## Explorer company Limited, a digital company, manufactures and sells three products

Explorer company Limited, a digital company, manufactures and sells three products, Tatum, Satum and Qatum. The company maintains consistently a policy of 80% variable cost ratio for each product. The selling price per unit for Tatum, Satum and Qatum are \$100, \$125 and \$150 respectively. The company intends to sell 5,000 Tatum, 4,000 Satum and 3,000 qatum for the period. The total fixed cost for the period is \$580,000.

a. Calculate the break even total combined units.

b. Calculate the total combined units to be sold to achieve a target profit of \$870,000.

c. Calculate the total combined units to be sold to achieve a target profit of \$1,305,000 after tax (tax rate is 25%)

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## Absolusia, an emerging economy, has just made an issue of coupon-paying

Absolusia, an emerging economy, has just made an issue of coupon-paying bonds, each with 3 years to maturity, and a face value of \$1,000,000.Each bond has a coupon rate of 4% per annum, payable half-yearly.

The bonds have a yield of j2 = 6%, that is 6 per cent per annum, compounded half-yearly.

(a) Calculate the current price of each \$1,000,000 bond, correct to the nearer cent.
(b) Calculate the duration of each bond. (Show 4 places of decimals).
(c) Calculate the convexity of each bond. (Show 4 places of decimals).
(d) You have just heard that, immediately after issue, the yield on the bond has increased from 6% per annum, compounded half-yearly, to 6.2% per annum, also compoundedhalf-yearly.

Using the formula (and/or the method) applied in (a) above, calculate the new bond price and the resultant price change, assuming that there are still 3 years until the bond’s maturity.

(e) Before the increase in yield in part (d) above took place, calculate the value of the bond at the duration date, as calculated in (b) above.

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## You are contemplating a portfolio of two risky assets

You are contemplating a portfolio of two risky assets, comprising 75% in Deakin Ltd and 25% in Hall Ltd.

Your broker’s analyst has predicted that, on an ongoing basis, the expected returns from these assets will be 8% per annum from Deakin Ltd and 10% per annum from Hall Ltd.

The standard deviations of the returns from the assets are expected to be 9% for Deakin Ltd and 11% for Hall Ltd.

The correlation between the two assets is 0.30.

Answer the following question parts, showing all calculations in each case.

Calculate the expected annual percentage return of the contemplated portfolio.
For the above portfolio, calculate the standard deviation.[HINT: See section 7.4 of Brailsford’s (2015) text-book.)
What happens to the portfolio variance in (a) and (b) above when the asset returns are perfectly negatively correlated? Explain carefully.
With the aid of two hypothetical worked examples, explain hoiow expected utility is a useful criterion for investor choice when the investor payoffs are certain.

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## A company has \$50 per unit in variable costs and \$1,200,000 per year

1. A company has \$50 per unit in variable costs and \$1,200,000 per year in fixed costs. Demand is estimated to be 110,000 units annually. What is the price if a markup of 40% on total cost is used to determine the price?

2. Tory Company sells a single product. Troy estimates demand and costs at various activity levels as follows:

Units Sold Price Total Variable Costs Fixed Costs

120,000 \$48 \$3,000,000 \$1,000,000

147,500 \$45 \$3,500,000 \$1,000,000

160,000 \$40 \$4,000,000 \$1,000,000

180,000 \$35 \$4,500,000 \$1,000,000

200,000 \$30 \$5,000,000 \$1,000,000

How much profit will Troy have if a price of \$45 is charged?

3. The Falling Snow Company is considering production of a lighted world globe that the company would price at a markup of 0.25 above full cost. Management estimates that the variable cost of the globe will be \$60 per unit and fixed costs per year will be \$240,000.

Assuming sales of 1,200 units, what is the full selling price of a globe with a 0.25 markup?

4. PowerDrive, Inc. produces a hard disk drive that sells for \$175 per unit. The cost of producing 25,000 drives in the prior year was:

Direct material \$625,000

Direct labor 375,000

Total cost \$2,625,000

At the start of the current year, the company received an order for 3,800 drives from a computer company in China. Management of PowerDrive has mixed feelings about the order. On the one hand they welcome the order because they currently have excess capacity. Also, this is the company’s first international order. On the other hand, the company in China is willing to pay only \$130 per unit.

What will be the effect on profit of accepting the order?

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## You have joined the Projects division of Grow More Inc

You have joined the Projects division of Grow More Inc. Your first job is to analyze two projects. which you have code named “alpha” and “beta” Both projects will require the same initial investment of \$100,000 and are expected to generate the following cash flows over an peeled economic life of 4 years.

Year Project “Alpha,” \$ Project “Beta,” \$

1 70,000 40,000

2 32,000 40,000

3 32,000 40,000

4 9,000 40,000

Assuming that GrowMorc Inc.”s cost of capital for these projects is 10 percent:

a. Calculate its ( I) payback period, and (2) discounted payback period. Which project would you select under these methods? Explain your answer.

b. Calculate net present values for each project and indicate which one you would undertakeusingthis decision rule.

c. Calculate internal rates of return for each project. Which project would you select using the IRR rule?

d. Calculate the profitability index for each project and indicate your decision using this rule.

e. Can you think of any situations where, because of a change in the cost of capital, you might be confronted with conflicting decisions using the NPV and IRR rules? Show how this might happen.

