Sunshine Inc has no debt outstanding and a total market value of $308,100. Earnings before interest and taxes, EBIT, are projected to be $46,000. If economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 20% higher. If there is a recession, the EBIT will be 31% lower. The company is considering a $160,0000 debt issue with an interest rate of 5%. The proceeds will be used to repurchase shares of stock. There are currently 7,900 shares outstanding. Ignore taxes for questions a and b. Assure the company has a market to book ratio of 10 and the stock price remains constant. a1. Calculate Return on Equity (ROE) under each of the 3 economic scenarios before any debit is issued. a2. Calculate the percentage changes in ROE when the economy expands or enters a recession. b1. Assume the corp. goes through with the proposed recapitalization. Calculate the Return on Equity (ROE) under each of the three economic scenarios. b2. Assume the firm goes through with the proposed recapitalization. Calculate the percentages changes in ROE when the economy expands or enters a recession. Assume the firm has a tax rate of 24% c1. Calculate return on equity(ROE) under each of the three economic scenarios before any debit issued. c2. Calculate the percentage changes in ROE when the economy expands or enters a recession. c3. Calculate the return on equity(ROE) under each of the three economic scenarios assuming the firm goes through with the recapitalization. c4. Given the recapitalization, calculate the percentage changes in ROE when the economy expands or enters a recession.

On June 1, Alexander Corporation sold goods to a foreign customer at a price of 1,110,000 pesos and will receive payment in three months on September 1. On June 1, Alexander acquired an option to sell 1,110,000 pesos in three months at a strike price of $0.055. Relevant exchange rates and option premiums for the peso are as follows:

Alexander must close its books and prepare its second-quarter financial statements on June 30.

1. a-1. Assuming that Alexander designates the foreign currency option as a cash flow hedge of a foreign currency receivable, prepare journal entries for these transactions in U.S. dollars.

2. Record the sale of merchandise.

3. 2

   Record the foreign currency option.

4. 3

   Record the entry for changes in the exchange rate.

5. 4

   Record the change in the fair value of the option.

6. 5

   Record the gain or loss on the option.

7. 6

   Record the option expense.

8. 7

   Record the entry for changes in the exchange rate.

9. 8

   Record the change in the fair value of the option.

10. 9

    Record the gain or loss on the option.

11. 10

    Record the option expense.

12. 11

    Record receipt of pesos.

13. 12

    Record the exercise of the option.

14. a-2. What is the impact on net income over the two accounting periods?

15. b-1. Assuming that Alexander designates the foreign currency option as a fair value hedge of a foreign currency receivable, prepare journal entries for these transactions in U.S. dollars.

16. Record the sale of merchandise.

17. 2

    Record the foreign currency option.

18. 3

    Record the entry for changes in the exchange rate.

19. 4

    Record the change in the fair value of the option.

20. 5

    Record the gain or loss on the option.

21. 6

    Record the option expense.

22. 7

    Record the entry for changes in the exchange rate.

23. 8

    Record the change in the fair value of the option.

24. 9

    Record the gain or loss on the option.

25. 10

    Record the option expense.

26. 11

    Record receipt of pesos.

27. 12

    Record the exercise of the option.

28. b-2. What is the impact on net income over the two accounting periods?

