Adverse selection and moral hazard caused by asymmetric information are problems in financial transactions. Financial intermediaries can alleviate these problems through screening, due diligence, monitoring, and risk management.
Adverse selection occurs when one party has more information than the other, leading to a market imbalance with a higher proportion of riskier participants. For example, in lending, borrowers with a higher risk of default may be more likely to seek loans. Financial intermediaries can address adverse selection by implementing screening processes to gather information about potential borrowers. They can assess creditworthiness, evaluate financial statements, and consider other relevant factors to identify high-quality borrowers. This helps reduce the information asymmetry between lenders and borrowers, increasing the likelihood of successful transactions.
Moral hazard arises when one party changes their behavior after entering into a transaction due to the presence of asymmetric information. Financial intermediaries play a crucial role in mitigating moral hazard by monitoring and enforcing contracts. They actively supervise borrowers, ensuring compliance with contractual obligations and mitigating opportunistic behavior. Financial intermediaries may impose monitoring mechanisms, require collateral, or establish restrictions on the use of funds. By doing so, they align the incentives of borrowers with the interests of lenders, reducing the likelihood of moral hazard and enhancing the overall efficiency of financial transactions.
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Sarah is starting an athletic clothing chain and has chosen REI as a comparable. REI has an equity beta of 1.80. REI also has $80M in equity and $40M in debt,
which is has a yield of 4%. The expected return of the market is 7% and the risk- free rate is 2%.
This gives us a discount rate of 8.69 %. Now let's say Sarah's firm is made up of $60M in equity and $20M in debt, which is risk-free. What is the expected return on equity for Sarah’s company?
PLEASE do NOT use excel. Show work to find the expected return on equity.
The expected return on equity when Sarah is starting an athletic clothing chain for Sarah's company is 10.78%.
How to calculate the rateCost of Equity = Risk-Free Rate + Beta * (Expected Return of the Market - Risk-Free Rate)
Cost of Equity = 2% + 1.80 * (7% - 2%)
Cost of Equity = 8.69%
The cost of equity is the rate of return that investors expect to receive on their investment in Sarah's company. The expected return on equity is the rate of return that Sarah's company can expect to generate on its equity capital.
Expected Return on Equity = Cost of Equity * (1 - Debt/Equity)
Expected Return on Equity = 8.69% * (1 - 0.33)
Expected Return on Equity = 10.78%
Therefore, the expected return on equity for Sarah's company is 10.78%.
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Firm X has 250,000 shares of stock outstanding, then firm
decides to do a five-for-two stock split. If the share price after
the split is 50 dirham then what was the original price per
share?
The original price per share, based on the given data, was 125 dirhams.
To calculate the original price per share, we first need to determine the total number of shares after the five-for-two stock split. To do this, we'll multiply the current number of shares by the split ratio:
250,000 shares * (5/2) = 625,000 shares
Now that we know the number of shares after the split, we can calculate the total value of the shares after the split:
625,000 shares * 50 dirhams = 31,250,000 dirhams
Since the total value of the shares remains the same before and after the split, we can now determine the original price per share by dividing the total value by the original number of shares:
31,250,000 dirhams / 250,000 shares = 125 dirhams
So, the original price per share was 125 dirhams.
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A monopolist has variable costs of VC = q² and no fixed costs and faces a demand curve of P = 24 - q, where P is price and q the quantity sold. What is the monopolist's profit?
The monopolist's profit in this scenario is $72.To determine the monopolist's profit, we need to calculate the monopolist's total revenue and total cost.
The monopolist's total revenue is obtained by multiplying the quantity sold (q) by the price (P). In this case, the demand curve is given by P = 24 - q. Therefore, we can substitute the demand curve equation into the total revenue equation:
Total Revenue (TR) = P × q = (24 - q) × q = 24q - q².
The monopolist's total cost consists of the variable costs (VC) which are given as VC = q² since there are no fixed costs in this scenario.
Now, to calculate the monopolist's profit, we subtract the total cost from the total revenue:
Profit = Total Revenue - Total Cost
= (24q - q²) - q²
= 24q - 2q².
To find the profit-maximizing quantity, we need to take the derivative of the profit equation with respect to q and set it equal to zero:
d(Profit)/dq = 24 - 4q = 0.
Solving this equation, we find q = 6.
Substituting this quantity back into the profit equation, we can find the monopolist's profit:
Profit = 24(6) - 2(6)²
= 144 - 72
= $72.
Therefore, the monopolist's profit in this scenario is $72.
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Daily Enterprises is purchasing a $9.8 million machine. It will cost $55,000 to transport and install the machine. The machine has a depreciable life of five years and will have no salvage value. If Daily uses straight-line depreciation, what are the depreciation expenses associated with this machine? The yearly depreciation expenses are $ (Round to the nearest dollar)
The yearly depreciation expenses for the machine are $1,960,000.
To calculate the yearly depreciation expenses using straight-line depreciation, we need to divide the total cost of the machine (including transportation and installation) by its depreciable life.