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## For a recent year, the mean fare to fly from Charlotte, North Carolina

For a recent year, the mean fare to fly from Charlotte, North Carolina, to Chicago, Illinois, on a discount ticket was \$267. A random sample of 13 round-trip discount fares on this route last month gives:

\$321, \$286, \$290, \$330, \$310, \$250, \$270,\$ 280,\$ 299,\$265,\$ 291, \$275, \$281

For each problem:

1. State the null (Ho) and alternative (Ha) hypotheses

2. Select or note the (alpha) level of significance (for the test)

3. Identify [for later Calculation] the test statistic formula (e.g.: z, t)

4. Determine the Critical Value and Formulate a Decision Rule based on the critical value

5. Derive and Compute The Test Statistic Value

6. Make a Decision: Decide to Reject or not Reject the Null Hypothesis

7. State the implication(s) to the original exercise scenario.

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## Global Services is considering a promotional campaign that will increase

Global Services is considering a promotional campaign that will increase annual credit sales by \$620,000. The company will require investments in accounts receivable, inventory, and plant and equipment. The turnover for each is as follows:

Accounts receivable 4times

Inventory 8times

Plant and equipment 2times

All \$620,000 of the sales will be collectible. However, collection costs will be 3 percent of sales, and production and selling costs will be 73 percent of sales. The cost to carry inventory will be 4 percent of inventory. Depreciation expense on plant and equipment will be 15 percent of plant and equipment. The tax rate is 35 percent.

a. Compute the investments in accounts receivable, inventory, and plant and equipment based on the turnover ratios. Add the three together.

b. Compute the accounts receivable collection costs and production and selling costs and then add the two figures together.

c. Compute the costs of carrying inventory.

d. Compute the depreciation expense on new plant and equipment.

e. Compute the total of all costs from parts b through d.

f. Compute income after taxes.

g-1. What is the aftertax rate of return? (Input your answer as a percent rounded to 2 decimal places.)

g-2. If the firm has a required return on investment of 12 percent, should it undertake the promotional campaign described throughout this problem?

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## As part of a study on the bluntnose minnow (Pimephales notatus)

As part of a study on the bluntnose minnow (Pimephales notatus) you want to determine which factors contribute to how many of these fish live in parts of a stream. So you sampled 80 different sections of a stream and counted the number of minnows per cubic meter, the water temperature (°C), the water depth (meters), and whether or not there was a predator present (yes/no). After confirming all relevant assumptions, you ran a general linear model predicting the density of bluntnose minnows:

b   SE
Intercept                  -4.61 0.45
Water Temp.             0.51 0.37
Water Depth            12.33 5.13
Predator (0=No, 1=Yes) -8.71 1.56

a. Calculate the test statistics for each explanatory variable in the model. Which predictors explain a significant amount of variation in the response variable?

b. Write out the full regression equation for predicting the density of bluntnose minnows in this stream.

c. Interpret the estimate for Predator in context.

d. Predict the bluntnose minnow density in a part of the stream that is 12°C, 2.5 meters deep, and has a predator present. (1pt)

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## The economy of Utopia produces three goods: Computers, DVDs, and Pizzas

The economy of Utopia produces three goods: Computers, DVDs, and Pizzas. The table below shows the prices and output of the three goods for the years 2014, 2015, and 2016.

Computers DVDs Pizzas

Year Price Quantity Price Quantity Price Quantity

2014 \$900 10 \$10  100  \$15  2

2015 \$1,000 10.5 \$12  105  \$16  2

2016 \$1,050 12 \$14  110  \$17  3

a. Calculate the nominal GDP for Utopia for each of the three years.

b. What is the percentage change in nominal GDP from 2015 to 2016.

c. Calculate the real GDP for Utopia using 2014 prices (2014=base year) for each of the three years.

d. What is the percentage change in real GDP from 2015 to 2016.

e. Discuss why economists consider real GDP a more accurate measure of growth in the economy?

-You should construct a table like the one below and fill in the blanks to answer the questions.

Year  Nominal GDP Growth rate Real GDP Growth rate

2014 —— N/A ——- N/A

2015 —— —— ——- ——-

2016 —— —— ——- ——-

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## Oriole Company uses the LCNRV method, on an individual-item basis

Oriole Company uses the LCNRV method, on an individual-item basis, in pricing its inventory items. The inventory at December 31, 2017, included product X. Relevant per-unit data for product X are as follows.

Estimated selling price\$49Cost38Estimated selling costs15Normal profit9

There were 1,050 units of product X on hand at December 31, 2017. Product X was incorrectly valued at \$38 per unit for reporting purposes. All 1,050 units were sold in 2018.

Compute the effect of this error on net income for 2017 and the effect on net income for 2018, and indicate the direction of the misstatement for each year.

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