Westfield Graziers packages and distributes three grades of animal feed. The material cost per tonne and estimated annual sales for each of the products are as follows.

The indirect cost of operating the machinery used to package all three products is $40 000 per year. In the past, prices have been set by allocating the indirect costs to products on the basis of estimated sales in tonnes. The resulting total costs (material costs plus allocated fixed overhead) are then marked up by 100 per cent.

Required

1. Calculate the price per tonne for each grade of feed using the method described for setting prices.

2. Does the price in part (a) take into account how much customers are willing to pay for the product?

You are considering a new product launch. The project will cost $680,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 100 units per year, price per unit will be $19,000, variable cost per unit will be $14,000, and fixed costs will be $150,000 per year. The required return on the project is 15%, and the relevant tax rate is 35%. Ignore the half-year rule for accounting for depreciation.

a. Calculate the following six numbers for this project. Round your answers to two decimal places.

(i) NPV

(ii) Profitability Index (PI)

(iii) Payback period (in years)

(iv) Discounted payback period (in years)

(v) Internal Rate of Return (IRR in %)

(vi) Average Accounting Return (AAR in %)

Hint: Net Income = {[(Price – variable cost)*Quantity Sold] – Fixed Costs – Depreciation} * (1 – Tax rate)

Below is the listing of a bond issued by International Business Machines Corporation (IBM). Below the detail of the bond is the information on a recent sale of part of the bond issue. Explain what the price of $148.850 on a $100 par value bond means in this purchase. Explain how the yield to maturity of 4.058% is calculated. Contrast that with the calculation of the current yield of 4.703%. Explain why it matters to know if the bond pays interest monthly, semi-annually or annually. This bond does not mature for almost 28 years. Explain the concept of interest rate risk in context with this bond for both the issuer and the investor. Rating Issuer – CUSIP Coupon Maturity Price Yield to Maturity A1 – Moody’s International Business 7.000% 10/30/2045 $148.850 4.058% Machines Corp (IBM) Current Yield Dated Minimun Size Coupon Pd Callable 4.703% 04/30/1996 5K Semi-Annual No

USE OF AVERAGE COST METHOD

ENN Inc. expects to earn $2 per share in year 1. The company has a policy of retaining 60 percent of its earnings and investing them at a return (R) of 20 percent. Stockholders in EG expect a return (K) of 15 percent on the stock.

1. What price should ENN’s stock sell for?
2. What is the premium for growth and the PE ratio

The company has just come up with a new highly profitable product. As a result it plans to retain all earnings for the next 3 years (i.e. b=1) and invest them at a return (R) of 100% per year. After three years the company will go back to its old policy of retaining 60 percent of its earnings and investing them at 20 percent.

3. What will be the new price of the stock?
4. The new PE ratio
5. The new premium for growth?

You are making an investment where you have an exclusive patent for production of Barkelgassers (BGs) for a period of six years.

The investment will cost $25 million and production/revenue will not commence until year 2. Your production costs are $65 per BG and the marketing manager believes you will be able to sell 200,000 units at $100 per unit until the patent runs out in year 6 (five years’ time).

After that the marketing manager is unsure what the price will be as competitors will come into the market.

The real cost of capital is 9%, you assume the technology will not change and capital and production costs will remain the same. There are no taxes and BG production facilities will last for 12 years and will have no salvage value.

What is the NPV of the project?

Hint: You need to work out what the price will be per Barkelgassers when the competitors come into the market when the patent runs in year 6.

Company A considers acquiring company B. Shares of the company A trade at $30 and there are 5,000 of A shares outstanding. Company B has 200 shares outstanding worth $100 each. If A acquires B, then the resulting synergy will amount to $10,000.

Suppose A offers to exchange every B’s share for four shares in the merged company.

1.What will be the share price of the merged company?

2. What will be the total benefit for the existing shareholders of A?

3. What will be the total benefit for the existing shareholders of B?

4.  Suppose A offers to exchange every B’s share for $130 in cash. What will be the share price of the merged company?

5.  Suppose A offers to exchange every B’s share for $130 in cash. What will be the total benefit for the existing shareholders of A?

6. Suppose A offers to exchange every B’s share for $130 in cash. What will be the total benefit for the existing shareholders of B?

Suppose an individual experiences utility from consumption C and hours of leisure λ. Consider a period of one week, that is, a period of length T = 168 hours. Suppose the price P of a unit of output is $10. Suppose a person’s particular tastes and preferences can be represented by the utility function U(C, λ) = (C - 100) x (λ - 50). Suppose the individual can command a net wage of $40 per hour. During the period suppose the individual receives non-labor income of $300.

A. Graph the individual’s budget set.

B. Suppose λ = 123 and the individual is on the budget line. How much is this person working per week? What “price” is this person willing to pay for an additional hour of leisure? Demonstrate and explain.

C. Does this person work “too much” or “not enough”? Or does this person work the “optimal” number of hours? Demonstrate and explain.

Demand for copper from the Red Dog mine is steady over time, at p = 1000 - q for both this year and next year (where p is the price in dollars per ton and q is the number of tons). Your marginal cost of mining and marketing copper is constant at $100 per ton, and your discount rate is r = 0.05. You can price like a monopolist but your available supply is only S = 600 tons that can be marketed this year and next.

A. Write the two conditions that you would use to solve for the specific quantities 0 q and 1 q that maximize your profits over the two periods. (You don’t actually have to solve for them.)

B. Using the information in part (a), develop an equation that explains how marginal net benefits in year 1 depend on marginal net benefits in year 0.