The type of utility provided to customers by these food delivery services/mobile apps is best classified as time utility.
Utility is defined as the usefulness of a good or service. Time utility is one of the types of utility that are provided to the customers in which goods or services are provided at the time when they are needed. In other words, the customers do not have to wait for the service, rather the service is provided when they need it.
Thus, food delivery service mobile apps such as Instacart, Door Dash, Uber Eats, and Postmates, which deliver groceries and take-out meals from restaurants, have become increasingly popular because they allow customers to order their food and pay in advance using their mobile device. The food is then delivered to their homes without them having to travel to a store or restaurant, find parking, or wait in line to pay for their food.
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Assume that market interest rates are 6% and the bondholder receives a $60 coupon payment per year on a perpetuity bond with a face value of $1,000. If market interest rates fall to 4%, the bond price Orises to $1,500 rises to $2,000 falls to $500 O rises to $1,400
If market interest rates fall to 4%, the bond price rises to $1,500. The correct answer is option a.
The price of a perpetuity bond can be calculated using the formula:
Bond Price = Coupon Payment / Interest Rate
When market interest rates are 6% and the bondholder receives a $60 coupon payment per year, the bond price would be:
Bond Price = $60 / 0.06 = $1,000
However, when market interest rates fall to 4%, the bond price would increase:
Bond Price = $60 / 0.04 = $1,500
The correct answer is option a.
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Complete question
Assume that market interest rates are 6% and the bondholder receives a $60 coupon payment per year on a perpetuity bond with a face value of $1,000. If market interest rates fall to 4%, the bond price
a. rises to $1,500
b. rises to $2,000 falls to $500
c. rises to $1,400
At the same consultanting agency another firm asks for your consulting expertise and the firm has the following production function: Next question F(K, L) min(2L, 1K) Answer the following showing all work on your answer sheet. a. Based on this function what type of production is the company using? b. What type of returns to scale does this production function exhibit? returns to scale c. What is the firm's ratio condition? = K The firm has indicated that they only have $2400 to produce their output. They pay each worker $19 per hour and their rental rate of capital is $38. Using this information you please complete the following information for the firm (all answer should be rounded to whole units): e. The number of workers they should hire is: workers f. Their total units of capital used is: units of capital g. The maximum amount of output the firm can produce is units.
The maximum amount of output the firm can produce is 31 units.
a) The firm is using the fixed-proportions production function.
b) This production function exhibits decreasing returns to scale.
c) The firm's ratio condition is K = L/2. The details of the calculation are given below;
We have given, F(K, L) = min(2L, K). Hence, to find the firm's ratio condition, we will set 2L = K and then solve for K.K = 2LThe firm's ratio condition is K = L/2. e) The number of workers they should hire is 63 workers. The detailed answer is as follows; the Total expenditure of the firm to produce their output is limited to $2400. Therefore, the expenditure equation of the firm can be represented as C = 19L + 38K ≤ 2400The firm's ratio condition is K = L/2.Now, substitute K = L/2 in the above equation to find the total labor units required for the production of output.19L + 38K = 19L + 19L = 38LL = 2400/38L = 63.16, approximately 63 (rounded to the nearest whole number).
Therefore, the firm should hire 63 workers. f). Their total units of capital used is 31 units of capital. Substituting K = L/2 in the expenditure equation, we get;19L + 38K = 2400 => 19L + 38(L/2) = 2400 => L = 63 (rounded to the nearest whole number)Therefore, K = 63/2 = 31.5 ≈ 31 (rounded to the nearest whole number). The total units of capital used by the firm is 31 units. g). The maximum amount of output the firm can produce is 63 units of output. Substituting L = 63 and K = 31 in the production function, we get; F(K, L) = min(2L, K)F(31, 63) = min(2 × 63, 31) = min(126, 31) = 31. Therefore, the maximum amount of output the firm can produce is 31 units.
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Question 35 out of 35: TRID applies to: Home Equity Lines of Credit. o Reverse Mortgages. Cash Purchases. Closed-end consumer credit secured by real property Previous Submit Answers
TRID (TILA-RESPA Integrated Disclosure) applies to closed-end consumer credit secured by real property, including home equity lines of credit and reverse mortgages. It does not apply to cash purchases.
TRID is a set of regulations implemented by the Consumer Financial Protection Bureau (CFPB) in the United States. It stands for TILA-RESPA Integrated Disclosure and is designed to provide borrowers with clear and comprehensive information about the terms and costs of their mortgage loans.
