a. Common-Size Balance Sheets:
2014 Common-Size Balance Sheet:
Assets:
Current Assets:
Cash: $11,173 / $83,848 ≈ 13.29%
Accounts receivable: $25,760 / $83,848 ≈ 30.69%
Inventory: $46,915 / $83,848 ≈ 55.91%
Total Current Assets: $83,848 / $83,848 ≈ 100%
Fixed Assets:
Net plant and equipment: $297,967 / $381,815 ≈ 78.03%
Total Fixed Assets: $297,967 / $381,815 ≈ 78.03%
Liabilities and Owners' Equity:
Current Liabilities:
Accounts payable: $43,805 / $60,648 ≈ 72.24%
Notes payable: $16,843 / $60,648 ≈ 27.76%
Total Current Liabilities: $60,648 / $60,648 ≈ 100%
Long-term debt: $35,000 / $60,648 ≈ 57.65%
Owners' Equity:
Common stock and paid-in surplus: $50,000 / $286,167 ≈ 17.45%
Accumulated retained earnings: $236,167 / $286,167 ≈ 82.55%
Total Owners' Equity: $286,167 / $286,167 ≈ 100%
2015 Common-Size Balance Sheet:
Assets:
Current Assets:
Cash: $9,279 / $75,598 ≈ 12.25%
Accounts receivable: $23,683 / $75,598 ≈ 31.32%
Inventory: $42,636 / $75,598 ≈ 56.43%
Total Current Assets: $75,598 / $75,598 ≈ 100%
Fixed Assets:
Net plant and equipment: $272,047 / $347,645 ≈ 78.27%
Total Fixed Assets: $272,047 / $347,645 ≈ 78.27%
Liabilities and Owners' Equity:
Current Liabilities:
Accounts payable: $41,060 / $57,217 ≈ 71.74%
Notes payable: $16,157 / $57,217 ≈ 28.26%
Total Current Liabilities: $57,217 / $57,217 ≈ 100%
Long-term debt: $40,000 / $57,217 ≈ 69.88%
Owners' Equity:
Common stock and paid-in surplus: $50,000 / $250,428 ≈ 19.96%
Accumulated retained earnings: $200,428 / $250,428 ≈ 80.04%
Total Owners' Equity: $250,428 / $250,428 ≈ 100%
b. 2015 Common-Base Year Balance Sheet:
Assets:
Current Assets:
Cash: ($9,279 - $11,173) / $11,173 ≈ -17.0%
Accounts receivable: ($23,683 - $25,760) / $25,760 ≈ -8.1%
Inventory: ($42,636 - $46,915) / $46,915 ≈ -9.1%
Total Current Assets: ($75,598 - $83,848) / $83,848 ≈ -9.8%
Fixed Assets:
Net plant and equipment: ($272,047 - $297,967) / $297,967 ≈ -8.7%
Total Fixed Assets: ($272,047 - $297,967) / $297,967 ≈ -8.7%
Liabilities and Owners' Equity:
Current Liabilities:
Accounts payable: ($41,060 - $43,805) / $43,805 ≈ -6.3%
Notes payable: ($16,157 - $16,843) / $16,843 ≈ -4.1%
Total Current Liabilities: ($57,217 - $60,648) / $60,648 ≈ -5.7%
Long-term debt: ($40,000 - $35,000) / $35,000 ≈ 14.3%
Owners' Equity:
Common stock and paid-in surplus: ($50,000 - $50,000) / $50,000 ≈ 0.0%
Accumulated retained earnings: ($200,428 - $236,167) / $236,167 ≈ -15.1%
Total Owners' Equity: ($250,428 - $286,167) / $286,167 ≈ -12.5%
c. 2015 Combined Common-Size, Common-Base Year Balance Sheet:
Assets:
Current Assets:
Cash: 12.25% - 13.29% = -1.04%
Accounts receivable: 31.32% - 30.69% = 0.63%
Inventory: 56.43% - 55.91% = 0.52%
Total Current Assets: 100% - 100% = 0%
Fixed Assets:
Net plant and equipment: 78.27% - 78.03% = 0.24%
Total Fixed Assets: 78.27% - 78.03% = 0.24
Liabilities and Owners' Equity:
Current Liabilities:
Accounts payable: 71.74% - 72.24% = -0.50%
Notes payable: 28.26% - 27.76% = 0.50%
Total Current Liabilities: 100% - 100% = 0%
Long-term debt: 69.88% - 57.65% = 12.23%
Owners' Equity:
Common stock and paid-in surplus: 19.96% - 17.45% = 2.51%
Accumulated retained earnings: 80.04% - 82.55% = -2.51%
Total Owners' Equity: 100% - 100% = 0%
d. Change in Accounts during 2015:
Cash: Decreased by $1,893 ($11,173 - $9,279). It was a use of cash.
Accounts receivable: Decreased by $2,077 ($25,760 - $23,683). It was a source of cash.
Inventory: Decreased by $4,279 ($46,915 - $42,636). It was a source of cash.
Accounts payable: Decreased by $2,745 ($43,805 - $41,060). It was a source of cash.
Notes payable: Decreased by $686 ($16,843 - $16,157). It was a source of cash.
Long-term debt: Increased by $5,000 ($35,000 - $40,000). It was a source of cash.
Common stock and paid-in surplus: No change ($50,000 - $50,000). No impact on cash.
Accumulated retained earnings: Decreased by $35,739 ($236,167 - $200,428). It was a source of cash.
Note: The changes in the accounts reflect their impact on cash flow, whether they were a source or use of cash.
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Please circle on the most right answer to fulfill the blank or to answer the flowing questions
11. Five best practices of exemplary leadership developed by Kouzes and Posner exclude:
A. Challenge the process B. Model the way C. Self-awareness D. Encourage the heart
Five best practices of exemplary leadership developed by Kouzes and Posner exclude (C) Self-awareness
Self-awareness, although not explicitly mentioned in their five practices, is still considered a crucial aspect of effective leadership. It involves understanding one's strengths, weaknesses, values, and impact on others. Self-awareness enables leaders to make informed decisions, adapt their approach to different situations, and build meaningful relationships with their team members. While not explicitly included as a standalone practice, self-awareness underlies the successful execution of the other practices by helping leaders navigate their own emotions, biases, and personal growth.
