3. What factors led to the urban crisis after World War II throughout northern American cities? How did cities decline? How did urban residents respond to the crisis?

ESSAY QUESTION PLEASE ANSWER FULLY

CASE 4.3
One Nation under Walmart

THE HUgE CORpORATIONS THAT produce our cars, appliances, computers, and other products—many of them household names like Nike, Coca-Cola, and Johnson & Johnson—are a familiar feature of contemporary capitalism.

But Walmart represents something new in the economic landscape. Now the world’s largest company, Walmart has achieved its corporate preeminence not in production but in retail. No other retailer, at any time or in any place, has ever come close to being as large and influential as Walmart has become. After years of nonstop growth, there are now more than 8,400 Walmart stores worldwide, and 140 million shoppers visit its U.S. stores each week. And the company is opening more stores all the time as it moves beyond its stronghold in the rural South and Midwest and into urban America. In fact, 82 percent of American households purchase at least one item from Walmart every year. As a result, the company’s marketplace clout is enormous: It controls about 30 percent of the market in household staples; it sells 15 percent of all magazines and 15–20 percent of all CDs, videos, and DVDs; and it is expected to control soon over 35 percent of U.S. food sales. For most companies selling consumer products, sales from Walmart represent a big chunk of their total business: 28 percent for Dial, 24 percent for Del Monte, and 23 percent for Revlon. Walmart is also responsible for 10 percent of all goods imported to the United States from China.

The good news for consumers is that Walmart has risen to retail supremacy through the bargain prices it offers them. The retail giant can afford its low prices because of the cost efficiencies it has achieved and the pressure it puts on suppliers to lower their prices. And the larger the store gets, the more market clout it has and the further it can push down prices for its customers.

Everyone, of course, loves low prices, but not everyone, it seems, loves Walmart. Why not? Here are some of the charges that critics level against the retail behemoth:

Walmart’s buying power and cost-saving efficiencies force local rivals out of business, thus costing jobs, disrupt- ing local communities, and injuring established business districts. One Walmart worker replaces approximately 1.4 other local retail workers, and typically within five years after a Walmart Supercenter opens, two other supermarkets close. Further, Walmart often insists on tax breaks when it moves into a community, so its presence does little or nothing to increase local tax revenues.

Walmart is staunchly anti-union and pays low wages. Its labor costs are 20 percent lower than those of unionized supermarkets; its average sales clerk earns only $8.23 an hour, and most of its employees must survive without company health insurance. Small wonder that employee turnover is 44 percent per year. Moreover, because of its size, Walmart exerts a downward pressure on retail wages and benefits throughout the country. Critics also charge that Walmart’s hard line on costs has forced many factories to move overseas, which sacrifices American jobs and holds wages down.

Government welfare programs subsidize Walmart’s poverty-level wages. According to one congressional report, a 200-employee store costs the government $42,000 a year in housing assistance, $108,000 in children’s health care, and $125,000 in tax credits and deductions for low-income families. And internal Walmart documents, leaked to the press, confirmed that 46 percent of the children of Walmart’s 1.33 million workers are uninsured or on Medicaid. The document also discusses strategies for holding down spending on health care and other benefits—for example, by hiring more part-time workers and discouraging unhealthy people from working at the store by requiring all jobs to include some physical labor.

As Walmart grows and grows, and as its competitors fall by the wayside, consumer choices narrow, and the retail giant exerts ever greater power as a cultural censor. Walmart, for example, won’t carry music or computer games with mature ratings. As a result, the big music companies now supply the chain with sanitized versions of the explicit CDs that they provide to radio stations and that are sold elsewhere. The retailer has removed racy magazines such as Maxim and FHM from its racks, and it obscures the covers of Glamour, Redbook, and Cosmopolitan with bind- ers. Although many locations offer inexpensive firearms, Walmart won’t sell Preven, a morning-after pill—the only one of the top ten drug chains to decline to do so.

