• The change in money supply affects the economic agents. Suppose the Federal Reserve increases the money supply to boost aggregate demand during recessionary pressure. How does the increase in money supply affect consumer spending and investment? How does it affect the firm or organization you work for? How do the Federal Reserve policies affect us as individuals (households)?

1. Briefly describe the expenditure multiplier and state how it is computed. How is it different from the Tax multiplier?

2. Discuss how spending and output influences equilibrium in a simple model where aggregate expenditure = consumption.

3. Describe how unplanned inventory can influence equilibrium in the model where AE=(C+I+G+(X-M))

Questions

1. Explain why decreases in income tax, savings and import spending all increase aggregate demand.

2. How does a change in the interest rate influence the aggregate demand curve?

3. If the value of the Canadian dollar decreases, what is the likely impact on aggregate demand?

4. Why is a shift of the aggregate supply curve to the right like an outward shift of the production possibilities curve?

State whether the following represent an injection into the circular flow of income or a withdrawal from it. You have to assume that “other things remain unchanged” (ceteris paribus)

a)         a cut in taxes
b)         BAe Systems (a defence contractor) receives a large order from abroad
c)         central government spending on higher education is cut
d)         retirement pensions are increased

Which of the following is an example of crowding out?

a. An increase in taxes increases interest rates, causing investment to fall.

b. A decrease in private savings increases interest rates, causing investment to fall.

c. An increase in government spending increases interest rates, causing investment to fall.

d. A decrease in the money supply increases interest rates, causing investment to fall.

In 2017, Congress enacted a bill that 1) reduced the corporate tax rate from 35% to 21% and 2) allowed the immediate write-off of capital spending. 3) disallowed the expensing of interest paid on debt. Discuss at a high level, how each of these changes will likely affect your valuations. (e.g. stock price, P/E ratio, ROR, WACC).

Lehighton Chalk Company manufactures sidewalk chalk, which it sells online by the box at $25 per unit. Lehighton uses an actual costing system, which means that the actual costs of direct material, direct labor, and manufacturing overhead are entered into work-in-process inventory. The actual application rate for manufacturing overhead is computed each year; actual manufacturing overhead is divided by actual production (in units) to compute the application rate. Information for Lehighton’s first two years of operation is as follows:

Selected information from Lehighton’s year-end balance sheets for its first two years of operation is as follows:

Required:

Lehighton Chalk Company had no beginning or ending work-in-process inventories for either year.

Prepare operating income statements for both years based on absorption costing.

Prepare operating income statements for both years based on variable costing.

Prepare a numerical reconciliation of the difference in income reported under the two costing methods used in requirements (1) and (2).

In October 2017, Nicole of Nicole’s Getaway Spa (NGS) eliminated all existing inventory of cosmetic items. The trouble of ordering and tracking each product line had exceeded the profits earned. In December, a supplier asked her to sell a prepackaged spa kit. Feeling she could manage a single product line, Nicole agreed. NGS would make monthly purchases from the supplier at a cost that included production costs and a transportation charge. The spa would use a perpetual inventory system to keep track of its new inventory.
  
    On December 30, 2017, NGS purchased ten units at a total cost of $7.00 per unit. NGS purchased thirty more units at $9.00 in February 2018, but returned five defective units to the supplier. In March, NGS purchased fifteen units at $11.00 per unit. In May, fifty units were purchased at $11.00 per unit; however, NGS took advantage of a 2.00/10, n/30 discount from the supplier. In June, NGS sold fifty units at a selling price of $12.90 per unit and thirty-five units at $10.90 per unit.


Required:
1. State whether the transportation cost included in each purchase should be recorded as a cost of the inventory or immediately expensed.

• Immediately expensed

• Inventory cost

2. Compute the Cost of Goods Available for Sale, Cost of Goods Sold, and Cost of Ending Inventory using the first-in, first-out (FIFO) method. (Do not round intermediate calculations. Round final answers to the nearest dollar amount.)

3-a. Calculate the inventory turnover ratio, using the inventory on hand at December 31, 2017, as the beginning inventory. (Round your answer to 1 decimal place.)

32) Which of the following statements are TRUE regarding the impact of a dividend issuance compared to a share repurchase on the three financial statements?

a) Both a dividend issuance and a share repurchase will change the company’s Earnings per Share (EPS), since dividends affect earnings and repurchased shares affect the company’s share count.

b) A share repurchase is better for both the company and shareholders because no taxes are paid on repurchased shares, whereas taxes are always paid on dividends issued.

c) Both a share repurchase and a dividend issuance will show up within the Cash Flow from Financing section of the Cash Flow Statement.

d) Both a dividend issuance and a share repurchase will reduce the Equity line item on a company’s Balance Sheet.

e) While a share repurchase reduces the Treasury Stock line item within Equity, a dividend issuance reduces Accumulated Other Comprehensive Income (AOCI), since AOCI represents the company’s saved-up, after-tax earnings.

42) Suppose that you have built a PP&E Schedule.. Which of the following conditions might you check to verify that you are using reasonable assumptions?

a) CapEx as a % of Revenue should almost always be rising over time for a high-growth company like this one.

b) The CapEx annual growth rate should be in-line with historical growth rates, perhaps declining modestly each year as the company grows.

c) Particularly if a company is growing quickly, CapEx as a % of Revenue will often exceed Depreciation as a % of Revenue.

d) In the long-term, Total CapEx should always equal Total Depreciation because the company’s Net PP&E balance should not be changing.

e) CapEx as a % of Revenue should be falling over time because companies have lower re-investment needs as their businesses grow.