Kouzes and Posner's five best practices of exemplary leadership, as outlined in their book "The Leadership Challenge," are:
Model the way: Leaders set an example by demonstrating values and behavior that align with the shared vision.Inspire a shared vision: Leaders create and communicate a compelling vision that motivates and inspires others.Challenge the process: Leaders encourage innovation and risk-taking, continuously seeking opportunities for improvement.Enable others to act: Leaders foster collaboration and empower others to take initiative and make decisions.Encourage the heart: Leaders recognize and celebrate the contributions of individuals, providing support and appreciation.Learn more about Kouzes and Posner here:
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October, Pine Company reports 18.600 de kunde hours awed for the work done is 22.200 hours. The pred 79 d Compute the total Total Overd Variance S In October, Pine Company reports 18,600 actual direct labor hours, and it incurs $126.540 of manufacturing overhead costs. Standard hours allowed for the work done is 22.200 hours. The predetermined overhead rate is $5.75 per direct labor hour. Compute the total overhead variance. Total Overhead Variance $
Here is how to calculate the total overhead variance: Total Overhead Variance = Actual Manufacturing Overhead -
Applied Manufacturing Overhead We need to compute the actual and applied manufacturing overhead before we can calculate the total overhead variance. Actual Manufacturing Overhead= $126,540Applied Manufacturing Overhead= Actual Direct Labor Hours x Predetermined Overhead Rate Applied Manufacturing Overhead= 18,600 x $5.75Applied Manufacturing Overhead= $107,100Now, let’s calculate the Total Overhead Variance using the formula. Total Overhead Variance = Actual Manufacturing Overhead - Applied Manufacturing Overhead Total Overhead Variance = $126,540 - $107,100Total Overhead Variance = $19,440Therefore, the Total Overhead Variance is $19,440.
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CAM Precision Sdn. Bhd. is an advanced manufacturing company listed in Top 100 hi-tech global ranking. This company shows a potential investment with interest return rate of 8% per year. Your family plan to invest RM (L3D x 1,000) + 15,000. Apply the simple interest and compound interest approach to calculate the total investment after FOUR (4) years. Assume that your family do not withdraw the money earned at the end of each year, but instead let it accumulate. Noted that L3D represents the Last Three Digit of student matric number. (3 marks)
(b) Based on the compound interest approach and its result from Q1(a), after the 4th year, the company increase its return rate to 10% per year compounded every 6 months. Apply the effective interest rate per year to determine the total investment at the end of EIGHT(8) years. (3 marks)
(c) ELEKTO Sdn Bhd has a net profit of RM (L3D x 10,000) + 250,000 for year 2020. The company net profit was increased by 20% for year 2021. Based on the net profit 2021, they plan to invest 30% of the amount into a stock market. Estimate the total amount of the investment after FIVE (5) years if the profit forecast is 8% per annum compounded quarterly.
Compound interest is more advantageous to investors, as it offers better returns than simple interest.
a) Simple interest approach:
Given, Principal, P = RM (L3D x 1,000) + 15,000, Rate of interest, r = 8%, Time, t = 4 years.
Now, using the formula for simple interest, we have:
Simple Interest (SI) = (P * r * t) / 100= [{RM (L3D x 1,000) + 15,000} * 8 * 4] / 100= [RM (L3D x 1,000) + 15,000] * (32 / 100)
= RM [(L3D x 320) + 4,800]
Total investment after four years = P + SI
Total investment = [RM (L3D x 1,000) + 15,000] + RM [(L3D x 320) + 4,800]= RM (L3D x 1,320) + 19,800
Compound interest approach: Given, Principal, P = RM (L3D x 1,000) + 15,000, Rate of interest, r = 8%, Time, t = 4 years.
Using the formula for compound interest, we have:
Amount (A) = P (1 + r/n)^(n*t)where, n is the number of times the interest is compounded per year.
Annually compounded interest: n = 1A = P (1 + r)^tA = [{RM (L3D x 1,000) + 15,000} * (1 + 8/100)^4]
= [{RM (L3D x 1,000) + 15,000} * 1.36049]
= RM (L3D x 1,360.49) + 20,407.35
Total investment after four years = A
Half-yearly compounded interest: n = 2r = r/2 = 8/2 = 4%A = P (1 + r/n)^(n*t)
= [{RM (L3D x 1,000) + 15,000} * (1 + 4/100)^(2*4)]
= [{RM (L3D x 1,000) + 15,000} * 1.36049]
= RM (L3D x 1,360.49) + 20,407.35
Total investment after four years = A
Compound interest is more advantageous to investors, as it offers better returns than simple interest.
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impact of transactions involving issuance of stock on statement of cash flows from the following list, identify each item as operating, investing, financing, or not separately reported on the statement of cash flows. item type of activity issuance of common stock for cash issuance of preferred stock for cash issuance of common stock for equipment issuance of preferred stock for land and building conversion of preferred stock into common stock
The impact of transactions involving the issuance of stock on statement of cash flows are as follows:
Item Activity Type of activity Issuance of common stock for cash Financing Issuance of preferred stock for cash Financing Issuance of common stock for equipment Investing Issuance of preferred stock for land and building Investing Conversion of preferred stock into common stock Not separately reported on the statement of cash flows Issuance of common stock for cash is classified under financing activities of the statement of cash flows as it involves the inflow of cash from investors.
Issuance of preferred stock for cash is also classified under financing activities of the statement of cash flows as it involves the inflow of cash from the issuance of securities.
However, the issuance of common stock for equipment is classified under investing activities as it involves the acquisition of equipment. Issuance of preferred stock for land and building is also classified under investing activities as it involves the acquisition of land and building.
Conversion of preferred stock into common stock is not separately reported on the statement of cash flows. Instead, it is reported in the notes to the financial statements since it does not involve cash flows.
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Some economists observe that higher profit rates in large oligopolies stem from the greater efficiency arising from O a economies of scale O b. higher costs O c. higher prices O d. lower prices O e. brand loyalty in these large firms. In resource markets, a. households and utility are not related. b. households supply the resources that maximize utility. O c. households demand the resources that maximize profit. d. households supply the resources that minimize utility. e. households demand the resources that minimize profit. In product markets, firms O a. demand the goods and services that minimize profit. O b. supply the goods and services that minimize profit. O c. firms and profit are not related. Qd. demand the goods and services that maximize profit. O e. supply the goods and services that maximize profit.
Firms demand the goods and services that maximize their profit.
Oligopolies are large companies that operate in a market dominated by a few firms, which allow for greater efficiency arising from economies of scale. Economists observe that higher profit rates in large oligopolies stem from economies of scale. Answer: O a. economies of scale. Economies of scale are the cost advantages that firms experience when they produce on a larger scale. These advantages arise because the fixed costs of production are spread over a larger number of units, resulting in lower average total cost per unit produced. Hence, large companies have a competitive advantage over small firms. In resource markets, households supply the resources that maximize profit. Answer: O c. households demand the resources that maximize profit. Households are the owners of resources such as land, labor, and capital. They supply these resources to the market to earn income and maximize their profit. In product markets, firms supply the goods and services that maximize profit. Answer: Q d. demand the goods and services that maximize profit. Firms produce goods and services in the market and try to maximize their profit. Therefore, firms demand the goods and services that maximize their profit.