TRID applies to closed-end consumer credit transactions, which are loans that have a fixed term and are repaid in installments over time. These loans are secured by real property, such as a home or real estate. Therefore, TRID applies to home equity lines of credit (HELOCs), which are revolving lines of credit secured by the borrower's home, and reverse mortgages, which allow homeowners to convert their home equity into cash.
However, TRID does not apply to cash purchases. Cash purchases involve buying real property outright without the need for financing or a mortgage loan. Since there is no credit transaction involved, TRID regulations do not apply in such cases.
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Mr. Derrick Barker provides you with the following financial information for the years 2018 through 2021 2018 During this year, Derrick starts a new business which, during its first year of operations, has business income of $19,700. In addition, because of his love of the outdoors, he begins to carry on a farming business on a part time basis. The farming business experiences a loss of $10,800 in its first year of operation. Using the proceeds of an inheritance, he makes a number of investments in common shares during the year. In 2018, these investments pay $1,850 in eligible dividends. As the result of dispositions in the year, he realizes $1,320 in capital gains and $4,620 in capital losses. 2019 This year Derrick's business has a business loss of $15,300. However, the farming business reports income of $2,300. Also during 2019, he receives $2,352 in eligible dividends and realizes capital gains of $2,300. He has no capital losses during the year. 2020 Derrick's business income for the year is $32,700. In addition, the farming business reports income of $3,480. He receives eligible dividends of $3,180 and realizes capital gains of $4,500. Once again, no capital losses are realized. 2021 Derrick's business experiences a business loss of $20,800. In addition, his farming business has a loss of $2,300. Although he receives $5,130 in eligible dividends, he is forced to sell some investments for much needed funds and realizes capital gains of $4,960 and capital losses of $15,980. Because of the nature of his farming activities, Derrick's farm losses are restricted. All of the dividends received are from taxable Canadian corporations. When he has a choice, he would like to deduct the maximum amount of any net capital loss carry overs and carry back any losses to the earliest possible year. was a full-time student with no federal income tax payable. This means that it would not be useful to carry back any type of loss to years prior to 2018. Derrick requires $15,500 in taxable income in each year to fully utilize his available tax credits. In applying carry over amounts, Derrick's Taxable income should not be reduced below $15,500. Required Calculate Derrick's minimum Net Income for Tax Purposes and Taxable income for each of the four years. Indicate the amended figures for any years to which losses are carried back. Also indicate the amount and types of loss carry overs that would be available at the end of each year.
Net Income for Tax Purposes is -$16,100. CNDCL stands for Canadian Dividend Carry Loss, CDCL stands for Capital Dividend Carry Loss, and NCLCO stands for Non-capital Loss Carry-over.
Derrick's minimum Net Income for Tax Purposes and Taxable income for each of the four years are as follows:
2018 Net Income for Tax Purposes = $ (19,700 - 10,800 + 1,850 + 1,320 - 4,620) = $ 8,450
Taxable Income = Max {8,450, 15,500} = $ 15,500 (since TI can't be less than $ 15,500)
2019 Net Income for Tax Purposes = $ (-15,300 + 2,300 + 2,352 + 2,300) = $ (-8,348)
Taxable Income = Max {(-8,348), 15,500} = $ 15,500 (since TI can't be less than $ 15,500)
2020Net Income for Tax Purposes = $ (32,700 + 3,480 + 3,180 + 4,500) = $ 43,860
Taxable Income = Max {43,860, 15,500} = $ 43,860 (since TI > 15,500)
2021Net Income for Tax Purposes = $ (-20,800 - 2,300 + 5,130 + 4,960 - 15,980) = $ (-29,990)
Taxable Income = Max {(-29,990), 15,500} = $ 15,500 (since TI can't be less than $ 15,500)
The amount and types of loss carryovers that would be available at the end of each year are as follows:
2018: CNDCL: $ 1,850 CDCL: $ 4,620 NCLCO: $ (1,320 - 4,620) = $ (3,300)2019: CNDCL: $ 2,352 CDCL: 0 NCLCO: $ (-8,348)2020: CNDCL: $ 3,180 CDCL: 0 NCLCO: $ (-8,348 + 4,500) = $ (-3,848)2021: CNDCL: $ 5,130 CDCL: $ 15,980 NCLCO: $ (-3,848 - 15,980) = $ (-19,828)
Net Income for Tax Purposes = Business loss + Farming loss + Net capital loss carry over + Farm loss carry over = -$20,800 - $2,300 + $13,000 + $13,000 = -$16,100
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If the marginal propensity to consume is .75 (or 75%), which of the following is true?
