Minion, Inc., has no debt outstanding and a total market value of $356,900. Earnings before interest and taxes, EBIT, are projected to be $50,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 16 percent higher. If there is a recession, then EBIT will be 25 percent lower. The company is considering a $180,000 debt issue with an interest rate of 5 percent. The proceeds will be used to repurchase shares of stock. There are currently 8,300 shares outstanding. Ignore taxes for questions a) and b). Assume the company has a market-to-book ratio of 1.0 and the stock price remains constant.

a-1. Calculate return on equity, ROE, under each of the three economic scenarios before any debt is issued. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

a-2. Calculate the percentage changes in ROE when the economy expands or enters a recession. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

b-1. Assume the firm goes through with the proposed recapitalization. Calculate the return on equity, ROE, under each of the three economic scenarios. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

b-2. Assume the firm goes through with the proposed recapitalization. Calculate the percentage changes in ROE when the economy expands or enters a recession. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Assume the firm has a tax rate of 23 percent.

c-1. Calculate return on equity (ROE) under each of the three economic scenarios before any debt is issued. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

c-2. Calculate the percentage changes in ROE when the economy expands or enters a recession. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

c-3. Calculate the return on equity (ROE) under each of the three economic scenarios assuming the firm goes through with the recapitalization. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

c-4. Given the recapitalization, calculate the percentage changes in ROE when the economy expands or enters a recession. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Variables typically included in a multivariate demand function (other than the price and quantity of the item the demand function represents) are consumer tastes and preferences, the number of buyers, spendable (disposable) income, prices of substitute goods, prices of complementary goods, advertising expenditures, weather, and expectations. Recalling that the price of the item being considered is placed on the vertical axis, and the quantity on the horizontal axis, the other variables are termed demand shifters. Please answer the following questions about the affect changes in other variables might have on the demand for the item. These changes will either cause demand to increase (shift right) or decrease (shift left). Use either word as applicable, for the short answer.

1. In an effort to reduce congestion in central London, vehicle owners must now purchase expensive passes to drive there. As a result, the demand for public transportation (busses, the tube) _________ .

2.   When the price of gasoline broke the magic $4.00 per gal, makers of large vehicles suddenly faced a ___________ demand for them.

3.   Automobiles are an example of a normal good. This designation means that as per capita income increases, the demand for automobiles ______________.

4. Recently an outbreak of E.coli (which causes intestinal distress, liver damage, and sometimes death) was attributed to contaminated Romaine lettuce grown in Yuma, Arizona.   As a result, the demand for other varieties of lettuce (not infected by the virus) ________________.

5.   If research ever shows conclusively that increased cell phone use is linked to the increased incidence of brain tumors, then the demand for cell phone might ______________ .

Variables typically included in a multivariate supply function (other than the price and quantity of the item the supply function represents) are prices of other goods that use similar input resources for production, expectations, the number of suppliers, techniques of production, taxes and subsidies, and prices of input resources, weather. Please answer the following questions about the affect changes in other variables might have on the supply of the item. These changes will either cause supply to increase (shift right) or decrease (shift left). Use either word as applicable, for the short answer.

1. The production of Ethanol is being significantly subsidized by increasing the tax on “real gas” (which contains no Ethanol). Therefore, land devoted to growing corn is increasing and that devoted to growing wheat is decreasing. Thus it is likely that the supply of wheat will ______________.

2. Productivity is a key variable in the supply of items. An increase in productivity translates into a ____________ in the supply of the items.

3. Jet fuel prices are soaring. Therefore an economist would not be surprised to learn that airlines are _________________ the number of planes they are flying, hoping to more completely fill the remaining flights.

4. American automobile manufactures are responding to the increased demand for SUV and Crossover styles by ____________ the supply of them and ________________ the supply of unpopular Sedan styles..

5. Think of highways as a resource used in the production of highway transportation. Thus building more and better highways is likely to _______________ the supply of vehicles using them.

Consider the current situation with the Covid-19 virus and its effects on the US economy.

