Crystal Inc. is currently an all equity firm with a market capitalization of 100 million dollars. It has a total of 10 million shares. The firm announces it will borrow 20 million dollars permanently to repurchase its shares. The capital market is not perfect: The corporate tax rate is 30%, personal tax rate on interest income is 20%, and personal tax rate on equity income is 10%.

a. What is the firm’s stock price before announcing the stock repurchase?

b. What is the effective tax advantage of debt?

c. What is the firm’s value after announcing the stock repurchase?

d. What is the firm’s stock price after announcing the stock repurchase?

e. What is the market value of the firm’s equity after the stock repurchase?

Exercise 9-10

During 2017, Bridgeport Furniture Company purchases a carload of wicker chairs. The manufacturer sells the chairs to Bridgeport for a lump sum of $55,000 because it is discontinuing manufacturing operations and wishes to dispose of its entire stock. Three types of chairs are included in the carload. The three types and the estimated selling price for each are listed below.

During 2017, Bridgeport sells 200 lounge chairs, 100 armchairs, and 140 straight chairs.

What is the amount of gross profit realized during 2017? What is the amount of inventory of unsold straight chairs on December 31, 2017?

XYZ stock price and dividend history are as follows:

An investor buys four shares of XYZ at the beginning of 2015, buys another two shares at the beginning of 2016, sells one share at the beginning of 2017, and sells all five remaining shares at the beginning of 2018.

a. What are the arithmetic and geometric average time-weighted rates of return for the investor? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

b-1. Prepare a chart of cash flows for the four dates corresponding to the turns of the year for January 1, 2015, to January 1, 2018.

Woodside Petroleum Limited has issued $100 million of debentures with a fixed interest coupon equal to current interest rates of 7.70 per cent per annum, coupons paid half-yearly and a maturity of 10 years. (Viney & Phillips, 8th ed., p.349 Q13)

(a) What amount will Woodside raise of the initial issue?

(b) After three years, yields on identical types of securities have risen to 8.75 per cent per annum. The existing debentures have exactly seven years to maturity. What is the value or price of the existing debentures in the secondary market?

(c) Discuss why the value of the debentures has changed; that is, explain the bond price/yield relationship using the above example.

Tastee Mart sells Frostee Flakes. Demand for Frostee Flakes is 500 boxes per week. Tastee
Mart has a holding cost of 30 percent and incurs a fixed cost of $100 for each replenishment
order it places for Frostee Flakes. Given that cost is $2 per box of Frostee Flakes, i) how
much should Tastee Mart order in each replenishment lot? ii) If a trade promotion lowers the
price of Frostee Flakes to $1.80 (d=$0.2) for one month, how much should Tastee Mart order
given the short-term price reduction? iii) What will be the forward buy? iv) For how many
periods will the forward buy be enough? V) What will be the cycle inventory over these
periods?

1a) Arthur sells $100 worth of cotton to Bob. Bob turns the cotton into cloth, which he sells to Camille for $300. Camille uses the cloth to make prom dresses that she sells to Donita for $700. Donita sells the dresses for $1,200 to kids attending the prom. Determine the GDP in two ways; the value-added method, by computing value added at each stage of production, and the final sales value method.







1b) Why might the GDP be a poor measure of production in an economy? Fully detail 3 reasons.







1c) Why might the CPI index be a preferred measure of price movements compared to the GDP deflator?







1d) Why might the PCE index be a preferred measure of price movements compared to the CPI index?

We have three types of firms in the market. Type 1 firms has the total cost of production as T C1 = Q2 1 + 100 and the fixed cost of production as F C1 = 19. Type 2 firms has the total cost of production as T C2 = Q2 2 + 64 and the fixed cost of production as F C2 = 15. Type 3 firms has the total cost of production as T C3 = Q2 3 + 36 and the fixed cost of production as F C3 = 11. The short run market demand is P = 100− 5 6Q. The long run market demand is P = 35− 3 5Q. There are a total of 3 type 1 firms, 4 type 2 firms, and 5 type 3 firms in the market in the short run. a. Characterize the ATC, AVC for each type of firm. Characterize the minimum ATC and AVC for each type of firm. b. Draw the ATC, AVC and MC curves for each type of firm. Make sure to label it carefully. c. Calculate and plot the market supply curve in the short run. Then characterize the equilibrium price and quantity in the market in the short run. d. Calculate and plot the market supply curve in the long run. Then characterize the equilibrium price and quantity in the market in the long run.

a. Characterize the ATC, AVC for each type of firm. Characterize the minimum ATC and AVC for each type of firm.

b. Draw the ATC, AVC and MC curves for each type of firm. Make sure to label it carefully.

c. Calculate and plot the market supply curve in the short run. Then characterize the equilibrium price and quantity in the market in the short run.

d. Calculate and plot the market supply curve in the long run. Then characterize the equilibrium price and quantity in the market in the long run