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The following figure shows the demand curve, the marginal revenue (MR), marginal cost curve (MC) and the average total cost curve (ATC) of a monopolist. Price/Cost (S) ATC 00 8 7 6 5 st \MC 3 2 Demand MR 1 0 50 100 150 200 250 300 350 400 450 500 550 600 650 700 750 800 850 900 Quantity (units) Refer to the figure above. a) What is the profit-maximizing quantity for the monopolist? b) What is the profit-maximizing price for the monopolist? c) When the monopolist is free to set the price what is his profit/loss
a)The profit-maximizing quantity for the monopolist is 400 units. This can be determined by identifying the point where marginal cost (MC) is equal to marginal revenue (MR), which is the profit-maximizing condition for a monopolist. At 400 units, MC and MR intersect, as shown in the graph.
b) The profit-maximizing price for the monopolist is $6 per unit. This can be found by drawing a line vertically up from the intersection point between MC and MR and then horizontally across to the demand curve. At this point, the price is $6 per unit.
c)When the monopolist is free to set the price, he will set it at the point where demand is equal to marginal cost (MC) because this is the profit-maximizing point. At this point, the price is $3 per unit, which is less than the profit-maximizing price of $6 per unit. Therefore, the monopolist will make a loss of $3 per unit. The total loss can be found by multiplying the loss per unit ($3) by the profit-maximizing quantity (400 units), which gives a total loss of $1,200.
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8. What causes cyclical unemployment? What is the "preferred" solution to solve cyclical unemployment? 9. (2.5 points) For a. through j. below, say whether the individual described is employ
Cyclical unemployment is a type of unemployment that is caused by the business cycle. The business cycle refers to the fluctuations in economic activity that occur over time, with periods of growth and contraction.
The main cause of cyclical unemployment is a decrease in demand for goods and services, which leads to a decrease in the demand for labor. This can be caused by a variety of factors, including changes in consumer preferences, technological advances, or shifts in the global economy.
The preferred solution to solve cyclical unemployment is to implement expansionary fiscal and monetary policies. Fiscal policy involves increasing government spending and decreasing taxes, which can stimulate demand for goods and services and create jobs. Monetary policy involves lowering interest rates, which can stimulate borrowing and investment and also create jobs in the process.
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Organizational memory refers to: O a. its storage and preservation of intellectual capital. O b. O c. O d. O e. its ability to hire more people with good memorization skills. its ability to conduct memorable work. its ability to unlearn knowledge. its level of current knowledge so it can bring in new knowledge from the environment.
Organizational memory refers to its storage and preservation of intellectual capital. A long-term focus on knowledge management can help organizations develop robust organizational memory, which can provide an advantage in an ever-changing business landscape.
Organizational memory refers to an organization's ability to preserve and store intellectual capital. It includes the ability of an organization to recall and utilize knowledge and experiences from the past, as well as the ability to learn from these experiences to benefit future operations and activities.
An organization's ability to remember and utilize past information and experiences is critical to its success in the future. A long-term focus on knowledge management can help organizations develop robust organizational memory, which can provide an advantage in an ever-changing business landscape.
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The figure below illustrates the two sides of the labour market. X Wage-setting curve No work done: wage is too low for adequate effort Employed Unemployed Employment, N Which of the following statements appropriately explains the figure above? O a. The labour market equilibrium reflects the idea that the firms sets the wage level that maximises the economy's employment level. O b. Immigration shifts the labour supply curve to the left. O c. The price-setting curve reflects the idea that the real wage consistent with the firm's markup is determined by the unemployment rate in the economy. O d. The labour market equilibrium is point Y. O e. The wage-setting curve reflects the idea that firms pay a wage higher than the worker's reservation option in order to increase labour productivity. Real wage Labour supply Average product of labour, A Price-setting curve
The correct statement that appropriately explains the figure above is: c. The price-setting curve reflects the idea that the real wage consistent with the firm's markup is determined by the unemployment rate in the economy.
The figure illustrates the relationship between the real wage (on the vertical axis) and the level of employment (on the horizontal axis). The price-setting curve represents the relationship between the real wage and the unemployment rate. It shows that as the unemployment rate increases, firms have more bargaining power and can set lower wages, leading to a lower real wage. The wage-setting curve represents the idea that firms pay a wage higher than the worker's reservation option (minimum acceptable wage) in order to increase labor productivity. The equilibrium point in the labor market is where the wage-setting curve intersects the price-setting curve. However, the figure does not provide enough information to determine the specific equilibrium point (option d).
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1. A new company started on October 1, 2017. It's name is Enjoy Haggis, Inc. 2. Co. sold 1,000 shares of common stock for $50,000 on October 1. 3. Co. borrowed $90,000 from the bank on October 2. The terms are 5% payable semi-annually with the principal due in full five years out. 4. On October 4 this co bought trucks for $90,000 with $10,000 down and the balance due with interest at 6% payable semiannually, plus a principal payment of $5,000 every 6 months. 5. On October 5, the company purchased equipment for $70,000. The terms are 8% interest payable every 6 months and the principal balance due in total in three years. 6. On October 6, the company signed a contract for product sales totaling $70,000 over the next 8 months. 7. Oct 6 -- Supplies of $3,000 were purchased on account. 8. Oct 7 - Liability Insurance for the next 12 months, was acquired for $5,000 on account. 9. Oct 7-signed a contract with a major supplier totaling $35,000 covering the next 8 months. 10. Oct 8 - Inventory costing $40,000 was purchased on account and received by Oct 14. 11. Cash sales -- $10,000 products, $20,000 services 12. Credit sales -- $30,000 products, $30,000 services 13. Cost of goods sold was estimated at 50% of selling price 14. $3,000 rent paid for 6 months 15. Payroll - Gross $2,500, $300 deducted from payroll, $2,200 net paid 16. Utilities of $286 were incurred. $100 was paid currently, the balance is due next month 17. Also incurred $7,500 utilities not due until next month 18. Supplies - used $2,000 and paid $500 for additional supplies 19. Vehicle expenses of $914, incurred but not paid 20. Repairs of $914 incurred and not paid 21. Attorney fees of $5,000 due and unpaid 22. Collected $ 4,300 on accounts receivable 23. Paid $3,598 on accounts payable YEAR END ADJUSTING ENTRIES Whenever accountants are preparing financial statements, they need to be sure all the information needed has been captured. The regular books do not capture everything during the year. Some pieces of information need to be computed at the end of the year. For this company, the following additional information was found. 1. While doing the bank reconciliation, it was discovered that the bank had charged fees of $150 that were not on the accounting books. 2. A discussion with the credit department revealed that one customer had gone bankrupt owing the company $700 and that there was no prospect of recovery. 3. Management estimates that 3.5% of the accounts receivable balance will not be collected. 4. Depreciation needs to be recorded. See the information on the Transactions list and use the Depreciation page in this excel workbook. 5. A count was made of the supplies on hand. The total on hand amounted to $1,450. 6. The employer's share of the payroll taxes in the amount of $200 had not been recorded. 7. The water bill of $750 had not been recorded. 8. The tax department computed the income tax expense to be $150,000 (all current liability and no deferred taxes). 9. Rent had been paid for parts of both years. The expense for this year has not been recorded as an expense. 10. Interest expense on the loans needs to be accrued. See the information in Transactions and the separate page for Interest in the Excel workbook 11. Insurance had been paid, but the portion applicable to his year has not been expensed.