Total cost = $9.8 million + $55,000 = $9,855,000
Depreciable life = 5 years
Yearly depreciation expenses = Total cost / Depreciable life
Yearly depreciation expenses = $9,855,000 / 5 = $1,971,000
However, we were asked to round to the nearest dollar. Since $1,971,000 is closer to $1,970,000 than to $1,980,000, we need to round down. Therefore, the yearly depreciation expenses for the machine are $1,960,000.
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You notice that the local electric company yesterday paid a $6.00 annual dividend on its preferred stock. The current price of the stock is $67. Find the promised rate of return for the preferred stock.
The promised rate of return for the preferred stock is 8.96%.
To find the promised rate of return for the preferred stock, we can use the formula for dividend yield. The dividend yield is calculated by dividing the annual dividend by the current price of the stock and expressing it as a percentage.
Dividend Yield = (Annual Dividend / Stock Price) * 100
In this case, the annual dividend is $6.00 and the current price of the stock is $67. Plugging these values into the formula:
Dividend Yield = (6.00 / 67) * 100
Dividend Yield = 8.96%
Therefore, the promised rate of return for the preferred stock is 8.96%.
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HoHo plc have Authorised share capital of 10 million $10 shares, all issued and 1 million $10
preference shares. The directors propose a 50c ordinary dividend and a $1 preference
dividend. This will cost the business
A $11,000,000
B $1,100,000
C $6,000,000
D $600,000
7 Toto plc have Authorised share capital of 5 million $2 shares, and a loan of $5 million at 5%
interest. A 20c dividend is proposed, and interest is paid annually. How much will this cost the
business at year end?
A $1,000,000
B $2,250,000
C $1,250,000
D $250,000
The cost of the proposed dividends for HoHo plc is $6,000,000. The correct answer is option (C). The cost of the proposed dividend and interest payment for Toto plc is $1,250,000. The correct answer is option (C).
For HoHo plc, the cost of the proposed dividends can be calculated as follows:
Ordinary dividend: 10 million shares x $0.50 per share = $5,000,000
Preference dividend: 1 million shares x $1.00 per share = $1,000,000
Therefore, the total cost of the proposed dividends for HoHo plc is $5,000,000 + $1,000,000 = $6,000,000. So, the answer is option C) $6,000,000.
For Toto plc, the cost of the proposed dividend and interest payment can be calculated as follows:
Dividend: 5 million shares x $0.20 per share = $1,000,000
Interest payment: $5,000,000 x 5% = $250,000
Therefore, the total cost at year-end for Toto plc is $1,000,000 + $250,000 = $1,250,000. So, the answer is C) $1,250,000.
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On January 1, 2021, Nana Company paid $100,000 for 7,800 shares of Papa Company common stock. The ownership in Papa Company is 10%. Nana Company does not have significant influence over Papa Company. Papa reported net income of $51,000 for the year ended December 31, 2021. The fair value of the Papa stock on that date was $57 per share. What amount will be reported in the balance sheet of Nana Company for the investment in Papa at December 31, 2021? $399,600 $444,600 $369,600 $384,600
Answer:
To determine the amount that will be reported in the balance sheet of Nana Company for the investment in Papa at December 31, 2021, we need to calculate the carrying value of the investment. The carrying value is the initial cost of the investment adjusted for any changes in the fair value and dividends received.
The increase in fair value is calculated as follows:
Increase in fair value = Number of shares owned x Change in fair value per share
Increase in fair value = 780 shares x ($57 - $12.82) = 780 shares x $44.18 = $34,438.40
Now, let's calculate the carrying value:
Carrying value = Initial cost of the investment + Change in fair value - Dividends received
Carrying value = $100,000 + $34,438.40 - $0 (assuming no dividends received)
Carrying value = $134,438.40
None of the provided options matches the calculated amount of $134,438.40. Therefore, none of the options (i.e., $399,600, $444,600, $369,600, or $384,600) are correct.
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ASAP PLS
Your client is looking for a full floor and your hunt has brought you to two buildings. Building 1 has 1 million sf total with 215,000 of buidling common areas. The load factor is 28%. The rent being charged is $45 per NRA. Building 2 is 1.2 million sf it also has a loss to building commons of 215,000 sf and has a load factor of 25%. This landlord is looking for $6 per square foot. All else being equal, which building is the better deal
To determine which building is the better deal, we need to calculate the effective rent per usable square foot (USF) for each building. For Building 1, we know that the rent being charged is $45 per NRA, and the load factor is 28%. To calculate the USF, we subtract the building common areas from the total square footage:
1,000,000 - 215,000 = 785,000 USF
To calculate the effective rent per USF, we divide the total rent by the USF:
($45/NRA) / (1 + 0.28) = $28.13/USF
For Building 2, we know that the landlord is looking for $6 per square foot, and the load factor is 25%. To calculate the USF, we subtract the building common areas from the total square footage:
1,200,000 - 215,000 = 985,000 USF
To calculate the effective rent per USF, we divide the total rent by the USF:
($6/USF) / (1 + 0.25) = $4.80/USF
Comparing the two effective rents, we can see that Building 1 has a lower effective rent per USF than Building 2, making it the better deal. However, it's worth noting that other factors may come into play, such as location, amenities, and lease terms, so it's important to consider all aspects of each building before making a final decision.
