Bonus Versus Stock

A. The company has offered you a $5,000 bonus, which you may receive today, or 100 shares of the company’s stock, which has a current stock price of $50 per share. Mathematically, what is the best choice? Why?

B. What are the advantages and disadvantages of each option? Be sure to support your answers.

C. What would you ultimately choose to do? What is your financial reasoning behind this choice? Consider supporting your answer with quantitative data.

C Program: How do I write a Greedy function for 0-1 knapsack, to find total value only( replace struct Knapsack)

# include
#include
#include

struct Knapsack {
   int value;
   int weight;
};

   // returns maximum of two integers
   int max(int a, int b) { return (a > b)? a : b; }
   // Returns the maximum value that can be put in a knapsack of capacity W
   struct Knapsack knapSackExhaustive(int W, int wt[], int val[], int n){
   int i, w;
   int K[n+1][W+1];
   int totalWeight=0;

   // Build table K[][] in bottom up manner

   for (i = 0; i <= n; i++){
      
       for (w = 0; w <= W; w++){
      
   if (i==0 || w==0)
       K[i][w] = 0;
   else if (wt[i-1] <= w){
       K[i][w] = max(val[i-1] + K[i-1][w-wt[i-1]], K[i-1][w]);
   }
   else
       K[i][w] = K[i-1][w];
   }
  
   }
  
   //For calculation of totalweight;
   int res = K[n][W];   
  
   w = W;
  
   for (i = n; i > 0 && res > 0; i--) {
   // either the result comes from the top
   // (K[i-1][w]) or from (val[i-1] + K[i-1]
   // [w-wt[i-1]]) as in Knapsack table. If
   // it comes from the latter one/ it means
   // the item is included.
   if (res == K[i - 1][w])
  
   continue;   
  
   else {
   // This item is included.
   //printf("%d ", wt[i - 1]);
  
   totalWeight=totalWeight+wt[i-1];
  
   // Since this weight is included its
   // value is deducted
      
   res = res - val[i - 1];
  
   w = w - wt[i - 1];
   }
}

   struct Knapsack knap;
   knap.value=K[n][W];
   knap.weight=totalWeight;
   return knap;
}// end struct knapSackExhaustive

int main(void) {
  
   struct Knapsack aSack;  
   int i;
   time_t t;
   int val[5];
   int wt[5];
  
   //Intializes random number generator
   srand((unsigned) time(&t));

   // Print 5 random values from 3 to 15
printf("Five Random Values:\n");
for( i = 0 ; i < 5 ; i++ ) {
   
   val[i]=rand()%15+3;
   printf("%d\n",val[i]);
  
}
  
   int j;
   //Print 5 random weights from 1 and 10000
   printf("Five Random Weights:\n");
   for( j = 0 ; j < 5 ; j++ ) {
   wt[j]=rand() % 10000;
   printf(" %d\n", wt[j]);
  
}

   int W = 10000;
   int n = sizeof(val)/sizeof(val[0]);
  
   aSack = knapSackExhaustive(W, wt, val, n);

   printf("Total Value: %d\t\n", aSack.value);
   printf("Total Weight:%d\t",aSack.weight);
  
   return 0;
}

1. Consider a market of homogeneous products in which firms compete on price. Demand in this market is

given by

q(p) = 50 -10p

Consumers buy from the producer with the lowest price. If the prices of both firms are the same then they

purchase from E. There are both an incumbent firm M and a potential entrant E which can produce the good

at marginal costs 3 and 2 , respectively. Prior to entry, E must incur an entry cost equal to Ce is greater than or equal to 0 .

(a) Suppose that Ce = infinity . What are the equilibrium price, quantity, and surplus?

(b) Suppose that Ce = 0 . What are the equilibrium price, quantity, and surplus?

(c) What is the maximum value of Ce for which E does not make a loss if it enters?

(d) What is the maximum value of Ce for which it is optimal from a welfare perspective (i.e. total surplus)

for E to enter? (At the maximum value it is also optimal for E not to enter.)