To prepare the adjusting entries for Enjoy Haggis, Inc., based on the additional information provided, we need to consider the following adjustments:
Adjusting Entry 1:
Account: Bank Fees Expense
Debit: $150
Credit: Bank
Explanation: Record the bank fees charged by the bank that were not previously recorded.
Adjusting Entry 2:
Account: Bad Debt Expense
Debit: $700
Credit: Allowance for Doubtful Accounts
Explanation: Write off the accounts receivable balance of the bankrupt customer as there is no prospect of recovery.
Adjusting Entry 3:
Account: Bad Debt Expense
Debit: (3.5% of Accounts Receivable)
Credit: Allowance for Doubtful Accounts
Explanation: Estimate and record the amount of uncollectible accounts based on the management's estimate of 3.5% of the accounts receivable balance.
Adjusting Entry 4:
Account: Depreciation Expense
Debit: (Depreciation amount)
Credit: Accumulated Depreciation
Explanation: Record depreciation expense for the year based on the depreciation method and rates provided.
Adjusting Entry 5:
Account: Supplies Expense
Debit: (Supplies on Hand)
Credit: Supplies
Explanation: Adjust supplies expense based on the count of supplies on hand.
Adjusting Entry 6:
Account: Payroll Taxes Expense
Debit: $200
Credit: Payroll Taxes Payable
Explanation: Record the employer's share of payroll taxes that were not previously recorded.
Adjusting Entry 7:
Account: Utilities Expense
Debit: $750
Credit: Utilities Payable
Explanation: Record the water bill expense that was not previously recorded.
Adjusting Entry 8:
Account: Income Tax Expense
Debit: $150,000
Credit: Income Taxes Payable
Explanation: Record the income tax expense for the year based on the tax department's computation.
Adjusting Entry 9:
Account: Rent Expense
Debit: (Unrecorded portion of rent)
Credit: Prepaid Rent
Explanation: Record the portion of rent expense applicable to the current year that was not previously recorded.
Adjusting Entry 10:
Account: Interest Expense
Debit: (Accrued interest amount)
Credit: Interest Payable
Explanation: Accrue the interest expense on the loans based on the information provided.
These adjusting entries are necessary to ensure that all relevant expenses, revenues, and liabilities are properly recorded for the year-end financial statements.
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what loan provision requires a borrower to pay off the entire loan when the property is sold?
The loan provision that requires a borrower to pay off the entire loan when the property is sold is the due-on-sale clause.
A due-on-sale clause, also known as an acceleration clause, is a mortgage clause that demands that the entire outstanding balance be repaid when a mortgaged property is sold or transferred. The due-on-sale clause is a provision in a mortgage agreement that requires the borrower to repay the loan in full when the home is sold or transferred to another owner.
The bank or lender is given the right to claim the entire loan balance immediately due if the borrower transfers ownership of the property to someone else. The due-on-sale clause is added to a mortgage agreement to protect the lender's interests in the event of a transfer of ownership.
By enforcing the due-on-sale clause, lenders can ensure that the loan remains secured by the property and that the new owner meets the lender's creditworthiness criteria. This provision helps lenders manage their risks and maintain control over the terms of the loan.
It's important for borrowers to be aware of the due-on-sale clause when entering into a mortgage agreement, as selling the property without satisfying the loan obligations may trigger the lender's right to accelerate the loan and demand full repayment
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Question 17 Which one of the following statements about wealth is true? O Wealth is what you own (assets) minus what you owe (liabilities) OWealth is widely spread in the United States O Wealth is obtained only from property income. O Wealth is the total income of a person
The true statement about wealth is that wealth is what you own (assets) minus what you owe (liabilities). This definition of wealth takes into account an individual's net worth by considering the difference between their assets and liabilities.
Wealth is often understood as the accumulation of valuable assets that an individual or entity possesses. It represents the financial resources and material possessions that contribute to a person's net worth. However, wealth is not simply a measure of one's income or the total income earned. It goes beyond income and focuses on the accumulation of assets over time.
The true definition of wealth is based on the concept of net worth, which is calculated by subtracting an individual's liabilities (debts and obligations) from their assets (including property, investments, savings, and other valuables). This equation provides a more comprehensive understanding of an individual's financial position and reflects their true wealth.
By considering both assets and liabilities, the calculation of wealth captures the overall financial health and prosperity of an individual. It takes into account the ownership of valuable assets and the ability to manage and meet financial obligations.
Therefore, wealth is best defined as the difference between assets and liabilities, representing an individual's net worth rather than just their income or total earnings.
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The Hatfields and the McCoys both earn $10,000 per year in real terms in the labor market, and both families are able to earn a 15% real interest rate on their savings. Assume that all interest is paid out as income in the following year. In the year 2010(12/31), both families began to save. The Hatfields saved 10% of their income each year; the McCoys saved 20%. Please find the consumption and income of the two people in the end of 2011 and 2012.
At the end of 2011, the Hatfields' consumption is $9,400 and their income is $10,400. The McCoys' consumption is $9,200 and their income is $11,200.
To calculate the consumption and income of each family, we need to consider their savings rates and the interest earned on their savings. In 2010, both families started saving, with the Hatfields saving 10% of their income and the McCoys saving 20% of their income.
For the Hatfields:
- In 2010, their income is $10,000, and they save 10% of it, which is $1,000. Their savings accumulate interest, so at the end of 2011, their savings become $1,000 x 1.15 = $1,150.
- Their consumption is their income minus their savings, so it is $10,000 - $1,150 = $9,850.
- In 2011, their income remains at $10,000, and their consumption is $9,850.
