Analyze a simple model of a consumer's response to a price increase.

% change (growth rate) = (value_new - value_old) / value_old Elasticity = |% change in quantity / % change in price|

a. For the following questions, assume that the Year 2 price increases by an additional 30%.What would be the new Year 2 price after the additional price increase? Answer

b. Given the previously calculated price elasticity of demand, what quantity would the consumer purchase in Year 2 after the price increase? Answer

c. What would be the consumer's expenditure in Year 2 after the price increase? Answer

d. What is the change in the consumer's expenditure between Year 1 and Year 2 by Answer

e. Would a tax on this good be relatively more effective at raising revenue, or changing behavior? AnswerChanging BehaviorRaising RevenueBoth

The Carbondale Hospital is considering the purchase of ambulance. The TheXarbondale Hospital is considering the purchase of ambulance. The decision will rest partly on the anticipated mileage" be driven next year. The miles driven during the past 5
years are as follows:

a) Forecast the mileage for next year using a 2-year moving average.
b) Find the MAD based on the 2-year moving average forecast in part (a), (Hint: You will have only 3 years of matched data.)
c) Use a weighted 2-year moving average with weights of .4 and .6 to forecast next year's mileage. (The weight of .6 is for the most recent year.) What MAD results from using this approach to forecasting? (Hint: You will have only 3 years of matched data.)
d) Compute the forecast for year 6 using exponential smoothing, an initial forecast for year 1 of 3,000 miles, and a = .5.

*****PLEASE SHOW WORK

1. Wages of $12,000 are earned by workers but not paid as of December 31.
2. Depreciation on the company’s equipment for the year is $10,240.
3. The Office Supplies account had a $330 debit balance at the beginning of the year. During the year, $4,879 of office supplies are purchased. A physical count of supplies at December 31 shows $538 of supplies available.
4. The Prepaid Insurance account had a $5,000 balance at the beginning of the year. An analysis of insurance policies shows that $2,400 of unexpired insurance benefits remain at December 31.
5. The company has earned (but not recorded) $750 of interest revenue for the year ended December 31. The interest payment will be received 10 days after the year-end on January 10.
6. The company has a bank loan and has incurred (but not recorded) interest expense of $5,000 for the year ended December 31. The company will pay the interest five days after the year-end on January 5.

For each of the above separate cases, prepare adjusting entries required of financial statements for the year ended (date of) December 31.

2. A) What is the present value of a cash flow stream of $10,000 per year at an interest rate of 6% starting one year from today and goes on forever? B) What is the present value of a cash flow stream of $10,000 per year starting one year from today that grows at 3% at an interest rate of 6% starting one year from today and goes on forever? C) What is the present value of a cash flow stream of $10,000 per year starting one year from today at an interest rate of 6% for ten years? C-2) What is the future value of the cash flow stream in part C? D) What is the present value of a cash flow stream of $10,000 per year starting one year from today that grows at 3% at an interest rate of 6% for ten years? This problem is good practice of A) PV of a perpetuity, B) PV of a growing perpetuity, C) PV of an annuity, C-2) FV of an annuity, D) PV of a growing annuity.

Bond A has a coupon rate of 10%, with a three-year maturity and a face value of $1,000. If the discount rate now or future is 10%, and you want to buy bond A now, what is the price you have to pay now (P0)?

Stock A has an earnings of $5 per share at year 1. The interest rate is 20%, and the return on equity is 25%. If there is no plow-back, what is the book value of equity per share at the beginning of year 10 ?

What happens to the price of a one-year bond with a coupon rate of 8% when the interest rate changes from 6% to 8%?

Your friend promises you a perpetuity of $1 every year, which starts in year 1. However, your friend is an absent-minded guy, paying you $2 at year 9 but no payment at year 10. Except for these two years, in other years, the payment is always $1. Which of the following is right about the present value at year zero of your friend’s all payments if r = 5%?

Create a 5-year capital budget for the project below assuming the following.

1.$500,000 initial outlay for purchase of new machine for a 5-year contract the company was awarded from a customer.

2.The company will have to rent new space for $50,000/year to put machine in.

3.A one-time, year 1 cost to set up the machine and get it running will be $200,000.

4.The machine is expected to generate revenue beginning in year 2.

The machine will generate around $150,000 in year 2...that number will increase by about 10% per year thereafter.

5.Machine is depreciated using S/L depreciation.

6.The company hasa flat tax rate of 25%.

7.The discount rate is 9%.

Build a 5-year capital budget that includes all of the above items and shows EBITDA, EBT, Taxes Paid, Net Income, and cash flow per year.

Then calculate NPV and IRR. Should the company undertake the project? Why or why not?

Exercise 14-7 Trend Percentages [LO14-1] Rotorua Products, Ltd., of New Zealand markets agricultural products for the burgeoning Asian consumer market. The company’s current assets, current liabilities, and sales over the last five years (Year 5 is the most recent year) are as follows: Year 1 Year 2 Year 3 Year 4 Year 5 Sales $ 4,542,180 $ 4,808,250 $ 5,080,450 $ 5,484,830 $ 5,683,230 Cash $ 95,706 $ 103,151 $ 102,481 $ 79,325 $ 65,455 Accounts receivable, net 404,163 424,950 436,823 509,990 564,813 Inventory 809,570 877,017 834,956 891,516 912,503 Total current assets $ 1,309,439 $ 1,405,118 $ 1,374,260 $ 1,480,831 $ 1,542,771 Current liabilities $ 301,363 $ 342,540 $ 331,353 $ 321,208 $ 402,975 Required: 1. Express all of the asset, liability, and sales data in trend percentages. Use Year 1 as the base year. (Round your percentage answers to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)

Grayson Corporation is authorized by the state to sell 2 million shares of its $1 par value common stock to the public. Before Year Seven, the company had issued 60,000 shares for cash of $12 per share. During Year Seven, Grayson issued another 14,000 shares at the market value of $24 per share. On January 1, Year Seven, Grayson reported retained earnings of $1,950,000. During that year, Grayson earned net income of $80,000 and paid cash dividends to common stockholders of $19,000. Also, during December of Year Seven, Grayson repurchased 11,000 shares of its own stock when the market price was $22 per share. a. Record the issuance of the common stock in Year Seven. b. Determine retained earnings as of the end of Year Seven. c. Record the purchase of the treasury stock. d. Prepare the stockholders’ equity section of the balance sheet as of December 31, Year Seven. e. Compute the company’s return on equity (ROE) for Year Seven.

Comparing three depreciation methods

Dexter Industries purchased packaging equipment on January 8 for $90,000. The equipment was expected to have a useful life of three years, or 18,000 operating hours, and a residual value of $3,600. The equipment was used for 7,200 hours during Year 1, 5,400 hours in Year 2, and 5,400 hours in Year 3.

Required:

1. Determine the amount of depreciation expense for the three years ending December 31, by (a) the straight-line method, (b) the units-of-activity method, and (c) the double-declining-balance method. Also determine the total depreciation expense for the three years by each method. Round the final answers for each year to the nearest whole dollar.

Depreciation Expense

YearStraight-Line MethodUnits-of-Activity MethodDouble-Declining-Balance Method

Year 1 $  $  $

Year 2 $  $  $

Year 3 $  $  $

Total $  $  $

2. What method yields the highest depreciation expense for Year 1?

3. What method yields the most depreciation over the three-year life of the equipment?