Problem 12-26 Adjusted Cash Flow From Assets [LO3]

You have looked at the current financial statements for Reigle Homes, Co. The company has an EBIT of $2,890,000 this year. Depreciation, the increase in net working capital, and capital spending were $227,000, $92,000, and $425,000, respectively. You expect that over the next five years, EBIT will grow at 18 percent per year, depreciation and capital spending will grow at 23 per year, and NWC will grow at 13 per year. The company currently has $15,500,000 in debt and 415,000 shares outstanding. After Year 5, the adjusted cash flow from assets is expected to grow at 3.5 percent indefinitely. The company’s WACC is 8.9 percent and the tax rate is 35 percent.

What is the price per share of the company's stock? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Share price            $

1. The next several questions refer to the case of an economy with the following equations: Y = 3K + 2L, with K = 1000 and L = 1500 G = 1230, T = 500 I = 1020 - 1000r C = 1070 + 0.5(Y-T) (Assume a closed economy: Y = C + I + G; NX = 0) Compute the equilibrium level of the interest rate.

choices

0.07

0.05

0.3

0.1

2. For the case above, compute the equilibrium level of investment.

980

900

1000

750

950

3. For the case above, compute the equilibrium level of consumption.

3700

3820

3750

4000

4200

4. For the model economy above, suppose government spending is raised to 1250 (instead of 1230). Compute the amount by which investment falls.

10

15

0

30

20

5. In the case above, the amount by which investment falls is _____ the amount by which government spending rises.

less than

more than

the same as

1. If the marginal propensity to consume is 0.6, the marginal propensity to save is 0.4, and government spending increases by $2 billion at the same time taxes rise by $2 billion, equilibrium income will:

rise by $2 billion. is the answer, I just dont know what steps to undertake to get the answer nor know what equation to use.

2. In the nation of Economia, the economy is over heating and there is danger of inflation. The chief economist estimates that current income is $50 billion, the optimal level is $40 billion, and the multiplier is 4. If government wants to close the inflationary gap, it should reduce government spending by:

Answer is: $2.5 billion. I just dont know what steps to undertake to get the answer nor know what equation to use.

3. If consumption decreases from $600 billion to $575 billion and the marginal propensity to consume is 0.8, then equilibrium income will:

Answer: fall by $125 billion.(dont know how to arrive at that answer)

Suppose the economy of Protoss consists of three people: Fenix, Zeratul, and Tassadar. The following table shows their consumer spending at the given disposable income levels.

a. Identify each individual’s consumption function, i.e., the mathematical equation that describes the individual’s consumption schedule given income. (3 points)

b. Draw the individuals’ consumption functions. Label the graph fully. (3 points)

c. Identify aggregate consumption function. Show the intermediate steps. (Hint: You need to add individual disposable income and consumption spending.) (2 points)

d. On a separate graph, draw the aggregate consumption function. (1 point)

e. Suppose everyone’s disposable income becomes $6000. Calculate the individual consumption (for each person) and aggregate consumption. (2 points)

Let's assume I’m the financial vice-president of WW Corp and I’m thinking about doing business in either A country or B country.

Please explain your decision.

• Both countries have the same current GDP

Country A

• Democratic country, free speech

• Enforcing property rights

• Low investing in education and physical capital

• High public spending and federal deficit

• Sample income mean (n:100) is $894.96

• Probability that a household’s income is below the poverty line is 6%

Country B

• Run by peaceful one-party gov

• Budget has been balanced

• Gov. spending is focused on education

• Legal system is well developed, supporting property rights

• Low corruption

• No democracy, no elections, has political prisoners

• Sample income mean (n:100) is $1000

• Probability that a household’s income is below the poverty line is 20%

• Larger gap between the rich and the poor

1. Aggregate Demand curves slope down. Explain in a sentence what that means (what happens when Price Level falls, all else constant?) and give one reason for the negative slope (inverse relation).

2. Assume an economy operates in the intermediate range of its aggregate supply curve. State the direction of shift for the aggregate demand curve or aggregate supply curve for each of the following changes in conditions. What is the effect on the price level? On real GDP? On employment?

a. The price of crude oil rises significantly (300%, say) raising the price of energy generally.

b. Spending on national defense doubles.

c. Investment spending falls as firms expect slower sales growth.

d. An improvement in technology raises labor productivity.

e. The United States raises exports of new passenger aircraft to China.

3. Identify the three ranges of the aggregate supply curve. Explain the impact of an increase in aggregate demand in each range.

The following information for the past year is available from Thinnews Co., a company that uses machine hours to apply factory overhead:

1.The total actual variable factory overhead cost incurred during the year was:
2.The standard fixed overhead application rate is:

3. The variable factory overhead efficiency variance is:

4. The variable overhead spending variance is:

5. Under a three-variance breakdown (decomposition) of the total factory overhead variance, the total factory overhead spending variance is:

6. Under a two-variance breakdown (decomposition) of the total factory overhead variance, the total flexible-budget variance is:

The owners of an e-business have been successful in selling fashion products but are now venturing into another domain. Knowing that the impact of advertising on profit cannot be overemphasized, they are interested in determining the right amount to allocate to advertising for the new business. Based on a monthly report from the fashion e-business, a regression analysis of monthly profit (in thousands of dollars) on advertising spending (in hundreds of dollars) produced the following results:

where yy = profit (in $1000s)
           xx = advertising spending (in $100s)

a. State the least-squares regression line for the data.
ŷ = ŷ =

++

xx

c. Compute and interpret the coefficient of determination.
R2=R2=

Round to 4 decimal places

d. Predict the monthly profit for a month when advertising is $2,100.

Round to the nearest cent

e. If the expected profit in a particular month is $41,495, about how much should be set aside for advertising that month?

Round to the nearest cent

Use the information in the table to answer the following questions. Assume initially that no government spending or taxes occur in this hypothetical economy.

(a) What is the marginal propensity to consume in this economy? What is the marginal propensity to save?
(b) What is the equilibrium level of income? Explain, using Equations.
(c) Suppose investment spending declined by $20. What would be the new equilibrium income and the new level of consumption? What is the size of the multiplier? Why would it be reasonable to assume that an increase in the unemployment rate would be associated with the decline in national income?
(d) What actions, according to Keynes, could the government take to restore the equilibrium level of income that you determined in part (b)?