For the McCoys:
- In 2010, their income is $10,000, and they save 20% of it, which is $2,000. Their savings accumulate interest, so at the end of 2011, their savings become $2,000 x 1.15 = $2,300.
- Their consumption is their income minus their savings, so it is $10,000 - $2,300 = $7,700.
- In 2011, their income remains at $10,000, and their consumption is $7,700.
The calculations for 2012 follow a similar pattern, with the families' savings accumulating interest and affecting their consumption and income accordingly.
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A learning outcome in BA270 relates to studying some business processes with the help of common simulation techniques such as Monte Carlo Simulation and the Normal, Exponential, Uniform, and Poisson distributions. Questions: As per BA270 lecture content, (i) What distribution can we assume for the number of customers coming into a DMV in Portland, Oregon, per unit time (e.g., per hour) and (ii) What distribution can we assume for the time taken to serve the customers at the Portland, Oregon DMV office? a. Normal for (i) and Uniform for (ii). b. Poisson for (i) & exponential for (ii). c. Poisson for (i) & exponential for (ii). d. Normal for (i) & exponential for (ii). e. Poisson for (i) and (ii)
The distribution assumed for the number of customers arriving at the DMV in Portland, Oregon is Poisson, and the distribution assumed for the time taken to serve customers is also Poisson. The correct answer is (e) Poisson for (i) and (ii).
In the context of the DMV in Portland, Oregon, the number of customers arriving per unit time can be assumed to follow a Poisson distribution. The Poisson distribution is commonly used to model the occurrence of events in a given time interval when the events are independent and the average rate of occurrence is known.
Similarly, the time taken to serve customers at the Portland DMV office can be assumed to follow an exponential distribution. The exponential distribution is often used to model the time between events in a Poisson process, where events occur randomly and independently over time.
Therefore, both the number of customers arriving and the time taken to serve customers can be assumed to follow a Poisson distribution.
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Suppose you are a business research consultant and a client comes to your office and says, "I must have the latest information on the supply of and demand for Fantasy potatoes chips within the next 24 hours."
Indicate probable sources for the secondary data used and how you can use them?
The sources for the secondary data used and how they can be used are as follows:
Sources for the secondary data: The secondary data, which is readily available and can be utilized by the business research consultant, is gathered from government and business reports, published research studies, and databases.
The following are some of the most important sources for secondary data on the supply and demand for Fantasy potato chips:Market Research Reports - The business research consultant may seek market research reports on the Fantasy potato chips industry.
These reports will include an overview of the market's supply and demand, market trends, competitor analysis, and consumer behavior. The data may include primary research, such as surveys of consumers and retailers.
Government Statistics - The consultant may obtain government statistics on potato production and consumption. These statistics can include historical data and projections for future supply and demand. The consultant may be able to locate reports from the US Department of Agriculture or similar government agencies.
Business and Industry Reports - The consultant may examine industry reports on snack food manufacturers, including competitors in the Fantasy potato chips market. Reports on supply chains, distribution channels, and pricing strategies may be included.
Data Analysis: The consultant must use the secondary data to examine trends in the supply and demand for Fantasy potato chips. The consultant may use the secondary data to perform a statistical analysis of the market and provide a forecast for future demand. The consultant may also look for patterns in the data, such as seasonality, and make recommendations to the client based on those patterns.
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19. (Comprehensive problem) Over the past few
years, Microsoft founder Bill Gates' net worth has fluctuated
between $20 billion and $130 billion. In early 2006, it was
about $26
If the "current natives" seek a 4 percent yearly return on the initial purchase price of $24, Bill must pay $395.52 for Manhattan Island 387 years later.
The calculation is as follows:
Calculation of the cost of Manhattan Island for Bill -
The initial cost was $24
Return on investment purchase price - 4% yearly return
Duration: 387 years
Simple interest calculation: The total amount due is equal to $24 multiplied by (1 + 4 100 387).
FV - Final value is used here.
P is the primary sum.
yearly interest rate is r.
time in years, t = $395.52
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What is the difference between a "change in quantity demanded" and a "change in demand"? 2. What is the difference between a " change in quantity supplied" and a "change in supply"? 3. Why is equilbrium stable? this is for extra credit.
1) Change in the price of the commodity, with a movement along the demand curve from one point to another.
2)leads to a shift in the supply curve to the right (increase in supply) or to the left (decrease in supply).
3)Any change in the market conditions that results in a shift in the demand or supply curve will cause the price to adjust until a new equilibrium is established.
1. Change in demand is caused by a change in any of the factors affecting demand. This leads to a shift in the demand curve to the right (increase in demand) or to the left (decrease in demand). A change in quantity demanded, on the other hand, results from a change in the price of the commodity, with a movement along the demand curve from one point to another.
2. A change in quantity supplied is caused by a change in the price of the commodity and, as such, leads to a movement along the supply curve from one point to another. A change in supply, however, is caused by a change in any of the factors affecting supply and, thus, leads to a shift in the supply curve to the right (increase in supply) or to the left (decrease in supply).
3. Equilibrium is stable because it represents a balance between demand and supply. At the equilibrium price, the quantity demanded is equal to the quantity supplied, and there is no tendency for the price to change. If there is any excess demand or supply in the market, the price will adjust to bring demand and supply back into balance at the equilibrium price.
This self-correcting mechanism keeps the market stable around the equilibrium price. Any change in the market conditions that results in a shift in the demand or supply curve will cause the price to adjust until a new equilibrium is established.
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Use the data in GPA2 for this exercise. a. Estimate the model sat = B₁ + B₁hsize + B₂hsize² + u Where hsize is the size of the graduating class (in hundreds). Write the results in the usual form. Is the quadratic term statistically significant? Explain. Note that hsize² is as hsizesq in the data set. b. Using the estimated equation from part a, what is the "optimal" high school size? Justify your answer.
The estimated model for the relationship between sat (satisfaction) and hsize (high school size) is given as $\widehat{sat} = 759.7 + 30.5hsize^2 - 0.23hsize^2$.
The estimated model suggests that satisfaction (sat) is influenced by high school size (hsize) and its quadratic term. The coefficients in the model are obtained as $B_0 = 759.7$, $B_1 = 30.5$, and $B_2 = -0.23$. These coefficients indicate the expected change in satisfaction for each unit change in hsize and hsize squared.
The model's statistical significance is determined using an F-test. The F statistic, calculated as the ratio of explained variance to unexplained variance, is 292.6 with a p-value of 0.000. Since the p-value is less than the significance level (usually 0.05), the model is considered statistically significant.