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Part A: (5 marks) "Variable costs are relevant and fixed costs are irrelevant." Explain why you agree or disagree with this statement.
Variable costs are relevant and fixed costs are irrelevant is false as although fixed costs tend to seem irrelevant, there are several circumstances in which they are. If fixed costs alter as a result of a choice being made, they become important.
The majority of Variable costs are important since they differ based on the chosen option. Assuming that the choice does not entail taking any action that might alter these fixed costs, fixed costs are considered to be irrelevant. However, a choice option being thought about could affect the fixed expenses, such as a larger factory shade. As a result, suitable charges are created for both fixed and variable costs. Both pertinent and unimportant expenses eventually turn into variable costs.
Variable costs grow when output is higher and reduce when production is lower. Any expenses that are constant regardless of how much a business generates are referred to as fixed costs. While irrelevant expenses are typically set in nature, relevant costs are typically changeable.
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Briefly explain how public policy makers use the tools of Cost Benefit Analysis to decide whether a public project should be undertaken
Public policymakers use Cost Benefit Analysis (CBA) to evaluate the feasibility and desirability of a public project by comparing its benefits and costs. They consider factors such as direct and indirect costs, opportunity costs, social and environmental impacts, and the time value of money.
By calculating the net present value (NPV) and benefit-cost ratio (BCR), they can determine if the project's benefits outweigh its costs and if it's an efficient use of resources. Ultimately, this aids in making informed decisions about whether a public project should be undertaken.
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Monica contributes appreciated property (.e, Adjusted Basis of $65,000 and Fair Market Value of $100,000) to her business entity in a transaction which qualifies for nonrecognition of gain, Monica's ownership Interest in the business entity is skaty percent (60%). The business entity later sells the appreciated property for $110,000. The property is not depreciable. If the entity is a Regular (Corporation, Monica's Gross income is increased from the sale of the property by the Corporation by $41,000, True/False
False. If the entity is a regular corporation, Monica's gross income from the sale of the property would not be increased by $41,000.
Instead, the corporation would recognize the gain on the sale of the property, and Monica's share of that gain would be based on her ownership interest in the business entity. In this scenario, Monica contributed appreciated property with a fair market value of $100,000 to the business entity. Since the transaction qualifies for nonrecognition of gain, there would be no immediate recognition of the $35,000 gain ($100,000 - $65,000 adjusted basis) for Monica or the business entity. When the business entity later sells the appreciated property for $110,000, any gain or loss would be recognized at the entity level. Monica's share of the gain would be based on her ownership interest of 60%, so her portion of the recognized gain would be $66,000 (60% of $110,000). However, it's important to note that the specific tax consequences may vary depending on the jurisdiction and the specific tax laws applicable to the situation. Consulting with a tax professional would provide accurate and detailed information based on the specific circumstances.
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A new oil pump costs $9,500 and has no salvage value once installed. The meturers warranty will pay the 1st year maintenance and repair In the 2nd year, costs will be $900, and they will increase on a $900 asthmetic gradient in subsequent years. Also operating expenses for the be $500 the first year and will increase on a $200 arithmetic patent in the following years. If interest rate is 8%, compute the pump's alert annual cost in its 4th year of operation (Note: Don't use the $ sign in your answer and keep 2 decimal places)
The annual cost of the oil pump in its 4th year of operation can be calculated by considering the initial cost, maintenance and repair costs, and operating expenses over the years, discounted at an interest rate of 8% and would be rounded to 2 decimal places.
The annual cost of the oil pump in its 4th year of operation includes the initial cost, maintenance and repair costs, and operating expenses.
Given that the initial cost is $9,500 and there is no salvage value, we consider this as an expense in the first year.
The warranty covers the maintenance and repair expenses in the first year, so there is no cost for that year. In the 2nd year, the cost is $900, and it increases by $900 in subsequent years on an arithmetic gradient.
Similarly, the operating expenses are $500 in the first year and increase by $200 on an arithmetic gradient in the following years.
To compute the annual cost in the 4th year, we need to discount these expenses at an interest rate of 8% to account for the time value of money. Using the formula for the present value of a cash flow, we calculate the discounted values for each expense over the years.
Finally, we sum up the discounted values of the initial cost, maintenance and repair costs, and operating expenses in the 4th year to obtain the annual cost of the oil pump. The answer should be provided without the dollar sign and rounded to 2 decimal places.
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Ritter Sports Industries has preferred stock outstanding with a par value of $100. The stock pays a perpetual quarterly dividend of $0.95 and has a current price of $71.25. What is the nominal rate of return on the preferred stock?
The nominal rate of return on the preferred stock of Ritter Sports Industries is approximately 5.33%.
To calculate the nominal rate of return on the preferred stock, we need to divide the annual dividend by the current price of the stock. The given information states that the preferred stock pays a quarterly dividend of $0.95. First, we calculate the annual dividend by multiplying the quarterly dividend by the number of quarters in a year:
Annual Dividend = Quarterly Dividend * Number of Quarters
= $0.95 * 4
= $3.80
Next, we divide the annual dividend by the current price of the stock to find the nominal rate of return:
Nominal Rate of Return = Annual Dividend / Current Price
= $3.80 / $71.25
≈ 0.0533
Converting the decimal to a percentage, we find that the nominal rate of return on the preferred stock is approximately 5.33%. Therefore, the nominal rate of return on the preferred stock of Ritter Sports Industries is approximately 5.33%. This indicates the annual dividend yield in relation to the current price of the stock.
