The president of ABC made this statement in the company’s annual report: “ABC’s primary goal is to increase the value of our common stockholders’ equity. Later in the report, the following announcements were made:

a) The company contributed $1 million to the symphony orchestra in Chicago, IL, its headquarters city.

b) The company is spending $800 million to open a new plant and expand operations in South Vietnam. No profits will be produced by the Vietnamese operation for four years, so earnings will be depressed during this period versus what they would have been had the decision not been made to expand in South Vietnam?

c) The company holds about half of its assets in the form of U.S. Treasury bonds, and it keeps these funds available for use in emergencies. In the future, though, ABC plans to shift its emergency funds from Treasury bonds to common stocks.

Discuss how ABC’s stockholders might view each of these actions and how the actions might affect the stock price.

Mill Company is evaluating the proposed acquisition of a new milling machine. The machine's base price
is $140,000, and has a terminal value of $17,000. The company's cost of capital is 6%. The project has a
life-time of 3 years. The operating cash flows are as follows:

(a) Find the net present value of this project (NPV). Should it be accepted?

Suppose Mill Company wishes to expand its operations in the UK. The exchange rate at the time of
investment is £1= $1.6.
(b) Use the PPP to find the exchange rate 1 year from now, 2 years from now and 3 years from now. The
inflation rate in the U.S. (?$) is 3 percent and in the UK 2 percent (?£)
(c) Find the NPV in pounds. Should Mill Company invest in the UK?

Scenario 1 – Contracts

Greg, a consumer in Tennessee, sent a purchase order to Campbell Manufacturing, a U.S. company, for a 4000 PSI gas pressure washer valued at $1275. Greg needed a new pressure washer for his part time business of washing houses. The order did not specify how disputes between the parties would be settled. Campbell returned a definite, unconditional acceptance that contained one additional term which stated that disputes must be submitted to arbitration. Greg received the acceptance; however, he never agreed or objected to the additional term.

Campbell orally contracted to sell 15 pressure washers to London Painting Company a large commercial painting company in France.

Explain the status of the contract between Greg and Campbell.

If a contract was formed, did the additional term in the acceptance become part of the contract?

Is the contract between Campbell and London legally enforceable? (Additional research outside of the textbook may be necessary).

Sako Company’s Audio Division produces a speaker that is used by manufacturers of various audio products. Sales and cost data on the speaker follow:

Sako Company has a Hi-Fi Division that could use this speaker in one of its products. The Hi-Fi Division will need 9,000 speakers per year. It has received a quote of $29 per speaker from another manufacturer. Sako Company evaluates division managers on the basis of divisional profits.

Required:

1. Assume that the Audio Division is now selling only 55,000 speakers per year to outside customers.

a. From the standpoint of the Audio Division, what is the lowest acceptable transfer price for speakers sold to the Hi-Fi Division?

b. From the standpoint of the Hi-Fi Division, what is the highest acceptable transfer price for speakers acquired from the Audio Division?

Transfer price=

c. If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 9,000 speakers from the Audio Division to the Hi-Fi Division?

d. From the standpoint of the entire company, should the transfer take place?

2. Assume that the Audio Division is selling all of the speakers it can produce to outside customers.

a. From the standpoint of the Audio Division, what is the lowest acceptable transfer price for speakers sold to the Hi-Fi Division?

b. From the standpoint of the Hi-Fi Division, what is the highest acceptable transfer price for speakers acquired from the Audio Division?

Transfer price=

c. If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 9,000 speakers from the Audio Division to the Hi-Fi Division?

d. From the standpoint of the entire company, should the transfer take place?

xercise 11A-1 Transfer Pricing Basics [LO11-5]

Sako Company’s Audio Division produces a speaker that is used by manufacturers of various audio products. Sales and cost data on the speaker follow:

Sako Company has a Hi-Fi Division that could use this speaker in one of its products. The Hi-Fi Division will need 9,000 speakers per year. It has received a quote of $31 per speaker from another manufacturer. Sako Company evaluates division managers on the basis of divisional profits.

Required:

1. Assume the Audio Division is now selling only 53,000 speakers per year to outside customers.

a. From the standpoint of the Audio Division, what is the lowest acceptable transfer price for speakers sold to the Hi-Fi Division?

b. From the standpoint of the Hi-Fi Division, what is the highest acceptable transfer price for speakers acquired from the Audio Division?

c. What is the range of acceptable transfer prices (if any) between the two divisions? If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 9,000 speakers from the Audio Division to the Hi-Fi Division?

d. From the standpoint of the entire company, should the transfer take place?

