Determining Market-Based and Negotiated Transfer Prices

Clanahan, Inc., has a number of divisions around the world. Division US (in the United States) purchases a component from Division N (in the Netherlands). The component can be purchased externally for $24.60 each. The freight and insurance on the item amount to $2.45; however, commissions of $2.60 need not be paid.

Required:

Round your answers to the nearest cent.

1. Calculate the transfer price using the comparable uncontrolled price method.
$ fill in the blank 1per unit

2. Suppose that there is no outside market for the component that Division N transfers to Division US. Further assume that Division US sells the component for $27.30 and normally receives a 30 percent markup on cost of goods sold. Calculate the transfer price using the resale price method.
$ fill in the blank 2per unit

3. Now assume that there is no external market for the component transferred from Division N to Division US, and that the component is used in the manufacture of another product (i.e., it is not resold). Calculate the transfer price using the cost-plus method. Further assume that Division N’s manufacturing cost for the component is $18.50.
$ fill in the blank 3per unit

4. What if commissions avoided were $2.90 per unit?

What would be the comparable uncontrolled price?
$ fill in the blank 4per unit

What affect would this have on the resale price?

What affect would this have on the cost-plus price?

A company called Worldwide Development Ltd from Europe, had an electronic software manufacturing plant built for them by Electronic Merchandise Ltd, a company from the United States of America (USA). The amount that Worldwide Development Ltd owes to Electronic Merchandise Ltd for the manufacturing plant is $10,000,000. Worldwide Development Ltd Electronic agreed to pay Electronic Merchandise Ltd six months from now for the manufacturing plant. The current spot rate is €0.8573/$, the three month forward rate is €0.8617/$ and the six month forward rate is €0.8650/$. The annual interest rate is 0.2% in the USA and 2.0% in Europe. Electronic Merchandise Ltd can buy a six-month call or put option on $ at the strike price of €0.8649/$. The premium for put and call options are the same, namely €0.03 per $.

i. Should Electronic Merchandise Ltd enter into a put or call option? (Specify put or call and on what currency in the space provided below.)

ii. Compute the expected total future dollar cost (premium plus strike) of meeting this obligation if the option hedge is entered into by Electronic Merchandise Ltd. Show your workings and the correct answer as follows in the space provided below:

Premium:

Strike price:

Total cost:

One of the following answers will be correct for the total future dollar cost:

a. € 8,952,000.00

b. € 8,949,300.00

c. € 11,865,030.29

d. € 11,862,330.29

PLEASE SHOW THE EXPLANATION!!

1. Which of the following is consistent with advocates of rational expectations? If consumers fully anticipate an increase in interest rates, then

Real GDP will increase by the value of the multiplier

Real GDP will decrease by the value of the multiplier

Real GDP will not change

Price level will increase

Unemployment will increase

2. Fiscal policy is limited when the slope of the

AS curve is more vertical so the multiplier is more effective

As curve is more vertical hence the multiplier is less effective

As curve is more horizontal so the multiplier is more effective

AD and AS curves are more horizontal so the multiplier is more effective

AD curve is more vertical so the multiplier is more effective

3. If productivity rises in the United States, we expect that

The short-run Philips curve will shift left

The short-run Philips curve will shift right

The long-run Philips curve will shift right

There will be a movement to the right along the short-run Philips curve

There will be a movement to the left along the short-run Philips curve

4. If congress engages in contractionary fiscal policy, we can expect that

The short-run Philips curve will shift left

The short-run Phillips curve will shift right

The long-run Philips curve will shift right

There will be a movement to the right along the short-run Philips curve

There will be a movement to the left along the short-run Philips curve

Assume that the spot price of the Canadian dollar, CAD, is 0.7140 USD (USD per CAD). Assume also that the CAD/USD exchange rate has a volatility of 12% per annum. The risk-free rates of interest in Canada and the United States are 0.50% and 0.80% per annum, respectively. Exchange rate between USD and CAD (Canadian dollar) is 0.7140.

1. What is the value of a European CALL Option with maturity of 6-month to buy one CAD for 0.7100USD. (In other words, if K=0.7100USD per CAD, what is the call option value)

2. Using the put-call parity condition for European currency options, find the value of a European put option (with maturity of 6-month and the same exercise price as the call option) to sell one Canadian dollar, CAD, for 0.7100USD?

(If you wish, you can find out the value of put option using BSM formula and see if you get the same result as using the put-call parity. If you don not get the same results, then you must have made a mistake in calculating the put option using the BSM formula. However, the numbers are so close and you can make rounding along the way may give rise to different results. So, as long as you get quite close numbers, then it should be fine)

Please show your work!

Tables 1 and 2 show the quantities of the goods that Suzie bought and the prices she paid during two consecutive weeks. Suzie’s CPI market basket contains the goods she bought in Week 1. Calculate the cost of Suzie’s CPI market basket in Week 1 and in Week 2. What percentage of the CPI market basket is gasoline? Calculate the value of Suzie’s CPI in Week 2 and her inflation rate in Week 2.