Using the following data set:

Observation   Brand   Price ($)   Megapixels   Weight (oz.)   Score
1   Canon   330   10   7   66
2   Canon   200   12   5   66
3   Canon   300   12   7   65
4   Canon   200   10   6   62
5   Canon   180   12   5   62
6   Canon   200   12   7   61
7   Canon   200   14   5   60
8   Canon   130   10   7   60
9   Canon   130   12   5   59
10   Canon   110   16   5   55
11   Canon   90   14   5   52
12   Canon   100   10   6   51
13   Canon   90   12   7   46
14   Nikon   270   16   5   65
15   Nikon   300   16   7   63
16   Nikon   200   14   6   61
17   Nikon   400   14   7   59
18   Nikon   120   14   5   57
19   Nikon   170   16   6   56
20   Nikon   150   12   5   56
21   Nikon   230   14   6   55
22   Nikon   180   12   6   53
23   Nikon   130   12   6   53
24   Nikon   80   12   7   52
25   Nikon   80   14   7   50
26   Nikon   100   12   4   46
27   Nikon   110   12   5   45
28   Nikon   130   14   4   42

10. Test whether price and score are correlated, using level of significance ? = 0.01

11. Test for the significance of the relationship between price and score, using level of significance ? = 0.01.

12. Construct and interpret a 90% confidence interval for the slope of the population regression line between price and score.

Question 1

Which of the following is not a characteristic of the structure of perfectly competitive markets?

Each individual firm is small in size relative to the overall market.

Few sellers.

Homogeneous product.

Easy, low cost entry and exit.

------------------------------------------------------

Question 4

Marginal revenue is the change in:

total revenue resulting from a one unit change in output.

total revenue resulting from a change in marginal cost.

price resulting from a one unit change in output.

none of these.

----------------------------------------------------------------------

Question 5

Perfectly competitive markets are characterized by:

a small number of very large producers.

very strong barriers to entry and exit.

firms selling a homogeneous product.

all of these.

------------------------------------------------------------

Question 7

Price discrimination requires:

a firm to be a competitive firm.

a firm to be able to segment its customers based on different price elasticities of demand.

arbitrage.

that the product can be easily resold.

-----------------------------------------------------------------

Question 9

Compared to a perfectly competitive firm, a monopolist:

charges a higher price.

produces lower output.

fails to achieve an efficient allocation of resources.

all of these.

-------------------------------------------------------------

Question 14

Which of the following is the best example of an oligopoly?

Area restaurants.

The automobile industry.

Agricultural markets free of government support.

Local utilities.

--------------------------------------------------------------------

Question 18

Since the demand for labor depends on the demand for the product labor produces, the demand for labor is called:

primary demand.

secondary demand.

dependent demand.

derived demand.

---------------------------------------------------

Question 19

The demand for a factor of production depends on the:

supply of the factor.

supply of other factors of production.

demand for other factors of production.

demand for the products that it helps to produce.

-------------------------------------------------------------------

Question 20

Exhibit 11-2 Labor and output data

Labor    Output

0                 0

1             20

2             45

3             80

4             100

5             110

In Exhibit 11-2, the marginal product of the 4th unit of labor is equal to:

80.

45.

35.

100.

20.

1. The research department of Cardinal Novelties has estimated the demand function facing the firm for price increases and price declines from the prevailing price are, respectively: Q = 220 -10P and Q’ = 145-5P

The marginal and average total cost functions of the firm were also estimated to be, respectively: MC =2.5 + .05Q and ATC = 2.5 + .025Q

Determine the best level of output of the firm, the price at which the firm sells its output, as well as the total profit. (20 points)

• Reference Figure 6, p. 432,  This is a kinked demand problem.  The kinked demand model is an oligopoly model to explain a feature, common to many oligopolies, a reluctant to change the price.  You are attempting to determine whether the firm is maximizing profits at the price and quantity coordinates where it is, currently.  You first determine what those coordinates are and then find whether the marginal cost at the current quantity is between the marginal revenues of the two demand curves at the current quantity.  If it is then the firm is maximizing profits, if not then you fall back on the MR=MC rule (use the higher MR if MC is above the range and the lower MR if MC is below the range).  If you approach this problem by first equating MC to MR, you will get it wrong and will not likely receive any of the 20 points associated with the problem.
• You are trying to determine whether the MC goes through the gap in the MR

1. Find kink price and quantity (where two demand curves intersect)
2. Find the MC by plugging in the Q you found in part a.
3. There two marginal revenues, one associated with each demand
4. You must find MR equations for both -   Find both reverse demand curves, Double slope of each to get MR equation
5. Plug in Q from part a into each MR
6. Is the MC between the two MR’s?  If it is then they maximize profit at the kink (current P and Q).  If not, equate MR and MC (if MC is about the larger MR use that MR, if MC is below the lower MR use that MR).