Law of one price and Purchasing-power-parity theory

We employ a theory called the Purchasing Power Parity to explain the movement of nominal exchange rate. The PPP theory is built on the Law of One Price, which states that a currency must have the same purchasing power in all countries. Based one this assumption, PPP theory establishes the functional relationship between Nominal exchange rate, domestic price level, and foreign price level. Suppose you are provided with the following information: 1) P is the price of a basket of goods in US (measured in dollars); 2) P* is the price of a basket of goods in Mexico (measured in Peso); 3) e is the nominal exchange rate between USD and Peso; 4) you have $1 in hands.

1) Suppose there are two markets selling the same good located in Seattle and Dallas, respectively. Initially, the price is $5 in Seattle, and $4 in Dallas. Assuming perfect information and sufficient low cost of transporting. How does the price of good in these two markets adjust in the long run? (6pts) and why? (4pts) Show your analysis using graph or words in details.

An international version of law of one price states that one USD should have the same purchasing power in the U.S. and in any other countries. Based on the principle of law of one price,

2) What is the purchasing power of $1 in U.S and Mexico, respectively? (5pts) Express nominal exchange rate e as a function of P and P* , show your work with details (5pts)

3) Suppose that money supply growth continues to be higher in U.S than it is in Mexico. What does purchasing-power parity imply will happen to the real and to the nominal exchange rate between Peso and U.D. dollar? (10pts)

Minimum-Wage Law and Unemployment

Using labor supply and demand graph, explain

1) how are the equilibrium quantity of labor and the equilibrium wage rate determined? (6pts)

2) why might minimum-wage law lead to unemployment? (In other words, under what conditions does the minimum wage law lead to unemployment?) (9pts)

Dollars and Cents versus a Sense of Ethics   

Grizzly Community Hospital in central Wyoming provides health care services to families living within a 200-mile radius. The hospital is extremely well equipped for a relatively small, community facility. However, it does not have renal dialysis equipment for kidney patients. Those patients requiring dialysis must travel as far as 300 miles to receive care.

Several of the staff physicians have proposed that the hospital invest in a renal dialysis center. The minimum cost required for this expansion is $4.5 million. The physicians estimate that the center will generate revenue of $1.15 million per year for approximately 20 years. Incremental costs, including the salaries of professional staff and depreciation, will average $850,000 annually. Grizzly is exempt from paying any income taxes. The only difference between annual net income and net cash flows is caused by depreciation expense. The center is not expected to have any salvage value at the end of 20 years.

The administrators of the hospital strongly oppose the proposal for several reasons: (1) They do not believe that it would generate the hospital’s minimum required return of 12 percent on capital investments; (2) they do not believe that kidney patients would use the facility even if they could avoid traveling several hundred miles to receive treatment elsewhere; (3) they do not feel that the hospital has enough depth in its professional staff to operate a dialysis center; and (4) they are certain that $4.5 million could be put to better use, such as expanding the hospital’s emergency services to include air transport by helicopter.

The issue has resulted in several heated debates between the physicians and the hospital administrators. One physician has even threatened to move out of the area if the dialysis center is not built. Another physician was quoted as saying, “All the administrators are concerned about is the almighty dollar. We are a hospital, not a profit-hungry corporation. It is our ethical responsibility to serve the healthcare needs of central Wyoming’s citizens.”

Instructions

a. Financial factors and measures. (Compute Payback Period, ROI and NPV - Show all calculations for the supporting calculations. ​)

1. Seth Bullock, the owner of Bullock Gold Mining, is evaluating a new gold mine in South Dakota. Dan Dority, the company's geologist, has just finished his analysis of the mine site. He has estimated that the mine would be productive for eight years, after which the gold would be completely mined. Dan has taken an estimate of the gold deposits to Alma Garrett, the company's financial officer. Alma has been asked by Seth to perform an analysis of the new mine and present her recommendation on whether the company should open the new mine.

Alma has used the estimates provided by Dan to determine the revenues that could be expected from the mine. She has also projected the expense of opening the mine and the annual operating expenses. If the company opens the mine, it will cost $635 million today, and it will have a cash outflow of $45 million nine years from today in costs associated with closing the mine and reclaiming the area surrounding it. The expected cash flows each year from the mine are shown in the table. Bullock Mining has a 12 percent required return on all of its gold mines.

Questions:

1. Construct a spreadsheet to calculate the payback period, internal rate of return, modified internal rate of return, and the net present value of the proposed mine.

2. Based on your analysis, should the company open the mine?

3. Bonus question: Most spreadsheets does not have a built-in formula to calculate the payback period. Write a VBA script that calculates the payback period for a project.

Change the cash-flows as follows

Investment: 600,000,000

B. Answer the same question from problem 1

Case Study- A

National Foodservice Equipment Pty Ltd is a Western Australian company. Within the hospitality and catering industry, National Foodservice Equipment is recognised as a leading supplier and distributor to the foodservice sector. The business started in 1999 and has grown to 24 employees, with locations in Perth and Busselton.

National Foodservice Equipment needed to find a solution that could cater for multi warehousing and deliver adequate stock control. In short, they had simply outgrown their current systems and felt the previous software they were using could no longer meet the company’s growing needs. As a long term user of MYOB Premier and another third party custom built system, it meant that the integration of the two systems was critical for success.