47) Suppose that you are analyzing a high-growth software company, such as the one we have been using in these examples. This company, despite its high growth, also has high margins and is generating significant Free Cash Flow.

Which of the following answer choices represent the BEST ways for this company to spend its excess Free Cash Flow if it wants to maximize its valuation?

a) Return capital to investors in the form of dividends or share repurchases, as doing so will likely boost the value of the company’s shares.

b) Substantially increase spending on Working Capital or Capital Expenditures, as both items are essential for software companies to grow.

c) Spend more on sales & marketing to win bigger customers and boost the average customer value.

d) Acquire related companies if the market is highly fragmented and there are target companies with reasonable valuations.

I will not give credit for any unsupported answer -- even if it is correct!!. All cash flows are end-of-period unless otherwise stated .

Problems 1 and 2 relate to this information :

The current monthly income statement for JRT, Inc., represents the results of selling 8,000 coffee mugs: Sales (revenue) $56,000 Cost of goods sold (33,000) Gross margin $23,000 S & A expenses (16,000) Income before taxes $ 7,000 Income taxes (@ 30%) (2,100) Net income $ 4,900 Cost of goods sold included fixed manufacturing costs of $5,000, while selling and administrative expenses (“S & A expenses”) included $4,000 of fixed costs. Sales commissions amounting to $0.40 per coffee mug were also included in S & A expenses.

1. How many coffee mugs would JRT need to sell to earn a monthly net income of $7,000?

2. JRT received a special order for 3,000 coffee mugs from the Lyric Opera of Chicago (Lyric). JRT would not have to pay a sales commission on these mugs, but would have to place a special “Lyric” design on each mug at a cost of $0.50 per mug. In addition, the fixed cost of setting up this order would amount to $1,900. If the Lyric agreed to pay only $6.00 per mug, what would be the effect on JRT’s monthly net income if they accepted this order?

3. You are considering purchasing a fifteen-year annuity that offers annual payments of $9,000 with the first payment occurring one year from today. You expect that interest rates will be 5% per annum for the first five-year period, 6.5% per year for the second five-year period, and 8% for the third five-year period. What is the most that you would pay for this investment today, i.e., its present value?

4. You just sold a piece of property. The buyer offers you a choice between accepting $100,000 immediately followed by payments of $50,000 at the end of each year for fifteen years (#1). Alternatively, you could receive $150,000 now and payments of only $43,500 annually for fifteen years ( #2).

a. Which alternative would you prefer a. if your required rate of return is eight percent?

b. If your required rate of return is thirteen percent?

c. At what required rate of return would these two investments have the same present value?

5. You plan on retiring forty years after you begin your first job and wish to have $2,500,000 at retirement. You intend to make your first payment at the end of your first year on the job and then increase your payments by 3 percent annually thereafter. If you invest in a fund paying an annual percentage rate (APR) of six percent, compounded semiannually, what is the amount of the first payment necessary to reach your objective ?

6. Fast forward: You have just retired and reached your objective (see above) of accumulating $2,500,000 in your retirement fund. You expect to live for another thirty years (exactly) and wish to leave $1,000,000 to Illinois Tech when you are gone. What is the most that you could withdraw from this fund at the end of each month and still leave the money to Tech? The fund is expected to return eight per annum, compounded monthly?

7. You have been following a company, AmazingDotCom, Inc., that is about to go public this afternoon. You believe that the company will not pay any dividends for the first eight years of its operations. At the end of the ninth year, you foresee receiving $1 per share as a dividend. You forecast that the tenth year’s dividend will be $1.75 per share and after that dividends will grow at an annual rate of 2-1/2 percent forever. What would you pay for a share of this stock today if you wished to earn twenty percent per annum on your investment?

8. On June 30, 2018, you closed on your new condominium and obtained a $250,000 thirty year mortgage at an APR of 4.32%. The first monthly payment was due at that time (June 30, 2018), and then on the last day of each month thereafter (this is an “annuity in advance” or an “annuity due”).

a. What was the amount of your required monthly payment?

b. Assuming that you made all payments exactly when due, how much interest would you have paid on the mortgage in the year ending December 31, 2018?

c. How much interest would you pay in 2019 if you made all of your scheduled payments exactly when due?

d. If the interest rate were to increase to 4.62% after sixty payments, what would be the amount of your new monthly payment? (the life of the mortgage would be unchanged).

9. You are working on your income taxes and want to figure your mortgage interest deduction for the previous year. Unfortunately someone inadvertently ran your mortgage documents through a shredder. You were able to discover fragments of the amortization schedule that showed elements from a row from that schedule:

Payment# =100

Amount = $1,932.90

Interest = ???

Principal = $709.30

Balance = $244,010.90

a. Determine the APR of this mortgage (two three decimal places);

b. Determine the original amount of the mortgage;

c. Determine the original term (length) of the mortgage; d. Complete the following row of the mortgage’s amortization schedule:

Payment # = 200

Amount = ??

Interest = ??

Principal = ??

Balance = ??

10. You are considering lending some money to a company that offers to make semiannual payments of $4,000 to you for thirty years and then pay you $100,000 at the end of the thirtieth year. How much would you lend to this company if

a. you required an APR of ten percent compounded semiannually?

b. you required an APR of six percent compounded semiannually?

c. you required an APR of eight percent compounded semiannually?