2. Suppose that there is a single producer of a good and a single retailer. The producer’s marginal cost is 50

and the retailer’s marginal cost is the wholesale price w plus a unit retail cost equal to 50 . The producer

chooses the wholesale price and the retailer the retail price. The demand function is 200 - p .

(a) Write down the retailer’s profit function as a function of the retail price p and the wholesale price w .

(b) What is the optimal retail price choice as a function of the wholesale price?

(c) What is the corresponding quantity?

(d) What is the producer’s profit as a function of w ?

(e) What are hence the equilibrium values of w; p; q ?

(f) What are equilibrium producer and retailer pro ts (both separate and in aggregate)?

(g) Now suppose that the producer and retailer merge without a change in retail or production costs. Then

what would be the new equilibrium price, quantity, and profit?

(h) Provide a brief intuitive explanation for why the retail price is now less but profits are higher.

(i) If the producer and retailer are still separate rms, then how much of a $1 increase in the unit producer

cost gets passed through to the retailer and how much to the consumer?

(j) How would a $1 increase in the unit retail cost affect the wholesale and retail prices? Please explain.

3. Suppose that there is a nut manufacturer and a bolt manufacturer. Consumers need one of each. The cost

of producing a nut is 30 and the cost of producing a bolt is also 10 . Demand is

q(Pn; Pb) = 280 - 4pn - 4pb

(a) What are the equilibrium prices, quantities, and profits?

(b) What would be the corresponding numbers if the firms merged? You only need to set one combined price

for a nut–bolt pair.

(c) Explain why the price of a nut–bolt pair went down yet profits went up.

4. Consider a market for differentiated products with two producers. Each producer is tied to a single retailer.

Each producer firm sets a wholesale price. Then, the retailer chooses a retail price. The demand functions

are (

q1(p1, p2) = 100 - 3p1 + 2p2,

q2(p1, p2) = 100 + 2p1 - 3p2,

The production cost of each unit of either good is 56 . There are no retail costs and no fixed costs.

(a) For given wholesale prices w1;w2 , derive the optimal retail prices p1, p2 as a function of w1, w2 .

(b) Express the producers’ profit functions in terms of w1;w2 .

(c) What are the optimal wholesale prices?

(d) What are the optimal retail prices?

(e) What are retailer profits?

(f) What are producer profits?

(g) What would have been per firm profits absent a retail channel?

(h) What is the range of franchise fee amounts that would make both the producer and the retailer better

off with a retail channel?

RST Plc is a stock exchange listed manufacturing company. Following a decision made by the board to expand its manufacturing facilities, the company needs to raise additional finance amounting to $120 million by way of a five year corporate bond issue. The proposed corporate bond will have a par value of $100 and will be redeemed at this par value at the end of year five. Existing funds were raised by way of a ten year bond which matures in three years’ time. The existing bond has a coupon rate of 4.75% and a nominal value of $100. The bond will be redeemed at this nominal value three years’ time from now and coupon payments are made annually. There will be sufficient funds to redeem the existing bond. The issue will significantly change the company’s capital structure and as such, the credit rating will fall from the current AAA to A. the company’s treasurer has been advised that this is still within the investment grade. Five government bonds are in issue, bond 1, bond 2, bond 3, bond 4 and bond 5. Each bond has a par value of $100 and is redeemable at the par value upon maturity. Coupon payments on each bond are made annually.

The following additional information is available in respect of each bond:
Bond Maturity term Annual coupon rate Price
Bond 1 1 year 3.25% $99.90
Bond 2 2 years 3.75% $98.75
Bond 3 3 years 3.85% $97.80
Bond 4 4 years 4.15% $96.50
Bond 5 5 years 4.20% $96.10

In addition, the following table showing the credit spreads applicable to the sector in which RST Plc operates has been obtained from a credit rating agency:
Credit spreads in basis points

Credit Rating 1 year 2 years 3 years 4 years 5 years
AAA 20 30 40 50 60
AA 45 55 64 76 82
A 52 62 73 85 96

The following proposals have been made in respect of the proposed bond issue:

Proposal A
Issue the proposed corporate bond with a fixed annual coupon rate of 6%, with the first coupon payment being made at the end of year 1.