1. Draw out the AD/AS model starting at the long run equilibrium. Indicate all points and curves on the graph. Find the US Real GDP and CPI as of December 2019 (online). Use these values as the price level and natural rate of output in the long-run equilibrium. (10 points)

2. Explain the supply-side shocks coming from the Covid-19 virus. How would these supply-side shocks affect the AD/AS model from part (1)? Explain in words and graphically how these shocks would affect the macro-economy. Draw and analyze the effect of the shock on the AD/AS model, how does it affect production, unemployment, price level and inflation? (10 points)

3. Explain the demand-side shocks coming from the Covid-19 virus. How would these demand-side shocks affect the AD/AS model from part (1)? Explain in words and graphically how these shocks would affect the macro-economy. Draw and analyze the effect of the shock on the AD/AS model, how does it affect production, unemployment, price level and inflation? (10 points)

4. Illustrate the impact on the AD-AS model when both of these shocks are happening at the same time. What do we know will happen for certain, what is unknown, with respect to price level changes and production changes? (10 points)

5. How has the Federal Reserve responded to these shocks? What type of monetary policy changes have taken place? Explain in words and graphically using the MD/MS model. (10 points)

6. How has the Federal government and Congress responded to these shocks? What type of stimulus package has been passed? Explain. (10 points)

7. Consider the $2 trillion Congress has approved to be spent as a counter-shock to the recessionary pressures.

1. If the marginal propensity to consume is ½, what is size of the multiplier effect? (3 points)
2. If the package needs to be financed by new government bonds, and the result is an increase in interest rates by 0.5%, and investment spending declines by $100 million for each 1% increase in interest rates, what is the crowding out effect? (3 points)
3. What will be the net effect of the stimulus package, considering both parts a. and b.? Which effect dominates and why? (4 points)

8. In a generalized AD/AS model (without specific numbers), illustrate and explain how the changes in monetary and fiscal policy act as a counter-shock to the demand and supply side shocks coming from Covid-19. Draw your model starting from (3) and then include the effects of the (5) and (7) on the graph. (10 points)

9. What is the tradeoff that the government faces when enacting these counter-shock measures? Relate this specifically to the Phillips Curve. (10 points)

The x slider will control the circles with id xl and xr.    As the sliders move too the right the two circles get closer together until they meet in the middle. The y slider will control the circles with id yt and yb.    As the sliders move too the right the two circles get closer together until they meet in the middle. When all four circles are in the green square the circle should be red and black otherwise. The position and size of the square is random, and changes position and size when you load the page.

Instructions:

• Start with the files in midW05.zip.
• When all the circles are in the square all the circles should be red.
• Write a helper function call isCircleInRect that accepts an id of a circle and an id of a red box returns true if the center of the circle is in the box and false otherwise.
• Implement the sliderXListener such that the two circles with id's xl and xr move closers together as the slider value increases and meet at the middle, changes the color of the circle if necessary.
• Implement the sliderYListener such that the two circles with id's yt and yb move closers together as the slider value increases and meet at the middle, changes the color of the circle if necessary.
• Uses the helper functions isCircleInRect to help implement the event listeners.

.html file:

<!DOCTYPE html>

<html lang="en">

<head>

    <meta charset="UTF-8">

    <meta name="viewport" content="width=device-width, initial-scale=1.0">

    <script src="questionW05.js" defer></script>

    <title>Midterm Question</title>

    <script>

        function setup(){

            let box = document.querySelector("#box");

            let size = Math.random()*20 + 90;

            let x = Math.random()*10 + 45;

            let y = Math.random()*10 + 45;

            box.setAttribute("x",x);

            box.setAttribute("y",y);

            box.setAttribute("width",size);

            box.setAttribute("height", size);

        }

    </script>

</head>

<body onload="setup()">

    <svg width="200px" height="200px">

        <!-- the size and position of the rectangle changes randomly

            when the page is reloaded -->

        <rect id="box" x="50" y="50" width = "100" height="100" fill="green"/>

        <g id="circles">

            <circle id="xl" cx="0" r="10" cy="100" fill="black" />

            <circle id="xr" cx="200" r="10" cy="100" fill="black" />

            <circle id="yt" cx="100" r="10" cy="0" fill="black" />

            <circle id="yb" cx="100" r="10" cy="200" fill="black" />

        </g>

    </svg><br>

    <label>X Slider</label><input id="xSlider" type="range" min="0" max="100" value="0" oninput="sliderXListener(event)"><br>

    <label>Y Slider</label><input id="ySlider" type="range" min="0" max="100" value="0" oninput="sliderYListener(event)"><br>

</body>

</html>

.js file:

function isCircleInRect(circ, rect){

}

function sliderXListener(event){

}

function sliderYListener(event){

}