) What are the quantities chosen by each firm in the Stackelberg equilibrium, when Firm 1 moves first? What is the market price? How does this market price compare to the market price under Cournot?

(c) What are the profits of firms 1 and 2 under Cournot vs. Stackelberg equilibrium? Is firm 1 better off under Cournot or Stackelberg competition? What about firm 2? In which equilibrium are consumers better off (hint: compare the size of consumer surplus, given the equilibrium price and quantity under Cournot vs. Stackelberg?

The table below shows the demand and supply of coats in Small Town.

a. What is the equilibrium price of coats?

b. Will a shortage or surplus occur?

c. At what price will the most coats sold be sold?

d. The mayor of SmallTown in order to "help the poor by making coats cheaper", imposes a price ceiling of $40. How many coats will be bought and sold? Will a surplus or shortage of coats occur?

e. The mayor of Small Town, in order to "help protect our coat industry," imposes a price floor of $80 instead. How many coats will be bought and sold? Will a shortage of coats or surplus occur?

To answer all the questions, it will be easy for you to draw the supply and demand graph first to see the whole picture. Keep it up!

Tops Corporation is organized into two divisions, Manufacturing and Marketing. Both divisions are considered to be profit centers and the two division managers are evaluated in large part on divisional income. The company makes a single product. It is fabricated in Manufacturing and then packaged and sold in Marketing. There is no intermediate market for the product.

The monthly income statements, in thousands of dollars, for the two divisions follow. Production and sales amounted to 10,000 units.

The company has just received an offer to buy 1,000 units of the product this month at a price of $400 per unit. The Marketing Division manager suggests that for the special order only, the transfer price be set at 50 percent of the sales price, or $200 per unit. Instead, assume the transfer price is unchanged from the current transfer price.

Required:

a. Does Tops Corporation want to accept this order? Accept/Reject

b. Will the Marketing Division manager be willing to accept this order? Accept/Reject

c. Will the Manufacturing Division manager be willing to accept this order? Accept/Reject

QUESTION 11

1. What is the breakeven point in units with a selling price per unit of $100, total fixed expenses of $250,000, and variable expense per unit of $50?

   	a.	2500 units
   	b.	7500 units
   	c.	10,000 units
   	d.	5000 units

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What inputs are used to calculate the flexible budget?

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Selected financial information for Doors, Inc. is given below:

Sales = $5,000,000

Variable expenses = $2,000,000

Fixed expenses = $1,000,000

What is the company's operating leverage?

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QUESTION 22

1. Doors, Inc. has a goal of $60,000 profit for the year.  

   Fixed expenses total $40,000.

   The contribution margin per unit is $75.

   How many units must be sold this year to reach the target profit? (Round up to the next whole unit)

   	a.	800 units
   	b.	534 units
   	c.	3,200 units
   	d.	1,334 units

Suppose the aggregate demand for honey in a small country is given by Q^D = 100 − P and the aggregate supply is Q^S = P. The international price of honey is P^I = 60, and the world market is willing to buy or sell any amount at that price. Let all quantities be given in gallons and all prices in dollars per gallon. Suppose the country initially starts out with closed borders, and cannot import or export at all

Suppose now the country enters into an international free trade deal. The deal eliminates all subsidies and price supports, and the country opens up to import and export from the world market.

(j) What is the equilibrium domestic price, production, and consumption in the honey market with free trade? Depict it graphically. Will the country be an importer or exporter of honey?

(k) Which groups are better off with free trade relative to autarky (with no subsidies/price restrictions)? Which are worse off?

(l) Does total surplus increase or decrease relative to the competitive equilibrium with no trade. Can you find a set of transfers that would make everybody at least as well off as in the no-trade equilibrium?

     Getwell Pharmaceutical Ltd. has developed a new medical product Y to relieve hay fever symptoms. Analysis of demand in 20 regional markets suggests the following demand function for the product Y:

                                                Q_Y = 5680 – 20P_Y + 0.05Pop +1.5A + 0.4I

where Q_Y is market demand for product Y, P_Yis the price of Y, Pop is population, A is advertising expenditures ($), and I is average household disposable income ($).

In a typical market, the unit price of Y is $9, Pop = 30,000 persons, A is $50,000 and I = $45,000.

1. Calculate the expected level of demand in a typical market.                        

2. Calculate income elasticity of demand for the product Y. Interpret your answer.

3. Calculate price elasticity of demand for product Y.

Advise the management at Getwell Pharmaceutical Ltd. whether they should change the price of product Y, in order to increase the total revenue received.  Justify your answer.                                                           

4. Statement – “According to the market demand analysis, a 100% reduction in the price of product Y would be necessary to fully offset the effects of a 1% decline in income”.

            Use the information provided in this question to discuss whether this statement is true or false. Be sure to explain why.