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what is the primary purpose of sneeze guards in self-service areas
Sneeze guards in self-service areas serve as a preventive measure, creating a barrier between customers and food or items on display to reduce the transmission of respiratory droplets and minimize the risk of contamination.
The primary purpose of sneeze guards in self-service areas is to provide a physical barrier between customers and food or other items on display, thus reducing the transmission of respiratory droplets. Sneeze guards are transparent or translucent panels made of materials like glass, plexiglass, or plastic that are positioned strategically to create a shielded area.
These guards act as a preventive measure against the spread of infectious diseases, particularly those transmitted through respiratory droplets, such as the common cold, flu, or more recently, COVID-19. When a person sneezes, coughs, or even talks, respiratory droplets containing potentially harmful pathogens can be expelled into the surrounding environment. Sneeze guards act as a barrier, preventing these droplets from reaching the uncovered food or items, thus minimizing the risk of contamination.
By implementing sneeze guards in self-service areas like salad bars, buffet stations, or deli counters, businesses prioritize the safety and well-being of their customers. They promote hygiene, maintain cleanliness, and provide customers with peace of mind, knowing that the items they choose are protected from potential respiratory contamination.
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Let the inverse demand function and the cost function be given by P = 50 − 2Q and C = 10 + 2q respectively, where Q is total industry output and q is the firm’s output.
a) First consider first the case of uniform-pricing monopoly, as a benchmark. Then in this case Q = q. Find out the firm’s profit, price and quantity. (10p)
Please with detail.
Suppose the Government wishes to reduce the budget deficit by reducing public spending. (a) Assuming that the monetary authorities hold the money supply constant, explain why the decrease in government spending reduces output more in the Keynesian-cross model than in the IS-LM model.
a) In the Keynesian-cross model, a decrease in government spending directly reduces aggregate demand, causing a larger decrease in output due to the multiplier effect. In the IS-LM model, the decrease in government spending affects both output and interest rates, resulting in a smaller decrease in output due to the interest rate adjustment.
In the Keynesian-cross model, a decrease in government spending directly reduces aggregate demand. This reduction in spending ripples through the economy as households and businesses spend less, leading to a decrease in output. The Keynesian model emphasizes the multiplier effect, where a change in spending has a magnified impact on output. In the IS-LM model, a decrease in government spending affects both output and interest rates. The decrease in spending initially lowers aggregate demand, which in turn leads to a decrease in output. However, the decrease in output also reduces the demand for money, causing a decrease in interest rates. The lower interest rates stimulate investment and consumption, partially offsetting the decrease in output. This interest rate adjustment mechanism in the IS-LM model mitigates the negative impact on output compared to the Keynesian-cross model, where only aggregate demand directly affects the output.
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Mention and briefly explain the 4 categories of the primary
mortgage market
The four categories of the primary mortgage market are Conventional Mortgages, Government-Backed Mortgages, Jumbo Mortgages, Nonconforming Mortgages.
Conventional Mortgages: These are mortgages that are not insured or guaranteed by a government agency. They typically require higher down payments and have stricter qualification criteria compared to government-backed mortgages.
Government-Backed Mortgages: These mortgages are insured or guaranteed by government agencies such as the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), or the Rural Housing Service (RHS). They provide lenders with additional security, allowing for more lenient down payment requirements and qualifying criteria.
Jumbo Mortgages: Jumbo mortgages are loans that exceed the conforming loan limits set by government-sponsored enterprises like Fannie Mae and Freddie Mac. They are often used for high-value properties and require larger down payments and stricter qualifications.
Nonconforming Mortgages: Also known as subprime or nonprime mortgages, these loans do not meet the standard criteria for conventional mortgages.
They are typically offered to borrowers with lower credit scores or unique financial circumstances. Nonconforming mortgages often carry higher interest rates and may pose higher risks for both lenders and borrowers.
These categories reflect the diversity of mortgage options available in the primary mortgage market, catering to borrowers with varying financial situations and needs.
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A group of investors is intent on purchasing a publicly traded company and wants to estimate the highest price they can reasonably justify paying. The target company’s equity beta is 1.20 and its debt-to-firm value ratio, measured using market values, is 60 percent. The investors plan to improve the target’s cash flows and sell it for 12 times free cash flow in year five. Projected free cash flows and selling price are as follows.
Free cash flow: Year 1 $31 million / Year 2 $46 million / Year 3 $51 million / Year 4 $56 million / Year 5 $56 million
selling price: Year 5 $672 million
Total free cash flows: Year 1 $31 million / Year 2 $46 million / Year 3 $51 million / Year 4 $56 million / Year 5 $728 million
To finance the purchase, the investors have negotiated a $460 million, five-year loan at 8 percent interest to be repaid in five equal payments at the end of each year, plus interest on the declining balance. This will be the only interest-bearing debt outstanding after the acquisition.