Proposal B
Issue the proposed corporate bond with an annual fixed coupon rate of 4% from year 1 to year 3 and a fixed annual coupon rate of 7% from year 4 to year 5.

Proposal C
Issue the proposed corporate bond at an annual fixed coupon rate but such that the issue price will be equal to the bond’s par value of $100.

Proposal D
Issue the proposed corporate bond with a variable annual coupon rate based on the Bank Base rate so that the annual coupons will be Bank Base Rate + 40 basis points.

Required:

(a) Calculate the percentage decrease in the market value of the existing bond arising from the decrease in credit rating from AAA to A.

(b) Calculate whether the proposed bond would be issued at a discount or at a premium if the terms of issue were:
(i) Those in proposal A
(ii) Those in proposal B

(c) Calculate what the fixed annual coupon rate would be if the proposed bond was issued based on the terms of proposal C.

(d) Explain why a company may consider issuing a bond based on the terms stated under proposal B.

(e) Discuss the problems that are likely to be faced by the company if the proposed bond was issued based on the terms of proposal D.

Do It! Review 21-2

Pargo Company is preparing its master budget for 2017. Relevant data pertaining to its sales, production, and direct materials budgets are as follows.

Sales. Sales for the year are expected to total 2,000,000 units. Quarterly sales are 22%, 26%, 27%, and 25%, respectively. The sales price is expected to be $40 per unit for the first three quarters and $47 per unit beginning in the fourth quarter. Sales in the first quarter of 2018 are expected to be 15% higher than the budgeted sales for the first quarter of 2017.

Production. Management desires to maintain the ending finished goods inventories at 25% of the next quarter’s budgeted sales volume.

Direct materials. Each unit requires 2 pounds of raw materials at a cost of $11 per pound. Management desires to maintain raw materials inventories at 10% of the next quarter’s production requirements. Assume the production requirements for first quarter of 2018 are 498,000 pounds.

Prepare the sales, production, and direct materials budgets by quarters for 2017.

Oak Creek Company is preparing its master budget for 2020. Relevant data pertaining to its sales, production, and direct materials budgets are as follows.

Sales: Sales for the year are expected to total 1,000,000 units. Quarterly sales are 20%, 25%, 25%, and 30%, respectively. The sales price is expected to be $40 per unit for the first three quarters and $46 per unit beginning in the fourth quarter. Sales in the first quarter of 2021 are expected to be 10% higher than the budgeted sales for the first quarter of 2020.

Production: Management desires to maintain the ending finished goods inventories at 20% of the next quarter's budgeted sales volume.

Direct materials: Each unit requires 2 kg of raw materials at a cost of $10 per kilogram. Management desires to maintain raw materials inventories at 10% of the next quarter's production requirements. Assume the production requirements for the first quarter of 2021 are 630,000 kg.

1. Prepare the sales budget by quarters for 2020.

2. Prepare the production budget by quarters for 2020.

3. Prepare the direct materials budget by quarters for 2020.

Progressive Studios​ Corporation’s sales in Year 2019 is 800 million dollars.​ Let’s make the following assumptions on the​ firm’s performance to forecast its free cash flow in Year​ 2020:

​• Sales grow​ 25% from Year 2019 to Year 2020.

​• Corporate tax rate is​ 25%.

​• COGS is​ 40% of the sales in Year 2020.

​• SG&A is​ 20% of the sales in Year 2020.

​• Depreciation is​ 10% of the sales in Year 2020.

​• Net working capital amounts to​ 30% of the sales for each year​ (i.e., NWC for 2019 is​ 30% sales in​ 2019, NWC for 2020 is prediced to be​ 30% sales in​ 2020).