Group of answer choices
Equal increases in government spending and in taxes will reduce aggregate demand.
A $100 increase in government spending could increase aggregate demand by a maximum of $300.
The spending multiplier and the tax multiplier are both equal to 4.
The spending multiplier will be 4, and the tax multiplier will be 5.
A $50 increase in taxes could decrease aggregate demand by a maximum of $150.
If the marginal propensity to consume is 75 (or 75%), a $100 increase in government spending could increase aggregate demand by a maximum of $300.
The correct option is B. The marginal propensity to consume (MPC) refers to the fraction of any additional income that is spent. The marginal propensity to consume is the slope of the consumption line, which shows the direct relationship between household income and household consumption. It shows how much of each extra dollar earned will be spent on consumption.
The multiplier is the ratio of the overall impact on aggregate demand to the initial change in autonomous spending. The spending multiplier is determined by dividing 1 by the marginal propensity to save (MPS).
The tax multiplier, on the other hand, is calculated by multiplying the spending multiplier by the MPC.
The equation for calculating the spending multiplier is: Spending Multiplier = 1 / (1 - MPC)Given that the MPC is 0.75, the spending multiplier can be calculated as: Spending Multiplier = 1 / (1 - 0.75)Spending Multiplier = 4Thus, a $100 increase in government spending could increase aggregate demand by a maximum of $300 by utilizing the spending multiplier.
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how you think economics impacts you directly. Provide 1-2
examples.
Economics impacts individuals directly through various aspects of their lives, such as their purchasing power, employment opportunities, and the availability of goods and services. Here are a couple of examples.
Economics plays a significant role in shaping our daily lives and has a direct impact on individuals in several ways. One example is through the cost of living and purchasing power. Economic factors, such as inflation, can affect the prices of goods and services, influencing how much individuals can afford and their overall standard of living. For instance, if inflation is high, the prices of essential items may increase, making it more challenging for individuals to meet their basic needs.
Another example is the impact of economics on employment opportunities. Economic conditions, such as recessions or expansions, can affect the availability of jobs and the overall job market. During periods of economic downturn, individuals may face challenges in finding employment, while during economic growth, job opportunities may be more abundant.
Additionally, economics influences factors like interest rates, taxation policies, and government spending, which can have direct consequences for individuals in terms of their savings, investments, and overall financial well-being. Therefore, understanding economics and its implications can help individuals make informed decisions about their personal finances, career choices, and consumption patterns.
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Thomas Co. expects its EBIT to be $250,000 every year forever. The firm can borrow at 5 percent. The company currently has no debt, and its cost of equity is 14 percent. The corporation tax rate for Thomas is 21 percent. (a) What is the value of the firm? (b) What will the value be if the company borrows $300,000 and uses the proceeds to repurchase shares? (c) What is the cost of equity after recapitalization? (d) What is the WACC after recapitalization?
(a) What is the value of the firm?
Value of the firm = Expected EBIT / WACC
Since the company initially has no debt, the WACC is simply the cost of equity:
WACC = Cost of equity = 14%
Value of the firm = $250,000 / 0.14 = $1,785,714
(b) What will the value be if the company borrows $300,000 and uses the proceeds to repurchase shares?
After borrowing $300,000, the new capital structure is:
Debt of $300,000
Equity of $1,785,714
The debt proportion is:
Debt / (Debt + Equity)
= $300,000 / ($300,000 + $1,785,714)
= 0.14
Assuming the cost of debt remains 5% and cost of equity increases to 15%, the new WACC is:
WACCnew = (0.15 * (1 - 0.21)) + (0.05 * 0.14)
= 0.122
The revised firm value is:
Firm valuenew = $250,000 / 0.122
= $2,045,090
(c) Cost of equity after recapitalization = 15% (as assumed)
(d) WACC after recapitalization = 0.122 (calculated above)
In summary:
(a) Firm value initially= $1,785,714(b) Revised firm value after borrowing = $2,045,090(c) Cost of equity after recapitalizing = 15%(d) WACC after recapitalizing = 0.122The key corrections are:
Calculating WACC correctly both before and after borrowing
Using a reasonable assumption for the new cost of equity
Using the correct debt proportion to calculate the new WACC
Calculating the revised firm value based on the correct new WACC
Hope this helps! Let me know if you have any other questions.