DRIVING ARI FLEET MANAGEMENT WITH REAL-TIME ANALYTICS Automotive Resources International, better known as simple ARI, is the world's largest privately-held company for vehicle fleet management services. ARI is headquartered in Mt. Laurel, New Jersey and has 2,500 employees and offices throughout North America, Europe, the UK and Hong Kong. The company manages more than 1,000,000 vehicles in the US, Canada, Mexico, Puerto Rico and Europe. Businesses that need vehicles for shipments (trucks, vans, cars, ships, and rail cars) may choose to manage their own fleet of vehicle or they may outsource fleet management to companies such as ARI which specialize in these services. ARI manages the entire life cycle and operation of a fleet of vehicles for its customers, from up-front specification and acquisition to resale, including financing, maintenance, fuel management, and risk management services such as driver safety training and accident management. ARI also maintains six call centers in North America that operate 24/7, 365 days a year to support customers' drivers, and suppliers who expect access to real-time actionable information. Providing this information has become increasingly challenging. Operating a single large commercial vehicle fleet generates high volumes of complex data, such as data on fuel consumption, maintenance, licensing and compliance, A fuel transaction, for example, requires data on state taxes paid, fuel grade, total sale, amount sols, and time and place of purchase. A simple brake job and preventive maintenance checkup generates dozens of records for each component that is serviced. Each part and service performed on a vehicle is tracked using American Trucking Association codes. ARI collects and analyzes over 14,000 pieces of data per vehicle. Then multiply the data by hundreds of fleets, some with up to 10,000 vehicles, all operating simultaneously throughout the globe, and you'll have an idea of the enormous volume of data ARI needs to manage, both for itself and for its customers. ARI provided its customers with detailed information about their fleet operations, but the type of information it could deliver was very limited. For example, ARI could generate detailed reports on line-item expenditures, vehicle purchases, maintenance records, and other operational information presented as simple spreadsheets, charts, or graphs, but it was not possible to analyze all the data to spot trends and make recommendations. ARI was able to analyze data customer by customer, but it was not able to aggregate data across its entire customer base. For instance, if ARI was managing a pharmaceutical company's vehicle fleet, its information systems could not benchmark that fleet's performance against others in the industry. That type of problem required too much manual work and time, and still didn't deliver the level of insight management thought was possible. What's more, in order to create reports, ARI had to go through internal subject matter experts in various aspects of fleet operations, who were called "reporting power users". Every request for information was passed to these power users. A request for a report would take 5 days to fill. If the report was unsatisfactory, it would go back to the report writer to make changes. ARI's process for analyzing its data was extremely drawn out. In mid-2011, ARI implemented SAP BusinessObjects Explorer to give customers the enhanced ability to access data and run their own reports. SAP BusinessObjects Explorer is a business intelligence tool that enables business users to view, sort and analyze business intelligence data. Users search through data sources using an iTunes-like interface. They do not have to create queries to search the data and results are shown with a chart that indicates the best information match. The graphical representation of results changes as the user asks further questions of the data. In early 2012, ARI integrated SAP BusinessObjects Explorer with HANA, SAP's in-memory computing platform that is deplorable as an on-premise appliance (hardware and software) or in the cloud. HANA is optimized for performing real-time analytics and handling very high volumes of operational and transactional data in real time. HANA's in-memory analytics queries data stored in random access memory (RAM) instead of on a hard disk or flash storage. Things started happening quickly after that. When ARI's controller wanted an impact analysis of the company's top 10 customers, SAP HANA produced the result in 3 to 31/2 seconds. In ARI's old systems environment, this task would have been assigned to a power user versed in using reporting tools, specifications would have to be drawn up and a program designed for that specific query, a process that would have taken about 36 hours. Using HANA, ARI is now able to quickly mine its vast data resources and generate predictions based on the result. For example, the company can produce precise figures on what it costs to operate a fleet of a certain size over a particular route across specific industries during a certain type of weather and predict what the impact of changes in any of the variables. And it can do so nearly as easily as providing customers with a simple history of their expenditures on fuel. With such helpful information ARI provides more value to its customers. HANA has also reduced the time required for each transaction handled by ARI's call centers- from the time a call center staffer takes a call to retrieving and delivering the requested information-5 percent. Since call center staff account for 40 percent of ARI's direct overhead, that time reduction translates into major cost savings. ARI plans to make some of these real-time reporting and analytic capabilities available on mobile devices, which will enable customers to instantly approve a variety of operation procedures, such as authorizing maintenance repairs. Customers will also be able to use the mobile tools for instant insight into their fleet operations, down to a level of detail such as a specific vehicles's tire history. Question: Describe the changes in the business as a result of adopting HANA.

Mike Riley is the operation director for WFA (Which used to be known as Water for Africa).WFA is a charitable trust that was set up in the 1970s to provide long- term help for victims of environmental and political crises. WFA specialise in helping the inhabitants of disaster stricken towns and villages install their own water Supplies and improve sanitation facilities.

Because all of the funds have to be raised through the effort of volunteers, the directorate is concerned about mining cost. Mike is constantly under pressure to reduce his stock of sanitation equipment and supplies. Indeed over the last four years he has reduced stock holing across all of the stores from around €10m to 5m (cost of capital (10%) x cost of an items). But now it seems he has gone too far in reducing inventories. His filed manger are compiling of shortage, particular of copper pipe and sealant. From his main store in UK Mike Supplies 14 Regional stores which are close to where the 47 project are underway. The field workers can e-mail orders for any items, in predetermined order quantities, at any time and delivery is usually within three weeks. The expectation is portable electricity generators which are delivered directly from the supplier and take around six months. The cost of administration and delivery for any part is calculated at €45.

On a visit to a new project, Mike called into the regional store and checked the stock records on the computer. Being short of time, he selected 13 items from the 105 on the database-the result are shown in table 30.1.Walking around the store he was concerned to see large quantities of many items. He also noticed that some of the dehydrated food was more than 12 months old and past it sell- by date. He could not find any tubes of sealant but he noticed about 100 lengths of copper pipe in a corner.

Mike was bewildered. The directorate thought too much money was tied up in stock, he thought he had reduced it as far as he could –so much so that the field operation complain of shortages – yet there were heaps of equipment and rotting supplies in the storages.

Question:

1.            Evaluate the stock holding policies at WFA.

2.            What changes should Mike make?

Use the following information:

Today is June 8^th

The company knows that it will need 20,000 barrels of jet oil oil at some time in October or November.

Heating oil futures contracts are currently traded for delivery every month on the exchange

Each contract size is 1,000 barrels.

• the standard deviation of monthly changes in the price of a jet oil is 0.55,
• the standard deviation of monthly changes in the futures prices of a heating oil is 0.71,
• and the coefficient correlation between the two changes is 0.85
• Futures price on June 8 is $85.00 per barrel.