For these reasons, Walmart’s expansion is frequently meeting determined local resistance, as concerned residents trying to preserve their communities and their local stores and downtown shopping areas from disruption by Walmart through petitions, political pressure, and zoning restrictions. As one economist remarks, for Walmart “the biggest barrier to growth” is not competition from rivals such as Target or Winn-Dixie stores but “opposition at the local level.” As a result, Walmart has begun responding to the criticism that it is a poor corporate citizen and a miserly employer by improving employee health insurance coverage and adopting greener business practices. And even its usual critics applauded when the company responded rapidly to Hurricane Katrina, sending truckloads of water and food, much of it reaching residents before federal supplies did.

When it comes to Walmart, Professor John E. Hoopes of Babson College encourages people to take a long-term view: “The history of the last 150 years in retailing would say that if you don’t like Walmart, be patient. There will be new models eventually that will do Walmart in, and Walmart won’t see it coming.” And, indeed, in recent years the company’s sales growth has slipped as the Internet has changed people’s shopping habits and as other discounters have done a better job of attracting affluent consumers and providing higher quality and better service.

In the meantime, where you stand on Walmart probably depends on where you sit, as Jeffrey Useem writes in Fortune magazine: “If you’re a consumer, Walmart is good for you. If you’re a wage-earner, there’s a good chance it’s bad for you. If you’re a Walmart shareholder, you want the company to grow. If you’re a citizen, you probably don’t want it growing in your backyard. So, which one are you?”

DISCUSSION QUESTIONS

1. Do you like Walmart? Do you shop there? If so, how frequently? If not, why not?

2. Is there a Walmart store in your area? If so, has it had any impact on your community or on the behavior of local consumers? If there’s no store in your area, would you be in favor of Walmart opening one? Explain why or why not.

3. Is Walmart’s rapid rise to retail dominance a positive or a negative development for our society? What does it tell us about capitalism, globalization, and the plight of workers?

4. Can a retailer ever become too large and too powerful?

5. Is opposition to Walmart’s expansion a legitimate part of the political process or is it unfair interference with our market system and a violation of the company’s rights? Do opponents of Walmart have any valid concerns?

Given the Covid19 crisis that has impacted global economies on an unprecedented scale. The level of disruption is likely to persist as government around the world is likely to implement policies at all level to arrest the uncertainties. Some of the extreme policy implemented include utilizing of sovereign reserves of last resort, reducing interest rate, and quantitative easing to mitigate job losses.

In 500 words, evaluate the situation in relation to the case study on financial derivative chapter and case study of Kikos and South Korean Won.

Mini case of Kikos and Sounth Korean Won.

That possibility arises from a fundamental tenet of international law that is not written down in any law book: In extremis, the locals win.

—“Bad Trades, Except in Korea,” by Floyd Norris, The New York Times, April 2, 2009

South Korean exporters in 2006, 2007, and into 2008 were not particularly happy with exchange rate trends. The South Korean won (KRW) had been appreciating, slowly but steadily, for years against the U.S. dollar. This was a major problem for Korean manufacturers, as much of their sales was exports to buyers paying in U.S. dollars. As the dollar continued to weaken, each dollar resulted in fewer and fewer Korean won—and nearly all of their costs were in Korean won. Korean banks, in an effort to service these hedging needs, became the sale and promotion of Knock-In Knock-Out option agreements (KiKos).

Knock-In Knock-Outs (KiKos)

Many South Korean manufacturers had suffered falling margins on sales for years. Already operating in highly competitive markets, the appreciation of the won had cut further and further into their margins after currency settlement. As seen in Exhibit A, the won had traded in a narrow range for years. But that was little comfort as the difference between KRW1,000 and KRW 930 to the dollar was a big chunk of margin.

South Korean banks had started promoting KiKos as a way of managing this currency risk. The Knock-In Knock-Out (KiKo) was a complex option structure, which combined the sale of call options on the KRW (the ­knock-in component) and the purchase of put options on the USD (the knock-out component). These structures then established the trading range seen in Exhibit A that the banks and exporters believed that the won would stay within. In one case the bank salesman told a Korean manufacturer “we are 99% sure that the Korean won will continue to stay within this trading range for the year.”3

3“KIKO Hedges Slay Korean Exporters, Threaten Banks,” Bomi Lim, Bloomberg BusinessWeek, October 17, 2008.