2. Assume the Audio Division is selling all of the speakers it can produce to outside customers.

a. From the standpoint of the Audio Division, what is the lowest acceptable transfer price for speakers sold to the Hi-Fi Division?

b. From the standpoint of the Hi-Fi Division, what is the highest acceptable transfer price for speakers acquired from the Audio Division?

c. What is the range of acceptable transfer prices (if any) between the two divisions? If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 9,000 speakers from the Audio Division to the Hi-Fi Division?

d. From the standpoint of the entire company, should the transfer take place?

Viet Catfish Case

Sixteen years after the end of the

Vietnam war, the United States and

Vietnam signed a free trade agreement.

In December 2001, Vietnam

agreed to lower import tariffs and

restrictions on U.S. investments in

that nation. In return, the U.S.

agreed to dismantle discriminatory

trade barriers on Vietnamese

exports.

The trade pact was an instant

success. Vietnamese exports to

the U.S. more than doubled in the

first year after the trade pact was

signed, led by exports of textiles,

seafood, shoes, furniture, and

commodities. U.S. investments

in Vietnam also surged.

Catfish farmers in the

Mississippi Delta weren’t happy

about this surge in Viet-U.S. trade.

In fact, they were downright angr y.

For well over a decade, catfish

farmers in Mississippi, Arkansas,

and Louisiana had been struggling

to preserve their profits. As

reported in Chapter 23 of The

Economy Today (Chapter 8 in

The Micro Economy Today) low

entry barriers kept persistent

pressure on prices and profits.

The early entrepreneurs in the

industry had to contend with a

stream of cotton farmers who

sought higher returns in catfish

farming. Despite an impressive

rise in market demand, prices

and profits stayed low as the

industry expanded.

Surging Imports

The Viet-U.S. pact intensified competitive

pressures on Delta catfish

farmers. In 1998, only 575,000

pounds of Vietnamese catfish were

imported into the United States,

mostly in the form of frozen fillets.

Viet imports surged to 20 million

pounds in 2001 and jumped again

to 34 million pounds last year.

That was more competition than

domestic catfish farmers could

bear. The price of frozen fillets fell

by 15 percent in 2001, to a low of

62 cents a pound. Prices kept

falling in 2002, hitting a low of 53

cents a pound at years end. With

average production costs of 65

cents a pound, U.S. catfish farmers

were incurring substantial economic

losses. Suddenly, cotton farming

started looking better again.

Comparative Advantage

Shifting domestic resources from

catfish farming back to cotton

farming is consistent with the

principle of comparative advantage.

Most farm-raised U.S. catfish

are grown in clay-lined ponds filled

with purified waters from underground

wells. The fish are fed

pellets containing soybeans and

corn and are subject to regular

USDA health inspections.

Vietnamese catfish, by contrast,

are grown in giant holding pens

suspended under the free-flowing

Mekong river and other waterways.

The Vietnamese production process is

much less expensive, giving Vietnam’s

catfish farmers an absolute advantage

over U.S. farmers. Given the relatively

high costs of cotton farming in

Vietnam, the Vietnamese also have

a decided comparative advantage in

catfish farming. Because of this, both

the U.S. and Vietnam could enjoy

more output if the U.S. specialized

in cotton farming and Vietnam

specialized in catfish farming. That

is exactly the kind of resource

reallocation the surging Vietnamese

catfish exports was causing.

Trade Resistance

The 13,000 workers in the U.S.

catfish industry don’t want to hear

about comparative advantage.

They simply want to keep their jobs.

And their employers want to regain

economic profits. They aren’t willing

to sacrifice their own well-being for

the sake of cheaper fish and so-called

gains from trade.

Economic theory may not be on

the side of the domestic catfish

industry, but U.S. politicians

certainly are. At the urging of Trent

Lott, the Senate majority leader

from Mississippi, the U.S. Congress

decided that of the 2,000 or so

varieties of catfish, only the North

American channel variety of catfish

could be labeled as “catfish.”

Vietnamese catfish had to be labeled

as “basa” or “tra,” as in

the Vietnamese language.

To further discourage consumption

of imports, the Catfish Farmers of

America, an industry lobbying group,

ran advertisements warning American

consumers that “basa” and “tra” “float

a round in Third World rivers nibbling on

who knows what.” Arkansas

C o n g ressman Marion Berry warned that

Viet fish might even be contaminated by

Agent orange-- a defoliant sprayed over

the Vietnamese countryside by U.S.

f o rces during the Vietnam war. None of

these nontariff barriers halted the influx

of Viet catfish however.