Later, the company finds that it is ready to purchase the jet oil on October 10

Spot price (of jet fuel) and futures price (on heating oil) on Oct. 10 are $89.00 per barrel and $87.80 per barrel.

1. What is the optimal hedge ratio and what is the optimal number of contracts?
2. Should the company take LONG or SHORT?
3. Which delivery month?
4. With asset mismatch and timing mismatch, what is the total effective price paid? And what is the effective price the company paid per barrel?

5. If no cross hedging was necessary (i.e. no asset mismatch, hence the optimal hedge ratio would be 1), assuming that there was a JET OIL FUTURES, what would have been the number of contracts to enter? And what would have been the effective price per barrel and the total effective price paid on Oct. 10?

6. If it was a perfect hedge (no timing mismatch or asset mismatch at all), what would have been the effective price per barrel and the total effective price?

Suppose that ZX Inc. is currently selling at $50 per share. You buy 200 shares, using $5,000 of your own money and borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 5%.

1. What is the profit or loss $ in the net worth of your brokerage account if the price of ZX Inc. changes to $46?

2. What is the profit or loss $ in the net worth of your brokerage account if the price of ZX Inc. changes to $50?

3. What is the profit or loss $ in the net worth of your brokerage account if the price of ZX Inc. changes to $54?

4. What is the rate of return on your margined position (assuming again that you invest $5,000 of your own money) if ZX Inc. is selling after one year at $46 (use whole number percentage with two decimals rounded up/down - i.e. 0.3245 input 32.45)?

5. What is the rate of return on your margined position (assuming again that you invest $5,000 of your own money) if ZX Inc. is selling after one year at $50 (use whole number percentage with two decimals rounded up/down - i.e. 0.3245 input 32.45)?

6. What is the rate of return on your margined position (assuming again that you invest $5,000 of your own money) if ZX Inc. is selling after one year at $54 (use whole number percentage with two decimals rounded up/down - i.e. 0.3245 input 32.45)?

Part A) You know that you are operating in a monopolistically competitive market, that is, you are a small part of a large market with many competitors in this market. From data collected on the Widget Market, you know that market demand has recently increased and market supply has recently decreased. Name two shift factors and determinants that could have caused the market demand to increase and two shift factors and determinants that could have caused the market supply to decrease. Also as manager of the facility, what decisions should you make regarding production levels and pricing for your Widget facility? (15 points)

Remember that supply and demand are about the market supply and market demand, which is much bigger than your own company. You are being given data on supply and demand for the whole market and are being asked what effect that has on you as a small part of that market. You want to identify the possible change in market equilibrium price and possible change in market equilibrium quantity based on the shifts in demand and supply and adjust your own price and quantity to match the market.


(Part B) Now, suppose that the following changes in demand and supply occur: (1) a complimentary good goes up in price and (2) your costs of production decrease. What decisions will you make regarding production levels and pricing for your Widget facility based ONLY on these changes, for example, do not factor in the changes in part (a) here? (15 points)

6. A ) Suppose you are working as an economic consultant and you are supposed to explain the consequences of the following cases to your clients. Answer each part separately.

   1. Suppose due to a war in a neighbouring country, the country received refugees which increased the labour force. Also, there is a huge reduction in global oil prices. By using the Aggregate Supply curve, show the possible effects of these two changes on the price level and aggregate output in the Short-Run. Explain each step in your graph.

   2. Suppose there is an increase in interest rate. By using the Aggregate Expenditure (AE) – Aggregate Output (Y) graph, show the effects of this change on AE and Y in the Short-Run. Then, show the effect of increased interest rate by using the IS curve, explain what will happen to the IS curve.

   3. Now suppose government expenditure (G) increases and there is an increase in the overall price level (P). By using the IS curve and Fed (Central Bank) Rule curve graph, explain the effect of these changes on the interest rate and output in the Short- Run. Explain each step in your graph.

   4. Now assume that there is an increase in government expenditure (G), an increase in the labour force and a reduction in oil prices. By using the AS-AD graph, explain the effects of these changes on equilibrium output and equilibrium price level in the Short-Run. Explain each step in your graph.

   5. Now assume that for some reason Aggregate Demand shifts to the left (downwards) and suppose wages fully adjust. By using the AS-AD graph, show the effects of this shift on the equilibrium output and price level in the Short-Run and in the Long-run.

Mary Willis is the advertising manager for Bargain Shoe Store. She is currently working on a major promotional campaign. Her ideas include the installation of a new lighting system and increased display space that will add $36,000 in fixed costs to the $272,000 currently spent. In addition, Mary is proposing that a 5% price decrease ($40 to $38) will produce a 20% increase in sales volume (20,000 to 24,000). Variable costs will remain at $24 per pair of shoes. Management is impressed with Mary’s ideas but concerned about the effects that these changes will have on the break-even point and the margin of safety.

Compute the current break-even point in units, and compare it to the break-even point in units if Mary’s ideas are used. (Round answers to 0 decimal places, e.g. 1,225.)

Prepare a CVP income statement for current operations and after Mary’s changes are introduced.