But that was not the entirety of the KiKo structure. The bottom of the range, essentially a protective put on the dollar, assured the exporter of being able to sell dollars at a set rate if the won did indeed continue to appreciate. This strike rate was set close-in to the current market and was therefore quite expensive. In order to finance that purchase the sale of calls on the knock-in rate was a multiple (sometimes call the turbo feature) meaning that the exporter sold call options on a multiple, sometimes two or three times, the amount of the currency exposure. The exporters were “over-hedged.” This multiple yielded higher earnings on the call options that financed the purchased puts and provided added funds to be contributed to the final KiKo feature. This final feature was that the KiKo assured the exporter a single “better-than-market-rate” on the exchange of dollars for won as long as the exchange rate stayed within the bounds. Thus, the combined structure allowed the South Korean exporters to continue to exchange dollars for won at a rate like KRW 980=USD when the spot market rate might have only been KRW 910.

This was not, however, a “locked-in rate.” The exchange rate had to stay within the upper and lower bounds to reap the higher “guaranteed” exchange rate. If the spot rate moved dramatically below the knock-out rate, the knock-out feature would cancel the agreement. This was particularly troublesome because this was the very range in which the exporters needed protection. On the upper side, the knock-in feature, if the spot rate moved above the knock-in rate the exporter was required to deliver the dollars to the bank at that specific rate, although movement in this direction was actually in the exporter’s favor. And the potential costs of the knock-in position were essentially unlimited, as a multiple of the exposure had been sold, putting the exporter into a purely speculative position.

2008 and Financial Crisis

It did not take long for everything to go amiss. In the spring of 2008 the won started falling—rapidly—against the U.S. dollar. As illustrated by Exhibit B, the spot exchange rate of the won blew through the typical upper knock-in rate boundary quickly. By March of 2008 the won was trading at over KRW 1,000 to the dollar. The knock-in call options sold were exercised against the Korean manufacturers. Losses were enormous. By the end of August, days before the financial crisis broke in the United States, it was estimated there were already more than KRW 1.7 trillion (USD 1.67 billion) in losses by Korean exporters.

Exhibit B South Korean Won’s Fall and the Knock-In

Caveat Emptor (Buyer Beware)

The magnitude of losses quickly resulted in the filing of hundreds of lawsuits in Korean courts. Korean manufacturers who had purchased the KiKos sued the Korean banks to avoid the payment of losses, losses that in many cases would cause the bankruptcy of their businesses.

Exporters argued that the Korean banks had sold them complex products, which they did not understand. The lack of understanding was on at least two different levels. First, many of the KiKo contracts were only in English, and many Korean buyers did not understand English. The reason they were in English was that the KiKos were not ­originally constructed by the Korean banks. They were created by a number of major Western hedge funds that then sold the products through the Korean banks, the Korean banks earning more and more fees for selling more and more KiKos. The Korean banks, however, were responsible for payment on the KiKos; if the exporting companies did not or could not pay-up, the banks would have to pay.

Secondly, exporters argued that the risks associated with the KiKos, particularly the knock-in risks of multiple notional principals to the underlying exposures, were not adequately explained to them. The exporters argued that the Korean banks had a duty to adequately explain to them the risks—and even more importantly—only sell them products that were suitable for their needs. (Under U.S. law this would be termed a fiduciary responsibility.)

The Korean banks argued that they had no such specific duty, and regardless, they had explained the risks sufficiently. The banks also argued that this was not a case of an unsophisticated buyer not understanding a complex product; both buyer and seller were sufficiently sophisticated to understand the intricate workings and risks of these structures. The banks had in fact explained in significant detail how the exporters could close-out their positions and then limit the losses, but the exporters had chosen not to do so.

In the end the Korean courts found in favor of the exporters in some cases, in favor of the banks in others. One principle that the courts followed was that the exporters found themselves in “changed circumstances” in which the change in the spot exchange rate was unforeseeable, and the losses resulting—too great. But some firms, for example GM Daewoo, lost $1.11 billion. Some Korean banks suffered significant losses as well, and may have in fact helped transmit the financial crisis of 2008 from the United States and the European Union to many of the world’s emerging markets.4

4“Exotic Derivatives Losses in Emerging Markets: Questions of Suitability, Concerns for Stability,” by Randall Dodd, International Monetary Fund, IMF Working Paper WP/09, July 2009.