​• Capital expenditure is​ 5% of the sales in Year 2020.

a. What is the forcasted EBIT of Progressive Studios Corporation in Year​ 2020? Progressive Studios ​Corporation’s forecasted EBIT in Year 2020 is $___.(Round to the nearest​ dollar.)

b. What is Progressive Studios ​Corporation’s forecasted free cash flow in Year​ 2020? Progressive Studios ​Corporation’s forecasted free cash flow in Year 2020 is ​$___.​(Round to the nearest​ dollar.)

c. Assume that starting from Year 2021 and​ beyond, Progressive​ Studios' free cash flow will grow​ 2% per year. The weighted average cost of capital is ​ 12%. The corporation has debt outstanding of​ $100 million and cash of​ $50 million in Year 2019. The number of shares outstanding is 100 million shares. What is the price of Progressive Studios stock will be consistent with the​ forecast? The price per share of $___ will be consistent with the forecast

A firm faces the following costs: total cost of capital = $2,000; price paid for labor = $12 per labor unit; and price paid for raw materials = $4 per raw-material unit.

Instructions: In parts a and b, round your answers to 2 decimal places. In part c, enter your answer as a whole number.

a. Suppose the firm can produce 6,000 units of output this year by combining its fixed capital with 100 units of labor and 450 units of raw materials. What are the total cost and average total cost of producing the 6,000 units of output?

b. Now assume the firm improves its production process so that it can produce 7,000 units of output this year by combining its fixed capital with 100 units of labor and 450 units of raw materials. What are the total cost and average total cost of producing the 7,000 units of output?

c. If units of output can always be sold for $1 each, then by how much does the firm’s profit increase after it improves its production process?

d. Suppose that implementing the improved production process would require a one-time-only cost of $1,100. If the firm only considers this year’s profit, would the firm implement the improved production process?

      (Click to select)  Yes  No

   What if the firm considers its profit not just this year but in future years as well?

      (Click to select)  No  Yes

Use the following to answer questions 20-22

Amy Co. has the following data related to an item of inventory: Inventory, May 1 40 units @ $100 Purchase, May 7 70 units @ $80 Purchase, May 16 170 units @ $60 Ending Inventory 10 units

20. The value assigned to ending inventory if Amy uses LIFO is

21. The value assigned to cost of goods sold if Amy uses FIFO is

22. The value assigned to ending inventory if Amy uses weighted average is (round)

Bond Company adopted the dollar-value LIFO inventory method on January 1, 2019. In applying the LIFO method, Bond uses internal cost indexes and the multiple-pools approach. Its inventory at that date was $300,000 and the relevant price index was 100. The following data were available for Inventory Pool No. 3 for the three years following the adoption of LIFO: Inventory at Current Date Current Prices Price Index December 31, 2019 $345,600 108 December 31, 2020 362,500 125 December 31, 2021 420,000 120

23. What is the cost of the ending inventory at December 31, 2019 under dollar-value LIFO?

24. What is the cost of the ending inventory at December 31, 2020 under dollar-value LIFO?

25. What is the cost of the ending inventory at December 31, 2021 under dollar-value LIFO?

PU, INC (PUI) has the business of converting sewage sludge into fertilize. The business is not in itself very profitable. However, to induce PUI to remain in business, the Owner has agreed to pay whatever amount is necessary to yield PUI a 10 percent book return on equity. At the end of the year PUI is expected to pay a $4 dividend. It has been reinvesting 40 percent of earning and growing at 4 percent a year.
Suppose PUI continues on this growth trend. What is the expected long-run rate of return (r) from purchasing the stock at $100? What part of the $100 price is attributable to the present value of growth opportunities (PVGO)?
Now the Owner announces a plan for PUI to treat another type of sewage. PUI’s plant will, therefore, be expanded gradually over 5 years. This means that PUI will have to reinvest 80 percent of its earnings for 5 years. Starting in year 6, however, it will again be able to pay out 60 percent of earnings. What will be PUI’s stock price (Po) once this announcement is made and its consequences for PUI are known?
Note to answer the problems above please use formulas: r = DIVI/Po + g ; Po = EPS1/r + PVGO; Pn = DIVn/r-g; Po = DIVI/(1+r) + DIV2/(1+r)2 +…DIVn + Pn/(1+r)n