Dumping Charges

U.S. catfish farmers decided to mount

a more direct attack on Viet catfish. The

Catfish Farmers of America filed a complaint

with the U.S. Department of

C o m m e rce, charging Vietnam of “dumping”

catfish on U.S. markets. Dumping

occurs when foreign producers sell their

p roducts abroad for less than the costs

of producing them or less than prices

in their own market.

On its face, the complaint seemed to

have no merit. Export prices were no

lower than domestic prices in Vi e t n a m .

Plus, Vietnamese farmers were evidently

e a rning economic profits. Hence, neither

form of dumping seemed plausible.

The Department of Commerce found a

loophole to resolve this contradiction.

C o m m e rce officials decided that

Vietnam was still not a “market econom

y.” As a “nonmarket economy” its

prices could not be regarded as re l i a b l e

indices of underlying costs. Instead, the

U.S. Department of Commerce would

have to independently assess the “true ”

costs of Vietnamese catfish production.

To determine the “true” costs of

Vietnamese catfish farming, U.S.

investigators went to Bangladesh!

Bangladesh is widely regarded as a

market economy, with a level of

development similar to Vi e t n a m ’s.

So Bangladesh prices were assigned

to Vietnamese farmers. With no fully

integrated firms and fewer natural

resource advantages, Bangladesh

ended up with hypothetical costs in

excess of Vietnamese prices. With this

“evidence” in hand, the Commerce

Department concluded in January 2003

that Vietnamese catfish were indeed

being dumped on U.S. markets.

Anti-Dumping Duties

To “level the playing field,” the

U.S. Commerce Department leveled

temporary import duties (tariffs) of

37-64 percent. Importers of Viet

catfish had to deposit these duties

into an escrow account until the

U.S. International Trade Commission

(ITC) reviewed the case. The ITC

must not only affirm the practice of

dumping, but must also determine

that U.S. catfish farmers have been

materially damaged by such unfair

foreign competition. If the ITC so

rules, then the duties become

permanent and payable. If the ITC

rejects the dumping or damage

charges, the duties are rescinded

and the escrowed payments are

refunded. The odds are never

good for foreign producers: The

Commerce department ruled in

favor of domestic producers 91

percent of the time and the ITC

concurred 80 percent of the time.

The catfish case was similarly

decided: on July 23 of this year

the ITC unanimously ruled that

Viet catfish had injured U.S.

catfish farmers. The temporary

duties of 37-64 percent were

made permanent and retroactive

to January.

With your knowledge of comparative advantage and international trade – explain who were the winners and losers and why in this Catfish Case? Use economic terms and concepts to expain and support your answer. (5 points)