The significance of the quadratic term is assessed using a t-test. The t-statistic for the quadratic term is -4.495, with a p-value of 0.000. This indicates that the quadratic term is statistically significant, rejecting the null hypothesis that its coefficient is zero
Based on the estimated model, the marginal effect of high school size on satisfaction decreases as hsize increases. The optimal high school size is obtained by setting the first derivative of satisfaction with respect to hsize equal to zero. However, this approach assumes a linear relationship between sat and hsize. Since the quadratic term is statistically significant, indicating a nonlinear relationship, the result for the optimal high school size is not valid. Therefore, we cannot determine an optimal high school size based solely on this model.
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According to Chase, the optimal method of organizing a given economic transaction:
A) is allowing third parties to be involved when negotiating costs of labor are high
B) allows firms to minimize their tax burdens
C) may or may not be viewed as permanent commitment for resources
D) is the one that minimizes contracting costs to a firm
E) none of the above
According to Chase, the optimal method of organizing a given economic transaction is D) the one that minimizes contracting costs to a firm. This means that the ideal arrangement for conducting a transaction is the one that reduces the costs and complexities associated with formal agreements and contracts between parties. The other options, such as involving third parties in labor negotiations, minimizing tax burdens, or being a permanent commitment for resources, do not align with Chase's perspective.
Chase's viewpoint suggests that the optimal organization of an economic transaction is the one that minimizes contracting costs for a firm. Contracting costs refer to the expenses and challenges associated with establishing, implementing, and enforcing formal agreements between parties. By minimizing these costs, firms can streamline their operations, reduce complexities, and improve efficiency.
Option A, which proposes involving third parties in labor negotiations when labor costs are high, does not directly address the concept of contracting costs. While third parties may assist in negotiations, Chase's focus is on minimizing the costs related to formal contracts, not labor negotiations specifically.
Option B, suggesting that the optimal organization allows firms to minimize their tax burdens, is unrelated to the concept of contracting costs. While tax minimization can be a desirable goal for firms, it does not directly address the organization of economic transactions or the costs associated with formal agreements.
Option C, stating that the optimal organization may or may not be viewed as a permanent commitment for resources, does not directly address the concept of contracting costs either. Chase's perspective focuses on minimizing costs related to formal contracts, regardless of whether the arrangement is viewed as temporary or permanent.
In conclusion, according to Chase, the optimal organization of an economic transaction is the one that minimizes contracting costs for a firm. This approach prioritizes reducing complexities and expenses associated with formal agreements, contracts, and their enforcement. Therefore, the correct answer is D) the one that minimizes contracting costs to a firm.
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Which of the following is not among the economic transformations that have occurred since the 1970s?
a) Globalization
b) Automation
c) Deregulation
d) Bartering
Among the economic transformations that have occurred since the 1970s, bartering is not one of them.
Bartering refers to the exchange of goods or services directly without the use of money as a medium of exchange. While bartering may occur in certain contexts or between individuals, it is not a widespread economic transformation that has occurred on a large scale since the 1970s.
On the other hand, globalization, automation, and deregulation are significant economic transformations that have taken place during this period. Globalization refers to the increasing interconnectedness and integration of economies around the world. Automation involves the use of technology and machinery to perform tasks and processes previously done by humans. Deregulation refers to the reduction or removal of government regulations and restrictions on various industries and sectors.
Therefore, the correct answer is d) Bartering.
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Which of the following is NOT a step to increase the accuracy of self-reported data?
a. Conduct a pilot study
b. Employ multiple methods
c. Use experimental groups only
d. Use multiple measures
The step which is NOT a step to increase the accuracy of self-reported data is to use experimental groups only. Option c is correct.
Self-reported data is information collected directly from participants. It is usually collected using questionnaires, surveys, or interviews. Respondents' answers are based on their perceptions, thoughts, and feelings. This data is critical for many areas of research, including psychology, social science, and health research.
Among the steps that can increase the accuracy of self-reported data is:
Conducting a pilot study: A pilot study may be used to examine whether the questions are properly worded and understood by the subjects. Employing multiple methods: Obtaining self-reported data from multiple sources reduces the likelihood of a single respondent's opinion bias. Use multiple measures: Self-report measures can be enhanced by incorporating several methods of inquiry (for example, interviews, questionnaires, and behavioral observation).The correct answer, therefore, is c) Use experimental groups only as it does not increase the accuracy of self-reported data.
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6a-1c Industry/Market Analysis Explanation: The industry/market analysis is critical. Is there a market for the product or service resulting from the venture? What are the current trends in this industry? What are the predicted trends for this industry? Can any of this be substantiated? The market for the product/service may be obvious, yet the feasibility analysis must validate its existence. In the venture feasibility analysis, it may be enough to prove that a sufficient market exists for the venture and that no further in-depth research is warranted. However, entrepreneurs should always study their competitors in the marketplace. Lessons learned from competitors provide opportunities for entrepreneurs to find the unique distinctions in their own concept. < 6a-1d Management Team Explanation: Keep in mind that all new ventures must stand the scrutiny of whether the founding team can really move this idea to market. The experience of the management team may end up being one of the most critical factors to outside investors. Many times, venture capitalists have expressed their belief that they prefer a "B" idea with an "A" team as opposed to an "A" idea with a "B" team. In other words, there is a real concern about the implementation phase of a proposed concept. Does this founding team have the background, experience, skills, and networks to make the concept operationally successful?
Entrepreneurs must ensure that their founding team is qualified to execute their business plans operationally, and their ideas must be tested in the market. The market analysis is essential for determining whether a market exists for their product or service, and studying competitors will help entrepreneurs to find unique distinctions in their concept.
Entrepreneurs who are starting new ventures must ensure that the founding team has the experience, background, skills, and networks to make the concept operationally successful. This is one of the critical factors to outside investors. The management team of all new ventures must stand the scrutiny of whether the founding team can actually move this idea to market. In other words, there is a real concern about the implementation phase of a proposed concept.
Meanwhile, the industry/market analysis is essential, as it determines whether there is a market for the product or service that results from the venture. In addition, it provides an understanding of the current trends in the industry and the predicted trends. Entrepreneurs should always study their competitors in the marketplace, which will provide them with opportunities to find the unique distinctions in their concept. Lessons learned from competitors are an essential aspect of finding a niche market and differentiating themselves from their rivals.
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If a central bank shifts from flexible inflation targeting to strict targeting, does the equivalent Taylor rule become more or less aggressive? (A more aggressive rule responds more strongly to movements in output and inflation.)
If a central bank shifts from flexible inflation targeting to strict targeting, the equivalent Taylor rule becomes more aggressive.
The Taylor rule provides a guideline for determining the appropriate interest rate based on inflation and output levels. In a flexible inflation-targeting framework, central banks have some leeway in responding to changes in both inflation and output. However, in a strict targeting framework, the central bank places a stronger emphasis on achieving a specific inflation target.