Table 1 Data for Week 1

Item

Quantity

Price (per unit)

Coffee

11 cups

$3.25

DVDs

1

$25.00

Gasoline

15 gallons

$2.50

Table 2 Data for Week 2

Item

Quantity

Price (per unit)

Coffee

11 cups

$3.25

DVDs

3

$12.50

Gasoline

5 gallons

$3.00

Concert

1 ticket

$95.00

Use the following information to work Problems 4 and 5.

The GDP price index in the United States in 2000 was about 90, and real GDP in 2000 was $11 trillion (2005 dollars). The GDP price index in 2010 was about 111, and real GDP in 2010 was $13.1 trillion (2005 dollars).

Calculate nominal GDP in 2000 and in 2010 and the percentage increase in nominal GDP between 2000 and 2010.What was the percentage increase in production between 2000 and 2010, and by what percentage did the cost of living rise between 2000 and 2010?

The project will last for 8 years, beginning in 2011 (year 0) and ending in 2019 (year 8). Depreciation is straight line to zero, and taxation (at the time) is 35% in the United States. In any year with a negative EBIT, there is no tax. The capital investment for the fibre line project is $350,000,000 (invested in year 0), including costs of amplification sites, earthmoving equipment, easements etc. Working capital is expected to be $60,000,000, returned at the end of the project. A 24 hours a day, 7 days a week maintenance team is required to ensure 99.99% operational capacity, costing $60 million per year, and increasing at 3% per year. The project success hinges on access to the fibre ports in the exchanges, they know this and charge $50,000,000 per year (combined), declining by 5% p.a. as demand declines.      A team of surveyors and builders who inspected the 1400 km path cost $1.5 million. At the end of the project, the technology is obsolete for its purpose in investment banking, but it can be sold to a telecom provider (contributing to the revenue for year 8) for $127,000,000. Revenue is subscription based at $3,600,000 per year, per subscription. In year 1 there will be 200 subscriptions, year 2 is 150, year 3 is 100, year 4 is 50. In year 5, 6, 7, 8 only 20 subscriptions are taken in per year. The all-important discount rate is 14.5%.

Question: What is the NPV and IRR using excel?

What motivates employees? The Great Place to Work Institute evaluated nonfinancial factors both globally and in the United States. The results, which indicate the importance rating of each factor, are stored in Table 6. These items were chosen carefully to match each by a common characteristic or factor. At the 0.05 level of significance, is there evidence of a difference in the mean rating between global and U.S. employees? The first few lines of data are shown below:

Factor Global US

Being treated with respect 119 123

Work/life balance 111 112

The type of work that you do 110 111

The quality of people you work with 107 111

The quality of the leadership of the organization 107 112

Base Pay 106 104

What is the null hypothesis for the mean test?

2. Referring to Table 6, what is the upper limit of 90% confidence interval?

3. Referring to Table 6, what is the interpretation of the confidence interval?

Question # 2 The city of Atlanta, Georgia enacted an ordinance that imposes significant restrictions on the installation of outdoor advertising within the city. The express objectives of the ordinance are “to eradicate risks to motorists and other citizens caused by potentially distracting outdoor advertising” and “to maintain and enhance the attractiveness of Atlanta.” The ordinance allows certain commercial advertising (signs advertising products obtainable at the location where the sign is placed), but outlaws other types of outdoor advertisements, both commercial and non-commercial, unless expressly allowed by one of the ordinance’s 10 stated exclusions, such as impermanent political election signs. Big Al’s Big Ads Inc., and other organizations involved in outdoor advertising in the city when the ordinance was enacted, brought suit in state court alleging that the ordinance was unconstitutional. They sought an injunction against enforcement of the ordinance. The trial court determined that the ordinance was an unconstitutional violation of Big Al’s First Amendment rights. The Georgia Court of Appeals affirmed, but the Georgia Supreme Court reversed, holding, among other things, that the ordinance was not invalid under the First Amendment. Big Al’s and the other companies appeal to the United States Supreme Court and the Court agrees to hear the case. How does the Court generally deal with issues involving freedom of speech? How will the Court deal with the issues presented by this particular case? Fully discuss how the Court would likely analyze this case.

The mortgage on your house in Winnipeg is five years old. It required monthly payments of $1402, had an original term of 30 years, and had an interest rate of 9% (APR with semiannual compounding). In the intervening five years, interest rates have fallen, housing prices in the United States have fallen, and you have decided to retire to Florida. You have decided to sell your house in Winnipeg and use your equity for the down payment on a condo in Florida. You will roll over the outstanding balance on your old mortgage into a new mortgage in Florida. The new mortgage has a 30-year term, requires monthly payments, and has an interest rate of 6.625% (APR with monthly compounding, which is typical for U.S. mortgages).

1. What monthly repayments will be required with the new loan?

2. If you still want to pay off the mortgage in 25 years, what monthly payment should you make on your new mortgage?

3. Suppose you are willing to continue making monthly payments of $1402. How long will it take you to pay off the new mortgage?

4. Suppose you are willing to continue making monthly payments of $1402, and you want to pay off the mortgage in 25 years. How much additional cash can you borrow today as part of the new financing?

** please show the complete work out/steps with formulas. No excel sheets.**