The Finance and Administration Manager, Simon Phipps project managed the assessment, selection, specification and implementation of MYOB Exonet as National Foodservice Equipment’s business management system of choice. He also had a solid hand in configuring many of the business’s reports. It was showcased as the next step up from MYOB Premier and a logical choice for the business. According to Simon, “it was the association with MYOB that sold the product.” The integrated stock handling system of MYOB Exonet also appealed to the needs of National Foodservice Equipment. Each stock item can include codes, descriptions, groups, cost & sell prices, tracking methods and stock levels for each location.

Questions

1. What are the factors must be taken into account by National Food for efficient financial administration?
2. What are the benefits National Foods could reap after successful implementation of new system?
3. What are the risk management and contingency planning National Food Service should do whilst implementing a new system?
4. What are the change management issues faced by an organization like National Food Service?
5. What are the external factors affecting the successful implementation of a system?
6. Who are the main stakeholders when in setting up and managing financial system in this case scenario?
7. Compare and contrast the manual accounting system and computerised accounting system.
8. What are the equipment, manpower and software resources needed for the implementation of the system?

1- Which of the following statements is NOT true?

1. Basic shares outstanding are always included in fully diluted shares outstanding.

2. Fully diluted shares outstanding include all potentially dilutive securities that have been issued.

3. Fully diluted shares outstanding can not decrease unless shares are repurchased.

4. Basic shares outstanding are always equal to or less than fully diluted shares outstanding

2- An analyst has built a forecast showing a rapidly rising Fixed Asset Turnover Ratio. What error has the analyst likely made?

1. The CAPEX forecast is too low.

2. The depreciation forecast is too low.

3. The net profit forecast is too low.

4. The net sales forecast is too low

3- The number of shares repurchased and/or issued in a given period is shown on the:

1. income statement.

2. balance sheet.

3. cash flow statement.

4. statement of shareholders equity

4- Assume a firm has a current ratio of 2.0x and a debt ratio of 0.5x. The firm takes a charge to write-down some obsolete inventory. The firm's current ratio and debt ratio will:

1. Both decrease.

2. The current ratio will increase and the debt ratio will decrease.

3. The current ratio will decrease and the debt ratio will increase.

4. Both increase.

0. in R

1. To explore the characteristics of a Type I error rate, write the R code to do the following:

   1. (a) Generate 30 values from X~N(μX =10,σX=4) and 30 values from Y~N(μY =10,σY=4). Do not print any of these values. Use a t-test to test the hypotheses given above. (You are allowed to use the built-in R function to perform the t-test.)

   2. (b) Include a comment in your code that identifies the p-value and clearly state the conclusion of the test in part (a). The conclusion is either “Reject H0” or “Do not reject H0”.

   3. (c) Repeat part (a) 4000 times, and retain the p-value for each of the 4000 tests. Each repetition should generate a new sample for x and a new sample for y.
      Do not print the x values or the y values or the p-values for any of these tests.
      Do not use a loop to perform the repetitions.

   4. (d) Calculate the proportion of the 4000 repetitions in which H0 is rejected. Include a comment in our code that provides the proportion.

   5. (e) Generate a histogram of the 4000 p-values.

   6. (f) Include a comment in your code to answer the question: What probability distribution do the p- values appear to follow?

a. What is the difference between coupon rate and yield to maturity? How do you use the coupon rate to calculate the periodic payment received from a bond?

b. What is the price of a bond that is currently trading at a yield of 10% and has a face value of $1,000? This bond still has exactly 5 years to maturity. This bond pays semi-annual coupon at an annual rate of 8% (i.e., each coupon is 4%). Show how you found the value. Solving this in a calculator or at some other website that allows you to solve this kind of questions and just putting the value is not going to be an acceptable answer.

c. What is meant by duration of a bond? Describe the steps followed in finding the duration of a bond in Excel when built-in Excel functions are not used.

d. Calculate modi?ed Duration of a bond that pays annual coupon at a rate of 6% and matures in 2 years. This bond has face value of 1,000 and is currently selling at a yield of 8%. Show calculations. Using just modified duration, if yield changes by 0.5%, what is the expected change in the price of the bond? Show calculations. Solving this in a calculator or at some other website that allows you to solve this kind of questions and just putting the value is not going to be an acceptable answer.

Inkjet printers can be described as either continuous or drop-on-demand. In a continuous inkjet printer, letters are built up by squirting drops of ink at the paper from a rapidly moving nozzle. You are part of an engineering group working on the design of such a printer. Each ink drop will have a mass of

1.2×10⁻⁸ g . The drops will leave the nozzle and travel toward the paper at 50 m/s, passing through a charging unit that gives each drop a positive charge q by removing some electrons from it. The drops will then pass between parallel deflecting plates, 2 cm long, where there is a uniform vertical electric field with magnitude 8.0×10⁴ N/C . Your team is working on the design of the charging unit that places the charge on the drops.

A) If a drop is to be deflected 0.35 mm by the time it reaches the end of the deflection plates, what magnitude of charge must be given to the drop?

B) How many electrons must be removed from the drop to give it this charge?

C)If the unit that produces the stream of drops is redesigned so that it produces drops with a speed of 25 m/s, what q value is needed to achieve the same 0.35-mm deflection?