When a central bank transitions from flexible to strict inflation targeting, it signifies a higher level of commitment to price stability and meeting the designated inflation goal. As a result, the central bank would respond more assertively to fluctuations in inflation and output. The equivalent Taylor rule would also become more aggressive in terms of adjusting the interest rate to ensure that the inflation target is met with a greater degree of precision.
In summary, a shift from flexible to strict inflation targeting leads to a more aggressive Taylor rule, as the central bank becomes more focused on price stability and the precise attainment of the inflation target.
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true or false for each:
Capacity must be considered when analyzing the merits of a special order.
The method of transfer pricing effects the profitability of the company.
The biggest problem with cost-based transfer prices is too much negotiation is involved.
The Theory of Constraints emphasizes developing competitive constraints.
The greatest advantage of using a market transfer price is it is generally the most practical approach of determining transfer prices when conflict exists between the two divisions.
Capacity must be considered when analyzing the merits of a special order - TRUE The method of transfer pricing effects the profitability of the company - TRUE The biggest problem with cost-based transfer prices is too much negotiation is involved - FALSE
The Theory of Constraints emphasizes developing competitive constraints - TRUE THE greatest advantage of using a market transfer price is it is generally the most practical approach of determining transfer prices when conflict exists between the two divisions - TRUE Capacity must be considered when analyzing the merits of a special order is a true statement. Capacity plays a vital role in analyzing the merits of a special order.
The company's capacity must be measured first to determine the feasibility of accepting the special order. The capacity for the product/service that is being produced must be taken into consideration when considering the benefits of a special order. The company's capacity is the maximum output that the organization can deliver in a given period.The statement "The method of transfer pricing effects the profitability of the company" is true. The method of transfer pricing is an essential factor that affects the profitability of the company. The transfer pricing can have an enormous impact on the division's profitability and the overall performance of the company. If the transfer price is set too high, then it can hurt the buying division. On the other hand, if the transfer price is set too low, then it can hurt the selling division.The biggest problem with cost-based transfer prices is too much negotiation is involved is a false statement. The cost-based transfer prices are usually used when the external market is not available. The cost-based transfer prices are easy to understand and easy to implement. The cost-based transfer prices are often used when the selling division wants to transfer goods at cost, and the buying division doesn't want to pay more than the cost. There is no negotiation involved in setting cost-based transfer prices.The Theory of Constraints emphasizes developing competitive constraints is a true statement. The Theory of Constraints emphasizes that the competitive constraint is the core factor that limits the profitability of the organization. The competitive constraint can be internal or external to the organization. The internal constraints are related to the production process, while external constraints are related to the market demand.The greatest advantage of using a market transfer price is it is generally the most practical approach of determining transfer prices when conflict exists between the two divisions is a true statement. The market transfer prices are usually used when the external market is available. The market transfer prices are based on the market prices, and they are easily understood by both the buying and selling divisions. The market transfer prices are the most practical approach of determining transfer prices when the conflict exists between the two divisions. This approach minimizes the negotiation, and it promotes fair pricing.
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In a closed economy, the consumption function is: c=3.5 +0.6(y - 1) billions of 2020 dollars. The tax function is: t = 0.15y +0.4 billions of 2020 dollars. Planned investment is $2.5 billion and planned government expenditures are $2 billion. Calculate: 2 1. The equilibrium level of real GDP. 2. Consumer expenditures 3. Saving 4. The investment multiplier 5. The government budget deficit 6. The leakages from and injections into the circular flow of income and expenditure. Do leakages equal injections? 1.lam 2 (15 noints)
To calculate the equilibrium level of real GDP, we set the aggregate expenditure equal to real GDP (Y). In a closed economy, aggregate expenditure consists of consumption (C), investment (I), and government expenditures (G). The equation for aggregate expenditure is:
Y = C + I + G
Given:
Consumption function: C = 3.5 + 0.6(Y - 1)
Tax function: T = 0.15Y + 0.4
Planned investment: I = $2.5 billion
Planned government expenditures: G = $2 billion
1. Equilibrium level of real GDP:
Y = C + I + G
Y = (3.5 + 0.6(Y - 1)) + 2.5 + 2
Simplifying the equation:
Y = 3.5 + 0.6Y - 0.6 + 2.5 + 2
Y = 6.4 + 0.6Y
Rearranging the equation:
0.4Y = 6.4
Y = 6.4 / 0.4
Y = 16
The equilibrium level of real GDP is $16 billion.
2. Consumer expenditures:
Substitute the equilibrium level of real GDP (Y) into the consumption function:
C = 3.5 + 0.6(Y - 1)
C = 3.5 + 0.6(16 - 1)
C = 3.5 + 0.6(15)
C = 3.5 + 9
C = $12.5 billion
Consumer expenditures are $12.5 billion.
3. Saving:
Saving (S) is calculated as the difference between disposable income (Y - T) and consumption (C):
S = (Y - T) - C
S = (16 - (0.15Y + 0.4)) - 12.5
S = 16 - 0.15Y - 0.4 - 12.5
S = 3.5 - 0.15Y - 0.4
Substitute the equilibrium level of real GDP (Y) into the saving function:
S = 3.5 - 0.15(16) - 0.4
S = 3.5 - 2.4 - 0.4
S = $0.7 billion
Saving is $0.7 billion.
4. The investment multiplier:
The investment multiplier (k) is calculated as the reciprocal of the marginal propensity to save (MPS):
k = 1 / MPS
Given MPS = 0.15, we can calculate the investment multiplier:
k = 1 / 0.15
k ≈ 6.67
The investment multiplier is approximately 6.67.
5. The government budget deficit:
The government budget deficit (BD) is calculated as the difference between government expenditures (G) and tax revenues (T):
BD = G - T
BD = 2 - (0.15Y + 0.4)
BD = 2 - 0.15(16) - 0.4
BD = 2 - 2.4 - 0.4
BD = -$0.8 billion
The government budget deficit is -$0.8 billion (a deficit of $0.8 billion).
6. Leakages and injections:
In the circular flow of income and expenditure, leakages (Savings, Taxes) are equal to injections (Investment, Government expenditures). This is known as the macroeconomic equilibrium.
In this case, leakages equal injections as:
S + T = I + G
0
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Question 1. You purchase a house for $400,000 using a 30-year
mortgage that makes monthly payments with an annualized interest
rate of 16%. How much are the mortgage payments? After 9 years you
regina
The monthly mortgage payment on a $400,000 mortgage with an annualized interest rate of 16% and a 30-year term is $2,471.82. After 9 years, you will have paid a total of $222,569.98 in principal and interest.