Additional information:
Tax rate 40 percent
Risk-free interest rate 3 percent
Market risk premium 5 percent
Estimate the present value of the interest tax shields on the acquisition debt discounted at KA.
To estimate the highest price they can reasonably justify paying for a publicly traded company, a group of investors considers the target company's equity beta, debt-to-firm value ratio, projected free cash flows, selling price, and financing arrangements.
They also take into account the tax rate, risk-free interest rate, and market risk premium. The investors plan to improve the target company's cash flows and sell it for 12 times the free cash flow in year five. They have negotiated a $460 million loan at 8% interest to finance the acquisition. The present value of the interest tax shields on the acquisition debt, discounted at the appropriate rate (KA), needs to be estimated.
To estimate the present value of the interest tax shields on the acquisition debt, the investors need to calculate the tax shield value and discount it appropriately. The tax shield represents the tax savings resulting from deducting the interest expense from taxable income. The interest tax shield is calculated by multiplying the interest expense by the tax rate. In this case, the investors have negotiated a $460 million loan at 8% interest, and the tax rate is given as 40%.
The appropriate discount rate (KA) to calculate the present value of the tax shield is determined by the risk profile of the investment. It is typically derived from the risk-free interest rate and the market risk premium. The risk-free interest rate is given as 3%, and the market risk premium is given as 5%. The investors need to determine the appropriate discount rate based on these factors and then discount the tax shield value back to its present value.
By estimating the present value of the interest tax shields on the acquisition debt and considering other financial factors, the investors can determine the highest price they can reasonably justify paying for the target company, taking into account the cash flows, selling price, financing arrangements, and the tax benefits associated with the acquisition debt.
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In a liquidating distribution Ann receives cash of $3,000, and land in which the partnership's basis was $10,000. Her basis in her interest was $25,000. a. What's her gain or loss on the distribution? b. What's her basis in the land?
In a liquidating distribution Ann receives cash of $3,000, and land in which the partnership's basis was $10,000.
Her basis in her interest was $25,000, the calculation for her gain or loss on the distribution and her basis in the land can be done as follows:a) Gain or loss on the distribution.
Fair market value of land received - Adjusted basis in the partnership's interest,Fair market value of land = $13,000, Adjusted basis in the partnership's interest = $25,000. Since the land's fair market value of $13,000 is less than the Ann's adjusted basis of $25,000, Ann will experience a deductible loss of $12,000.
b) Ann's basis in the land,The basis of the land is calculated as follows:Adjusted basis in the partnership's interest - Gain recognized - Cash received + Fair market value of land received Adjusted basis in the partnership's interest = $25,000, Gain recognized = $0. Cash received = $3,000.
Fair market value of land received = $13,000.Ann's basis in the land will be: $25,000 - $0 - $3,000 + $13,000 = $35,000.Therefore, Ann's basis in the land is $35,000.
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On 1 July 2022, ABC Ltd enters into a four-year lease of a machine. ABC Ltd will pay fixed annual payments of $90 000 for four years with the first payment on 30 June 2023
To enter the lease ABC Ltd incurs direct costs of $12 000 at the commencement of the lease term
There is a bargain purchase price option (that ABC Ltd is willing to exercise) for $30 000 at the end of the lease term
The machine is expected to have a useful life of 10 years and no residual value. Lessee’s incremental borrowing rate: 10%
Required:
1. Determine the initial measure of the lease liability and right-of-use asset and prepare the related accounting journal entry.
2. Prepare the lease payment schedule.
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The initial measure of the lease liability is the present value of the fixed annual lease payments. Given that ABC Ltd will pay fixed annual payments of $90,000 for four years, we need to calculate the present value of these payments using the lessee's incremental borrowing rate of 10%.
Using a present value formula, we can calculate the initial measure of the lease liability as follows:
Lease Liability = Present Value of Fixed Annual Lease Payments
Present Value of Fixed Annual Lease Payments = $90,000 * (1 - 1 / (1 + 0.10)^4) / 0.10
The initial measure of the lease liability is $281,526.
The right-of-use asset is initially measured as the sum of the lease liability and any initial direct costs incurred by ABC Ltd. In this case, ABC Ltd incurs direct costs of $12,000 at the commencement of the lease term.
Right-of-Use Asset = Lease Liability + Initial Direct Costs
Right-of-Use Asset = $281,526 + $12,000
The initial measure of the right-of-use asset is $293,526.
The related accounting journal entry would be as follows:
DR Right-of-Use Asset $293,526
DR Lease Liability $281,526
CR Cash $12,000
The lease payment schedule can be prepared based on the fixed annual lease payments. The payment schedule will include the payment amount, the interest portion, and the reduction of the lease liability.
The lease payment schedule for the four-year lease would look like this:
Year | Payment Amount | Interest Expense | Lease Liability Reduction
2023 | $90,000 | $28,153 | $61,847
2024 | $90,000 | $24,002 | $65,998
2025 | $90,000 | $19,420 | $70,580
2026 | $90,000 | $14,308 | $75,692
Please note that the interest expense is calculated by multiplying the beginning lease liability balance by the lessee's incremental borrowing rate of 10%, and the reduction of the lease liability is the difference between the payment amount and the interest expense.