This article illustrates the political economy of international trade and the concept of comparative advantage. Explain Who are the "Winners" and "Losers" and why as described in this article and the effect of "arbitrary government intervention" that circumvents the workings of free trade initiated by Senator Trent Lott as described in the article? Use the economic concept of comparative advantage in your explanation. (5 points). Viet Catfish Case Sixteen years after the end of the Vietnam war, the United States and Vietnam signed a free trade agreement. In December 2001, Vietnam agreed to lower import tariffs and restrictions on U.S. investments in that nation. In return, the U.S. agreed to dismantle discriminatory trade barriers on Vietnamese exports. The trade pact was an instant success. Vietnamese exports to the U.S. more than doubled in the first year after the trade pact was signed, led by exports of textiles, seafood, shoes, furniture, and commodities. U.S. investments in Vietnam also surged. Catfish farmers in the Mississippi Delta weren’t happy about this surge in Viet-U.S. trade. In fact, they were downright angr y. For well over a decade, catfish farmers in Mississippi, Arkansas, and Louisiana had been struggling to preserve their profits. As reported in Chapter 23 of The Economy Today (Chapter 8 in The Micro Economy Today) low entry barriers kept persistent pressure on prices and profits. The early entrepreneurs in the industry had to contend with a stream of cotton farmers who sought higher returns in catfish farming. Despite an impressive rise in market demand, prices and profits stayed low as the industry expanded. Surging Imports The Viet-U.S. pact intensified competitive pressures on Delta catfish farmers. In 1998, only 575,000 pounds of Vietnamese catfish were imported into the United States, mostly in the form of frozen fillets. Viet imports surged to 20 million pounds in 2001 and jumped again to 34 million pounds last year. That was more competition than domestic catfish farmers could bear. The price of frozen fillets fell by 15 percent in 2001, to a low of 62 cents a pound. Prices kept falling in 2002, hitting a low of 53 cents a pound at years end. With average production costs of 65 cents a pound, U.S. catfish farmers were incurring substantial economic losses. Suddenly, cotton farming started looking better again. Comparative Advantage Shifting domestic resources from catfish farming back to cotton farming is consistent with the principle of comparative advantage. Most farm-raised U.S. catfish are grown in clay-lined ponds filled with purified waters from underground wells. The fish are fed pellets containing soybeans and corn and are subject to regular USDA health inspections. Vietnamese catfish, by contrast, are grown in giant holding pens suspended under the free-flowing Mekong river and other waterways. The Vietnamese production process is much less expensive, giving Vietnam’s catfish farmers an absolute advantage over U.S. farmers. Given the relatively high costs of cotton farming in Vietnam, the Vietnamese also have a decided comparative advantage in catfish farming. Because of this, both the U.S. and Vietnam could enjoy more output if the U.S. specialized in cotton farming and Vietnam specialized in catfish farming. That is exactly the kind of resource reallocation the surging Vietnamese catfish exports was causing. Trade Resistance The 13,000 workers in the U.S. catfish industry don’t want to hear about comparative advantage. They simply want to keep their jobs. And their employers want to regain economic profits. They aren’t willing to sacrifice their own well-being for the sake of cheaper fish and so-called gains from trade. Economic theory may not be on the side of the domestic catfish industry, but U.S. politicians certainly are. At the urging of Trent Lott, the Senate majority leader from Mississippi, the U.S. Congress decided that of the 2,000 or so varieties of catfish, only the North American channel variety of catfish could be labeled as “catfish.” Vietnamese catfish had to be labeled as “basa” or “tra,” as in the Vietnamese language. To further discourage consumption of imports, the Catfish Farmers of America, an industry lobbying group, ran advertisements warning American consumers that “basa” and “tra” “float a round in Third World rivers nibbling on who knows what.” Arkansas C o n g ressman Marion Berry warned that Viet fish might even be contaminated by Agent orange-- a defoliant sprayed over the Vietnamese countryside by U.S. f o rces during the Vietnam war. None of these nontariff barriers halted the influx of Viet catfish however. Dumping Charges U.S. catfish farmers decided to mount a more direct attack on Viet catfish. The Catfish Farmers of America filed a complaint with the U.S. Department of C o m m e rce, charging Vietnam of “dumping” catfish on U.S. markets. Dumping occurs when foreign producers sell their p roducts abroad for less than the costs of producing them or less than prices in their own market. On its face, the complaint seemed to have no merit. Export prices were no lower than domestic prices in Vi e t n a m . Plus, Vietnamese farmers were evidently e a rning economic profits. Hence, neither form of dumping seemed plausible. The Department of Commerce found a loophole to resolve this contradiction. C o m m e rce officials decided that Vietnam was still not a “market econom y.” As a “nonmarket economy” its prices could not be regarded as re l i a b l e indices of underlying costs. Instead, the U.S. Department of Commerce would have to independently assess the “true ” costs of Vietnamese catfish production. To determine the “true” costs of Vietnamese catfish farming, U.S. investigators went to Bangladesh! Bangladesh is widely regarded as a market economy, with a level of development similar to Vi e t n a m ’s. So Bangladesh prices were assigned to Vietnamese farmers. With no fully integrated firms and fewer natural resource advantages, Bangladesh ended up with hypothetical costs in excess of Vietnamese prices. With this “evidence” in hand, the Commerce Department concluded in January 2003 that Vietnamese catfish were indeed being dumped on U.S. markets. Anti-Dumping Duties To “level the playing field,” the U.S. Commerce Department leveled temporary import duties (tariffs) of 37-64 percent. Importers of Viet catfish had to deposit these duties into an escrow account until the U.S. International Trade Commission (ITC) reviewed the case. The ITC must not only affirm the practice of dumping, but must also determine that U.S. catfish farmers have been materially damaged by such unfair foreign competition. If the ITC so rules, then the duties become permanent and payable. If the ITC rejects the dumping or damage charges, the duties are rescinded and the escrowed payments are refunded. The odds are never good for foreign producers: The Commerce department ruled in favor of domestic producers 91 percent of the time and the ITC concurred 80 percent of the time. The catfish case was similarly decided: on July 23 of this year the ITC unanimously ruled that Viet catfish had injured U.S. catfish farmers. The temporary duties of 37-64 percent were made permanent and retroactive to January. With your knowledge of comparative advantage and international trade – explain who were the winners and losers and why in this Catfish Case? Use economic terms and concepts to explain and support your answer. (5points)

Suppose the U.S.​ dollar-euro exchange rate is 1.1 dollars per​ euro, and the U.S.​ dollar-Mexican peso rate is 0.1 dollars per peso. What is the​ euro-peso rate?

____ euros per Mexican peso. ​ (Enter your response rounded to three decimal​ places.)