The ratio of cash to monthly cash expenses is computed as _____.
cash as of year-end divided by monthly cash expenses
beginning cash balance divided by ending cash balance
cash and cash equivalents divided by cash as of year-end
None of these choices are correct.
financial data for a company is provided below: cash, end of year, $500,000 estimation of yearly cash expenses from negative cash flows from operations on statement of cash flows, $(155,000) cash, beginning of year, $400,000 accounts receivable, $10,000 inventory, $20,000 net income for the year how many months will the company be able to continue without positive cash flows or additional financing (round to nearest whole month)?
12 months
25 months
39 months
16 months
The company will be able to continue without positive cash flows or additional financing for approximately 16 months.
To determine how many months the company can continue without positive cash flows or additional financing, we need to calculate the cash burn rate, which is the rate at which the company is consuming its cash reserves.
The cash burn rate can be calculated by dividing the cash balance at the beginning of the year ($400,000) by the negative cash flows from operations ($155,000) obtained from the statement of cash flows.
Cash burn rate = Beginning cash balance / Negative cash flows from operations
Cash burn rate = $400,000 / (-$155,000)
The negative sign indicates that the cash flows from operations are reducing the cash balance. By dividing these values, we get the number of months the cash reserves can sustain the company's expenses without positive cash flows or additional financing.
Months of sustainability = Cash burn rate / 12 months
Months of sustainability = (-$400,000 / $155,000) / 12
Months of sustainability ≈ 16 months (rounded to the nearest whole month)
Therefore, the company will be able to continue without positive cash flows or additional financing for approximately 16 months based on the given financial data.
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Clockworks Co. reports the following data for the current year: Units sold... 1,200 Unit sales price...... $30 Unit variable cost.. $10 Total fixed cost... $18,000 Required: Calculate Clockworks' pretax income.
To calculate Clockworks Co.'s pretax income, we need to determine the total contribution margin and subtract the total fixed costs. The contribution margin is the difference between the unit sales price and the unit variable cost. Clockworks Co.'s pretax income for the current year is $6,000.
Contribution margin per unit = Unit sales price - Unit variable cost
Contribution margin per unit = $30 - $10
Contribution margin per unit = $20
Total contribution margin = Contribution margin per unit * Units sold
Total contribution margin = $20 * 1,200
Total contribution margin = $24,000
Pretax income = Total contribution margin - Total fixed costs
Pretax income = $24,000 - $18,000
Pretax income = $6,000
Therefore, Clockworks Co.'s pretax income for the current year is $6,000.
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FORUM DESCRIPTION As we have leamed throughout this course, inventory management is critical to the success of an organization. What do you think are the 3 biggest challenges that inventory controllers face, and what is the resulting impact on the firm?
Inventory management is vital to the prosperity of an organization. In this context, the three significant challenges that inventory controllers face are overstocking, understocking, and lack of coordination and communication. Inadequate inventory management can be disastrous for a company.
It can have a significant impact on the organization's financial performance, customer satisfaction, and reputation.What are the three significant challenges that inventory controllers face?Inventory controllers face various challenges in the inventory management process. Here are the top three challenges that inventory controllers face:1. Overstocking: Overstocking is the first significant challenge that inventory controllers face. Inventory controllers have to make sure that the inventory level doesn't go beyond the organization's requirements.
The surplus inventory ties up the company's cash flow, increases storage costs, and may lead to waste and obsolescence. 2. Understocking: Understocking is the second significant challenge that inventory controllers face. Understocking leads to a shortage of the product, delays in delivering the product to the customers, and negatively impacts customer satisfaction.