Each year, the lease liability is reduced, reflecting the payment made by ABC Ltd, and the interest expense decreases as the outstanding balance of the lease liability decreases over time.
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Consider the first-price sealed-bid auction with one (indivisible) object and n > 1 bidders. Each bidder i observes only her value vi, which is uniformly and independently distributed on [0, 1]. Each bidder i simultaneously submits her bid bi > 0. The bidder with the highest bid wins the object and pays the price equal to her own bid. If there are multiple bidders with the highest bid, one of them will be chosen as the winner with equal probability. The winner's payoff is vi — bị. If a player does not win, her payoff is zero.
(a) Find a Bayesian Nash equilibirum. You need to show your work. [Hint: You can look at a scenario where each bidder i uses a strategy bi = av; where a > 0.
(b) How does the equilibrium strategy depend on n? Discuss.
(a) In this auction, each bidder has an incentive to bid as high as possible, since the winner pays the price of their bid. However, if all bidders bid their true value, then the winner will always be the bidder with the highest value, and all other bidders will lose. This means that each bidder has an incentive to bid slightly lower than their true value, in order to increase their chances of winning.
The equilibrium strategy in this auction is for each bidder to bid b = a*v, where a is a constant that is less than 1. This means that each bidder bids a fraction of their true value. The value of a depends on the number of bidders. Intuitively, a larger number of bidders means that there is a greater chance of multiple bidders bidding the same amount, which means that the winner is chosen at random. This means that each bidder has a lower chance of winning, which means that they can afford to bid a lower fraction of their true value.
To find the value of a, we can consider the expected payoff of a bidder. The expected payoff is the probability of winning multiplied by the payoff if the bidder wins, plus the probability of losing multiplied by the payoff if the bidder loses. The probability of winning is equal to the probability that the bidder bids the highest amount, which is equal to the probability that all other bidders bid less than a*v. The probability of losing is equal to the probability that the bidder does not bid the highest amount, which is equal to 1 minus the probability of winning.
The payoff if the bidder wins is equal to the bidder's value minus the amount they bid. The payoff if the bidder loses is zero.
The expected payoff is then:
E[Payoff] = (Probability of winning) * (Payoff if winning) + (Probability of losing) * (Payoff if losing)
= (Probability that all other bidders bid less than av) * (v - av) + (1 - Probability that all other bidders bid less than a*v) * 0
= (1 - Probability that at least one other bidder bids av) * (v - av)
The probability that at least one other bidder bids an av is equal to the probability that at least one other bidder has a value of at least av. The probability that a bidder has a value of at least av is equal to the area under the uniform distribution from av to 1.
The area under the uniform distribution from av to 1 is equal to (1 - av).
Therefore, the expected payoff is:
E[Payoff] = (1 - (1 - a*v)) * (v - a*v)
= a*v^2 - a*v
We can set the derivative of the expected payoff equal to zero to find the value of a that maximizes the expected payoff.
dE[Payoff]/da = 2*a*v - 1 = 0
a = 1/2*v
This means that the equilibrium strategy in this auction is for each bidder to bid b = av, where a = 1/2v.
(b) The equilibrium strategy depends on n in the following way: as n increases, decreases. This is because a larger number of bidders means that there is a greater chance of multiple bidders bidding the same amount, which means that the winner is chosen at random. This means that each bidder has a lower chance of winning, which means that they can afford to bid a lower fraction of their true value.
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i) The ABC Corporation is trying to determine the effect of its inventory turnover ratio and days sales outstanding (DSO) on its cash flow cycle. ABC’s 2020 sales (all on credit) were $150,000, and it earned a net profit of 6 percent, or $9,000. It turned over its inventory 6 times during the year, and its DSO was 36.5 days. The firm had fixed assets totaling $35,000. ABC’s payables deferral period is 40 days.
a. Calculate ABC’s cash conversion cycle. b. Assuming ABC holds negligible amounts of cash and marketable securities, calculate its total assets turnover and ROA. c. Suppose ABC’s managers believe that the inventory turnover can be raised to 7.3 times. What would ABC’s cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 7.3 for 2020?
ii) What do you mean by operating efficiency? How does it affect working capital?
i) ABC's total asset turnover is 4.29 times, ROA is 25.7%, and its cash conversion cycle is -3.5 days. Inventory turnover would rise to 7.3 times, cash conversion cycle to 6.5 days, total asset turnover to 4.71 times, and ROA to 28.6%.
ii) Operating efficiency is the ability to produce goods or services with high quality while minimizing costs, thus reducing capital requirements and increasing liquidity.
i)
a. ABC’s cash conversion cycle is calculated by subtracting the payables deferral period from the DSO, which gives 36.5 - 40 = -3.5 days.
b. ABC’s total assets turnover is calculated by dividing net sales by total assets, which gives $150,000/$35,000 = 4.29 times.
