1. Determine the Basic and Diluted Earnings Per Share for Company X. All necessary Information is listed below. Show your calculations. 2. In 100 words, or fewer, explain why investors should be more interested in the the Diluted EPS number than the Basic EPS number. Company X information for Diluted Shares calculations for period 201X: Earnings for Year 201X - $20 million Average Basic shares outstanding for Company X in 201X – 10 million Average Stock Price for year 201X - $6.00 Warrants to purchase common shares: - Warrants A to purchase 2 million shares ex @ $2.00 - Warrants B to purchase 3 million shares ex @ $5.00. Assume the A and B Warrants are the only additional securities outstanding (besides the basic shares) for Company X in 201X.

Consider a project to supply 100 million postage stamps per year to the USPS for the next five years. To pursue the project, you will need to install $4.1 million in new manufacturing plant and equipment. This will be depreciated straight-line to zero over the project’s five years. The equipment can be sold for $540,000 at the end of the project. You will also need $600,000 in initial net working capital for the project and an additional investment of $50,000 in every year thereafter. All net working capital will be recouped at the end of the project. Your production costs are $.005 per stamp and you have fixed costs of $950,000 per year. If your tax rate is 34% and your required return is 12%, what bid price should you submit on the contract?

Consider an overlapping generations model with the following characteristics: Each generation is composed of 100 individuals. The fiat money supply changes according to Mt = 1.25Mt-1. The initial old own a total of 50 units of fiat money (M0 = $50). Each period, the newly printed money is given to the young of that period as a lump-sum transfer (subsidy). Each person is endowed with 10 units of the consumption good when born and nothing when old. Preferences are such that individuals wish to save 5 units when young at the equilibrium rate of return on fiat money.

(a) What is the real rate of return on fiat money in this economy?

(b) How many goods does a young individual receive as a subsidy in period 1?

(c) What is the price of the consumption good in period 1, p1, in dollars?

QUESTION 2

[100 marks]

What is inflation? According to the quantity theory of money, what causes inflation?                                                                                         [10 marks]

List and explain three types of costs associated with high levels of inflation in an economy.                                                                            [15 marks]

Explain, with the aid of a diagram, how monetary equilibrium determines the price level in an economy, and the value of money.              [20 marks]

Explain the terms systemic risk and macroprudential policy. Give an example of a macroprudential policy that has been implemented in Ireland to reduce systemic risk.                                                                         [20 marks]

What is a bond? Explain how a bank can change the money supply by buying or selling bonds. What is this policy tool called?              [20 marks]

The central bank does not have perfect control of the money supply. Explain why.                                                                                          [15 marks]

(Individual or component costs of capital) Compute the cost of capital for the firm for the following:

A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 10.8 percent. Interest payments are $54.00 and are paid semiannually. The bonds have a current market value of $1,130 and will mature in 15 years. The firm's marginal tax rate is 34 percent.

A new common stock issue that paid a $1.77 dividend last year. The firm's dividends are expected to continue to grow at 8.4 percent per year, forever. The price of the firm's common stock is now $27.61.

A preferred stock that sells for $141, pays a dividend of 8.5 percent, and has a $100 par value.

A bond selling to yield 10.4 percent where the firm's tax rate is 34 percent.

5-8

Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units):

5.If sales decline to 900 units, what would be the net operating income?

6 If the selling price increases by $2 per unit and the sales volume decreases by 100 units, what would be the net operating income?

7.  If the variable cost per unit increases by $1, spending on advertising increases by $1,150, and unit sales increase by 130 units, what would be the net operating income?

8. What is the break-even point in unit sales?

US can manufacture semiconductors at $45 a piece. The supply curve is horizontal at $45.

Canada can manufacture them at $ 43 a piece.Their supply curve is horizontal at $43.

China can manufacture them at $40 a piece.Their supply curve is horizontal at $40.

The demand for semiconductors is given by P = 100-0.1 Q.

Fill in the following table.

5. Explain what the name “the political cost hypothesis” relates to in the earnings management literature.?

6. Given the following information:

            Net Income     $1,200,000

            Preferred Stock, $100 par, 6%, 50,000 shares outstanding

            Common Stock Outstanding, 100,000 shares (all year)

            Total Common Dividends $200,000

            Total Assets $10,000,000

            Total Liabilities $3,000,000

            Market Price Per Share $120

Calculate: (a) EPS (b) Dividend Yield (c) Market-to- Book Ratio (d) P/E ratio

7. What are the components of Comprehensive Income? What is the current treatment of Comprehensive Income and why?

8. What constitutes Extraordinary Items? What was the treatment of 9/11 losses regarding extraordinary items? Do you agree or disagree with this? What is the current treatment of extraordinary items?