In October 1991, the Sacramento City Council adopted a law to reduce the allowed sound intensity level of the much despised leaf blowers from their current level of about 95 dB to 70 dB by May 1992.
With the new law, what is the ratio of the new allowed intensity to the previously allowed intensity?

Sunland Company, a manufacturer of audio systems, started its production in October 2020. For the preceding 3 years, Sunland had been a retailer of audio systems. After a thorough survey of audio system markets, Sunland decided to turn its retail store into an audio equipment factory.

Raw material costs for an audio system will total $77 per unit. Workers on the production lines are on average paid $13 per hour. An audio system usually takes 6 hours to complete. In addition, the rent on the equipment used to assemble audio systems amounts to $5,100 per month. Indirect materials cost $5 per system. A supervisor was hired to oversee production; her monthly salary is $3,700.

Factory janitorial costs are $2,000 monthly. Advertising costs for the audio system will be $9,000 per month. The factory building depreciation expense is $6,000 per year. Property taxes on the factory building will be $8,400 per year.

Assuming that Sunland manufactures, on average, 1,000 audio systems per month, enter each cost item on your answer sheet, placing the dollar amount per month under the appropriate headings. Total the dollar amounts in each of the columns.

Compute the cost to produce one audio system.

The market value of JC Engineering (JCE) was $60,000,000 on October 1. JCE plans to raise capital of $30,000,000 to invest in new electronic vehicle projects. JCE’s current capital structure, shown below, is considered to be optimal.

Debt $30,000,000
Common equity 30,000,000
Total capital $60,000,000

New bonds will have an 8% coupon rate, and they will be sold at par. The price of common stock is $30 per share. The stockholders’ required rate of return is estimated to be 12%, consisting of a dividend yield of 4% and an expected constant growth rate of 8%. The firm’s tax rate is 40%

a. In order to maintain the current capital structure, how much of the new investment must be financed by common stock? (5 Points)

b. Assuming there is enough cash flow for JCE to maintain its target capital structure without issuing additional shares of equity, what is its WACC? (5 Points)

Question II :

The Water Bottle Company was incorporated on October 1, 2016. The following transactions occurred during November:

Transaction Number Date

1) 1-Nov Issue additional common stock for $4500---------------------4,500

2) 1-Nov Purchase 800 water bottles @ $10 each on account------------------- 8,000

3A) 3-Nov Sell 300 water bottles @ $30 each for cash----------------------------- 9,000

3B) 3-Nov Same…. COGS entry 300 water bottles @ 10 each -----------------3,000

4A ) 10-Nov Sell 400 water bottles @ $40 each on account----------------------------------------------- 16,000

4B) 10-Nov Same…COGS entry 400 water bottles @$10 each----------- 4,000

5) 15-Nov Pay employees for work performed ($800 from October and $2400 November) ----------3,200

6) 15-Nov Pay $450 cash for advertising to be run in current month -----------------------------------------450

7A) 17-Nov Remaining goods from prepayment customer in October have been delivered (10 bottles @$30) -------------300

7B) 17-Nov Same…remaining goods from prepayment are delivered (COGS entry) ----------------------------------100

8) 27-Nov The Water Bottle Company makes a partial payment for the water bottles purchased Nov 1 - pay $500------------- 500

9) 28-Nov Pay $220 in utlities for current month use --------220

10) 30-Nov A customer paid in advance for 150 water bottles @ $30 each to be delivered in the future ---------4,500

11) 30-Nov Receive full payment from customer who bought on account on Nov 10 --------------------16,000

12) 30-Nov Pay cash dividends to your shareholders in the amount of $600. ------------------------------600

Adjusting Entries for November:

a) 30-Nov Adjust for use of prepaid rent 1 month

b) 30-Nov Adjust for use of insurance policy 1 month

c) 30-Nov Adjust for depreciation of equipment ($140 a month given)

d) 30-Nov Adjust for $1200 of salaries earned but not paid by month end

e) 30-Nov Adjust for interest on the loan 5% annual rate .

Deliverables:

Record all November transactions in the Financial Statement Impact Template

Record all November adjusting entries in the Financial Statement Impact Template

Create November Financial Statements

Record all closing entries in the Financial Statement Impact Template for November to set up for the following month .