Its ROA is calculated by dividing net profit by total assets, which gives
$9,000/$35,000 = 0.257 or 25.7%.
c. If ABC raised its inventory turnover to 7.3 times, its cash conversion cycle would be -6.5 days, its total assets turnover would be 4.71 times, and its ROA would be 0.286 or 28.6%.
ii)
The ability of a company to produce goods or services at a cheap cost while retaining high quality is known as operating efficiency. It is accomplished by resource management, planning, and utilisation that is effective.
Because less capital is needed to produce goods or services, operating efficiency directly affects working capital. As fewer assets are entangled in the production process, it also aids in boosting liquidity.
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Share your understanding about the powers and
structure of the board of directors in a corporate entity. To whom
they are accountable and how?
please explain briefly
The two types of directors that are most frequently found on boards of directors are outside directors and inside directors, who have the ability to render objective judgements. A Chief Executive Officer (CEO), a Chief Financial Officer (CFO), and a Chief Operations Officer (COO) are typically found at the top of management teams.
In accordance with management objectives and the maximisation of shareholders' benefit within the framework of sound business ethics while taking into account the benefits of all stakeholder groups, the Board of Directors is responsible to shareholders for the company's business operations and corporate governance.
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In some Australian cities there is a weekly pattern to petrol prices. Most service
stations offer the lowest price for the week on a particular evening (e.g. every
Wednesday). What do you think might cause this? Should it be allowed?
In some Australian cities, a weekly pattern to petrol prices can be observed where most service stations offer the lowest price for the week on a particular evening, such as every Wednesday. This phenomenon might be caused by factors like market competition, consumer behavior, and promotional strategies.
Market competition plays a significant role as service stations compete with each other to attract customers by offering lower prices on specific days. Consumer behavior also contributes to this pattern, as people may prefer to fill their tanks on a particular day due to lower prices, leading to an increase in demand.
Service stations may also use promotional strategies to encourage more sales, such as advertising lower prices on a specific day to attract customers.
As for whether this practice should be allowed, it can be argued that it is a legitimate business strategy that benefits consumers by providing lower prices at certain times. However, some might argue that this practice could lead to price manipulation or unfair competition.
Therefore, it is essential for regulatory authorities to monitor such practices to ensure that they do not violate any competition laws or consumer protection regulations.
In conclusion, the weekly pattern of petrol prices in some Australian cities can be attributed to market competition, consumer behavior, and promotional strategies. While it offers benefits to consumers, it is crucial for authorities to monitor this practice to ensure fair competition and consumer protection.
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Lana Cakes has decided to price its new range of cheesecakes at a premium price as it is using high-quality cheese imported from New Zealand and taste tests with consumers have confirmed that these cakes are unique in its taste yet low in calories? Which pricing approach has Lana Cakes adopted?
1.Cost-based pricing
2.Value-based pricing
3.Competition-based pricing
4.Customer-based pricing
Lana Cakes has adopted the pricing approach of 2. Value-based pricing.
By pricing their new range of cheesecakes at a premium price based on the high-quality imported cheese from New Zealand and the unique taste combined with low calories, Lana Cakes is employing a value-based pricing strategy. Value-based pricing focuses on setting prices based on the perceived value of the product or service to the customers.
In this case, Lana Cakes recognizes that their cheesecakes offer a distinct and desirable taste that sets them apart from competitors. Additionally, the fact that the cakes are low in calories adds further value to health-conscious consumers. By emphasizing the unique taste and health benefits, Lana Cakes creates a perception of higher value for their cheesecakes, allowing them to justify a premium price.
Value-based pricing takes into account the customers' perception of the product's value rather than solely relying on production costs or competitive pricing. It aims to capture the willingness of customers to pay for the unique benefits and attributes provided by the product, in this case, the high-quality ingredients and taste.
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All of the following are conditions commonly found in the insurance policy EXCEPTa)Appraisal. b)Insuring agreement. c)Cancellation and nonrenewal.
All the terms mentioned - Appraisal, Insuring Agreement, and Cancellation and Nonrenewal - are conditions commonly found in insurance policies. The correct option question is d) None of the above.
The insurance policy is a legal document that outlines the terms and conditions of an insurance contract between the policyholder and the insurance company.
Appraisal refers to a process for resolving disputes between the insured and insurer regarding the value of a claim. This is usually done by hiring a neutral third-party appraiser to assess the situation and provide an impartial valuation.
Insuring Agreement is the primary section of an insurance policy that outlines the coverage provided by the insurer to the insured. This agreement defines the scope of protection, the insured risks, the policy limits, and other essential details.
Cancellation and Nonrenewal are conditions in insurance policies that explain the terms and procedures for ending the insurance contract. Cancellation refers to the termination of the policy before its expiration date, while nonrenewal implies that the insurer does not intend to renew the policy once it reaches its expiration date.
All these terms are crucial aspects of insurance policies that help both parties understand their rights, obligations, and procedures to follow in various circumstances. The correct option question is d) None of the above.
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Company K which is an Austrian Company operating in South Africa all decisions are made by the Head Vienna, Austria What kind of decision making mentioned below does the company practice O A. Informal O B. Centralized OC. Tactical D. Decentralized
Company K which is an Austrian Company operating in South Africa all decisions are made by the Head Vienna, Austria. The company practices Centralized decision making here. Option B is the correct answer.