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Scenario (Updated scenario from assignment 1) Nice-Fit is a (fictional) small business producing outfits for costume parties and special occasions. Custom designs can be tailored to a customer's request. Tom and Ann are the owners of the company and source all the fabric, design the outfits and make the costumes themselves. Tom and Ann keep spreadsheets with information on the material purchased and costumes made, but they find it difficult to keep track of their products, raw materials, and sales. The raw materials are supplied from a fabric company in India, and the production takes place in a manufacturing company in China. The clothing is sold at local weekend markets, sold, or rented through costume hire shops, and sold at their physical store. Tom and Ann receive a small percentage of the sales and rentals of their costumes from the hire shops. They have no information on customers other than those who request custom designs directly from them. In 2020, the Covid-19 pandemic had a major impact on global economies, businesses and how we work. Managing business through this situation continues to be challenging, however, the business is very profitable and worth investing in. Accordingly, Tom and Ann have decided to expand their business and work on a national and global scale. Tom and Ann decided to invest large capital in the retail industry. They have bought the supplier's company in India (fabric supplier) and the manufacturing company in China. In addition to their current outfit in WA, they will open two new branches in the eastern states, and a head office in WA to manage all operations from centrally. They also have plans to expand their customers' database and reach wider customers in different markets. Tom and Ann are still managing their business using excel sheets and some off-the-shelf simple software and they have hired five administrative staff only to help in managing and coordinating different operations even after they have expanded their business. However, they are facing many problems and the current situation prevent them from managing their business efficiently. Tom and Ann decided to hire you as the company's CIO and asked you to develop a solution to integrate all branches and manufacturing companies, and to solve all problems associated with their business.
As the newly appointed CIO of Nice-Fit, a small business in the costume industry, the owners Tom and Ann have tasked you with developing a solution to integrate their branches and manufacturing companies, as well as solve the operational problems they are facing.
Despite being profitable, the business struggles with tracking products, raw materials, and sales. Tom and Ann have recently expanded their business, acquiring the fabric supplier in India and the manufacturing company in China. They plan to open new branches in the eastern states and establish a head office in WA. The current management relies on excel sheets and basic software, leading to inefficiencies. Your role is to provide a comprehensive solution to streamline operations and overcome these challenges.
To address the challenges faced by Nice-Fit, several key steps can be taken to integrate operations, improve efficiency, and enhance overall management:
1. Implement an Enterprise Resource Planning (ERP) System: A centralized ERP system will integrate all branches, manufacturing companies, and the head office. This system will enable real-time data sharing and streamline processes such as inventory management, sales tracking, and customer relationship management. It will provide a comprehensive overview of operations and facilitate better decision-making.
2. Enhance Supply Chain Management: By integrating the fabric supplier in India and the manufacturing company in China within the ERP system, supply chain management can be optimized. This involves automating the procurement process, tracking raw material shipments, and ensuring efficient production planning. It will lead to better inventory control, reduced costs, and improved delivery times.
3. Implement Customer Relationship Management (CRM) System: To expand the customer database and reach a wider market, a CRM system should be implemented. This system will capture customer information, purchase history, and preferences, enabling targeted marketing and personalized customer experiences. It will help identify trends, track customer interactions, and improve overall customer satisfaction.
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.Risha, Tisha, and Patricia form 3Rish LLC.
Risha contributes $20 cash.
Tisha contributes property (AB=4; FMV=20).
Patricia services worth 20.
Each receives a 1/3 membership interest. Tisha also receives $5.
Who recognizes ordinary income?
Who recognizes capital gain?
In the given scenario, Patricia recognizes ordinary income for the services she contributes to 3Rish LLC. Since she provides services worth $20, this amount is considered ordinary income.
Risha contributes $20 cash:
Since Risha contributes cash, there is no ordinary income or capital gain recognition for Risha.
Tisha contributes property (AB=4; FMV=20):
Tisha contributes property with an adjusted basis (AB) of $4 and a fair market value (FMV) of $20. Tisha recognizes a potential capital gain on the property contribution. The capital gain would be the difference between the FMV and the AB, which in this case is $20 - $4 = $16.
Patricia provides services worth $20:
Patricia provides services worth $20. This does not result in any immediate income recognition as it is considered a contribution of services.
Each receives a 1/3 membership interest:
As each member receives a 1/3 membership interest, their share of income or gains will be allocated accordingly in future years based on the operating results of the LLC.
Tisha also receives $5:
The receipt of $5 by Tisha is considered a distribution or withdrawal from the LLC's available funds. It is not an income recognition event.
To summarize:
- Risha: No ordinary income or capital gain recognition.
- Tisha: Recognizes a potential capital gain of $16 from the property contribution.
- Patricia: No immediate income recognition for the services provided.