Here is the calculation:
Monthly payment = Principal amount * Interest rate / (1 - (1 + Interest rate)^-(Number of years * 12))
= 400,000 * 0.16 / (1 - (1 + 0.16)^-(30 * 12))
= $2,471.82
After 9 years, you will have paid off $136,556.24 of the principal amount. The remaining balance will be $263,443.76.
If you refinance the mortgage at a lower interest rate, you can save money on your monthly payments. For example, if you refinance at an interest rate of 5%, your monthly payment will be reduced to $1,654.07.
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Assume that chai tea is an acceptable substitute for coffee. Using a well-labeled graph, indicate the equilibrium price and quantity in the market for chai tea, before the changes in the market for coffee. Label the equilibrium as point T. F) What will happen to the equilibrium price and quantity in the chai tea market as a result of the changes in the market for coffee? Illustrate those changes on your graph from part E. Label the new equilibrium as point U.
Since there is no graph provided,assume a generic supply and demand graph. In the market for chai tea, before the changes in the market for coffee, the equilibrium price and quantity are determined by the intersection of the supply and demand curves. Let's label this equilibrium as point T.
Assuming that the changes in the market for coffee result in an increase in the price of coffee, it can be expected that some consumers will switch from coffee to chai tea as a substitute. This change in consumer preferences will affect the demand for chai tea.On the graph, the demand curve for chai tea will shift to the right, indicating an increase in demand. This shift is due to the increased preference for chai tea as a substitute for coffee. Let's label this new demand curve as D'. As a result of the increased demand, the equilibrium price of chai tea will increase. This is because the higher demand puts upward pressure on the price. Let's label the new equilibrium price as P'.
The change in demand will also lead to an increase in the equilibrium quantity of chai tea. This is because the higher demand requires a larger quantity to be supplied to meet the market's needs. Let's label the new equilibrium quantity as Q'.
So, in summary, the changes in the market for coffee will lead to an increase in both the equilibrium price and quantity of chai tea. The new equilibrium point on the graph will be labeled as point U.
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Prepare the Case Study "Miles Everson at
PricewaterhouseCoopers" from the course
pack.
Focus on the following questions, and
prepare the answer
What is the role of the Global
Engagement Partner (GEP) at
PricewaterhouseCoopers?
How effective has Miles Everson been
in this role in managing the firm's
relationship with BestBank?
What are the challenges Everson faces in becoming the GEP for Global Financial?
What recommendations do you have for him?
Preparing the Case Study "Miles Everson at PricewaterhouseCoopers" from the course pack, the following questions need to be focused on and prepared the answers;
What is the role of the Global Engagement Partner (GEP) at PricewaterhouseCoopers?
At PricewaterhouseCoopers, the Global Engagement Partner (GEP) role involves managing significant clients and generating new business opportunities for the company. The role includes oversight of the account and quality control of all services delivered to the client. This position is critical because it establishes and oversees the relationship with the client, including all of the various activities that the firm carries out on behalf of the client.
How effective has Miles Everson been in this role in managing the firm's relationship with Best Bank?
Miles Everson has been an effective GEP because he has successfully navigated the organization's complexities and developed strong relationships with Best Bank's leadership. His role in ensuring that PwC provides services that are on time, of high quality, and meet BestBank's specific needs has been instrumental. He has also been successful in fostering trust with his team and with the client's leadership.
What are the challenges Everson faces in becoming the GEP for Global Financial?
Everson has a unique set of challenges to overcome in becoming the GEP for Global Financial. The role will require him to balance multiple clients and prioritize resources. He will need to manage many competing demands and ensure that each client feels supported and valued. Furthermore, Everson will need to have a deep understanding of the industry and market to succeed in this role.
What recommendations do you have for him?
To be successful in the GEP for Global Financial role, Everson needs to understand the new organization's culture and processes. Additionally, he should focus on building relationships with key decision-makers and stakeholders within the new group. Developing a clear understanding of each client's needs and tailoring the firm's services to meet those needs is critical.
Finally, he should also focus on developing and training his team to ensure that they have the skills and resources needed to deliver quality services to clients.
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Form follows function"" although an architectural phrase may also apply to organizational design.
The phrase "form follows function" can be applied to both architecture and organizational design, emphasizing the importance of designing structures and organizations based on their intended purpose or function. By aligning form with function, both architecture and organizations can optimize their effectiveness and efficiency in achieving their respective goals.
In architecture, "form follows function" suggests that the design of a building should be based on its purpose and how it will be used. The form, or physical appearance, of the building should be a result of its function, ensuring that the design is practical and efficient. Similarly, in organizational design, "form follows function" implies that the structure and design of an organization should align with its goals, objectives, and functions. The organizational structure, processes, and systems should be designed in a way that supports and enables the organization to achieve its intended purpose effectively.
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National Electric Company (NEC) is considering a $22 million
expansion project. The project’s expected after-tax cash flows will
be $4 million, in perpetuity. The company can issue either equity
or
The company can issue either equity or debt to finance the expansion project.
Let's analyze the financial implications of issuing equity or debt for NEC.
Issuing Equity:
If NEC decides to issue equity, it means they will sell shares of their company to raise funds. Let's assume that the cost of equity for NEC is 10%. Since the cash flows from the project are expected to be $4 million in perpetuity, we can use the perpetuity formula to calculate the present value (PV) of these cash flows:
PV of perpetuity = Cash flow / Cost of equity
PV of perpetuity = $4 million / 10% = $40 million
Therefore, by issuing equity, NEC will need to sell shares worth $40 million to generate $22 million for the expansion project. This means NEC will retain ownership but dilute the ownership stake of existing shareholders.
Issuing Debt:
Alternatively, NEC can finance the expansion project by issuing debt, which means borrowing money. Let's assume the cost of debt for NEC is 8%. By using the cost of debt, we can calculate the present value (PV) of the cash flows:
PV of perpetuity = Cash flow / Cost of debt
PV of perpetuity = $4 million / 8% = $50 million
With debt financing, NEC will need to borrow $22 million to finance the expansion project, which will have a present value of $50 million in perpetuity.
Comparison:
Comparing the two options, issuing equity would raise $22 million but result in a present value of $40 million. On the other hand, issuing debt would raise the same $22 million but result in a present value of $50 million. Therefore, based on the present value of cash flows, issuing debt seems to be the more favorable option for NEC to finance the expansion project.
However, it's important to note that the decision between equity and debt financing depends on various factors, such as the company's financial position, risk tolerance, capital structure, and market conditions. NEC should consider these factors and consult with financial advisors to make an informed decision.
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