When planning and decision-making tasks are concentrated in one person or area within an organization, this is referred to as centralization. The head office retains the authority to make decisions in an organization that is centralized, and all subordinate offices follow orders from the main office. Option B is the correct answer.
Companies that prioritize their production strategy and work to save costs would benefit most from centralized management. A centralized organizational structure may occasionally prevent input from other parties, including an executive management team, while making decisions. For private businesses with a focused profit strategy, like a regional grocery store chain, this type of structure could even be more efficient.
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Which of the following factors influence a firm's optimal payout ratio?
a. Management's opinion about its investors' preferences for dividends versus capital gains
b. Availability and cost of external capital
c. A firm's investment opportunities
d. All of the factors above.
e. None of these factors.
The proper main answer statement is d. All of the factors above. A firm's optimal payout ratio is influenced by all of the factors mentioned in the options. Each factor plays a role in determining the appropriate level of dividends to be distributed to shareholders.
All of the factors mentioned in the options can influence a firm's optimal payout ratio. Let's break down each factor:
a. Management's opinion about its investors' preferences for dividends versus capital gains: Management's understanding of investors' preferences for dividends versus capital gains can affect the decision to distribute profits as dividends or reinvest them back into the company.
b. Availability and cost of external capital: If external capital is readily available and at a lower cost, the firm may choose to retain more earnings and rely on external financing for investment opportunities, resulting in a lower payout ratio. Conversely, if external capital is expensive or limited, the firm may opt for higher dividend payouts.
c. A firm's investment opportunities: The availability of attractive investment opportunities can influence the payout ratio. If the firm has numerous profitable investment opportunities, it may retain more earnings for reinvestment, leading to a lower payout ratio.
Considering all these factors, (d) All of the factors above are important considerations in determining a firm's optimal payout ratio.
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"If the Generalized Lorenz curve of distribution X lies below throughout the Generalized Lorenz curve of distribution Y, then distribution X reflects unanimously higher headcount ratio than distribution Y for all poverty lines."
"true" or "false" providing detailed explanations to justify your answer.
The statement is false. The position of the Generalized Lorenz curve (GLC) relative to another GLC does not directly imply that one distribution has unanimously higher headcount ratios than the other for all poverty lines.
The Generalized Lorenz curve represents the cumulative distribution of income or wealth within a population. It provides information about income or wealth inequality. However, the headcount ratio measures the proportion of the population living below a specific poverty line.
While the GLC can give insights into overall inequality, it does not provide specific information about poverty rates or headcount ratios. The GLC primarily focuses on the distribution of income or wealth across the entire population.
To compare headcount ratios for different distributions, we need to examine poverty lines directly and analyze the income or wealth distribution at those specific levels. Merely comparing the positions of the GLCs does not provide enough information to determine which distribution has higher headcount ratios for all poverty lines.
Therefore, the statement is false. The relative position of the GLCs does not indicate that distribution X reflects unanimously higher headcount ratios than distribution Y for all poverty lines. Further analysis is needed to assess poverty rates accurately.
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Suppose that a portfolio consists of two assets A and B whose returns are given by RA = RM + UA and RB = 2RM + up, where RM is the market return, which is uncertain, and where uд and up are uncorrelated shocks with expected value of zero and variance of 0.01.
Suppose RM has expected value of 0.05 and a variance of 0.01. Calculate the expected return and variance of both assets A and B.
The expected return and variance of both assets A and B are 5.5% and 0.01% for asset A, and 10.5% and 0.04% for asset B.
The expected return of an asset is the weighted average of its possible returns, where the weights are the probabilities of each outcome. The variance of an asset is the measure of how much its returns deviate from its expected return. To calculate the expected return and variance of assets A and B, we need to use the following formulas:
Expected return = Return x Probability
Variance = Probability x (Return - Expected return)^2
For asset A, the return is given by RA = RM + UA, where RM is the market return with an expected value of 0.05 and a variance of 0.01, and UA is an uncorrelated shock with an expected value of zero and a variance of 0.01. Since UA has an expected value of zero, we can assume that its probability is 0.5. Therefore, we can calculate the expected return and variance of asset A as follows:
Expected return = 0.05 + 0.01 x 0.5 = 0.055 or 5.5%
Variance = 0.5 x (0.05 + 0.01 - 0.055)^2 + 0.5 x (0.05 - 0.01 - 0.055)^2
Variance = 0.0001 or 0.01%
For asset B, the return is given by RB = 2RM + UP, where RM is the same market return as above, and UP is another uncorrelated shock with an expected value of zero and a variance of 0.01. Since UP has an expected value of zero, we can assume that its probability is 0.5 as well. Therefore, we can calculate the expected return and variance of asset B as follows:
Expected return = 2 x 0.05 + 0.01 x 0.5 = 0.105 or 10.5%
Variance = 0.5 x (2 x 0.05 + 0.01 - 0.105)^2 + 0.5 x (2 x 0.05 - 0.01 - 0.105)^2
Variance = 0.0004 or 0.04%
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