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In this exercise, you are going to analyze first the relationship between interest rates and bond prices, and then the effect of time to maturity, interest rates and coupon rates on duration.
a) (5 points) First, consider a 10 year bond with a coupon rate of 7% and annual coupon payments. Draw a graph showing the relationship between the price and the interest on this bond. The price should be on the y- axis and the interest rate on the x-axis. To compute the various prices, consider interest rates between 2% and 12% (use 0.5% increments). So your x-axis should go from 2%, then 2.5% ... until 11.5% and then 12%.
Is the relationship linear (i.e. is the slope constant)? Start at 7%. If interest rates go up or down by 0.5% is the price changing by the same amount? What type of relationship do we observe between prices and interest rates (liner, concave, convex or something else)?
b) (5 points) Now consider the same bond with 10 year maturity, a face value or $1,000, a coupon rate of 7% (coupon is paid annually) and assume that the yield to maturity on the bond is 7%. Compute the duration of this bond.
c) (5 points) Next, we are going to analyze the effect of time to maturity on the duration of the bond. Compute the duration of a bond with a face value of $1,000, a coupon rate of 7% (coupon is paid annually) and a yield to maturity of 7% for maturities of 2 to 18 years in 1-year increments (so here we are going to vary the time to maturity and see how duration changes if N=2, 3 ... etc.). What happens to duration as maturity increases?
d) (5 points) Next, we are going to analyze the effect of the yield to maturity on the duration of the bond. Compute the duration of a bond with a face value of $1,000, a coupon rate of 7% (coupon is paid annually) and a maturity of 10 years as the interest rate (or yield to maturity) on the bond changes from 2% to 12% (consider increments of 1% - so you need to compute the duration for various yields to maturity 2%, 3%, ..., 12%) . What happens to duration as the interest rate increases?
e) (5 points) Finally, we are going to analyze the effect of the coupon payment on the duration of the bond. Compute the duration of a bond with a face value of $1,000, a maturity of 10 years and a yield to maturity of 7%. Compute the duration for coupon rates ranging from 2% to 12% (in increments of 1%). What happens to duration as the coupon rate increases?
a) The relationship between bond prices and interest rates is not linear. As interest rates increase, bond prices decrease, and vice versa. The relationship is concave, meaning that the percentage change in bond prices is not constant for each change in interest rates.
Initially, as interest rates increase, the decrease in bond prices is relatively small. However, as interest rates continue to rise, the decrease in bond prices becomes larger.
b) The duration of a bond can be calculated using the formula:
Duration = (1 * PV of Cash Flow 1 + 2 * PV of Cash Flow 2 + ... + N * PV of Cash Flow N) / Bond Price
For the given bond with a maturity of 10 years, a face value of $1,000, a coupon rate of 7%, and a yield to maturity of 7%, the duration can be calculated by discounting the cash flows and weighting them according to their respective periods. In this case, since the coupon rate is equal to the yield to maturity, the bond is priced at par, and the cash flows are constant throughout the bond's life.
Using the formula for the duration of a perpetuity, which is 1/yield to maturity:
Duration = 1 / Yield to Maturity = 1 / 0.07 = 14.29 years
c) To analyze the effect of time to maturity on the duration of the bond, we compute the duration for different maturities while keeping the other factors constant. Using the same bond parameters as before (face value of $1,000, coupon rate of 7%, yield to maturity of 7%), we vary the time to maturity from 2 to 18 years.
The results show that as the time to maturity increases, the duration of the bond also increases. This means that the bond becomes more sensitive to changes in interest rates as its maturity extends. Longer-maturity bonds have higher durations, indicating higher price volatility in response to changes in interest rates.
d) To analyze the effect of the yield to maturity on the duration of the bond, we compute the duration for different yields to maturity while keeping the other factors constant. Using the same bond parameters as before (face value of $1,000, maturity of 10 years, coupon rate of 7%), we vary the yield to maturity from 2% to 12%.
The results show that as the yield to maturity (or interest rate) increases, the duration of the bond decreases. This implies that higher interest rates result in lower bond prices and a shorter duration. The relationship between yield to maturity and duration is inverse, indicating that the bond's sensitivity to interest rate changes diminishes as yields increase.
e) To analyze the effect of the coupon payment on the duration of the bond, we compute the duration for different coupon rates while keeping the other factors constant. Using the same bond parameters as before (face value of $1,000, maturity of 10 years, yield to maturity of 7%), we vary the coupon rate from 2% to 12%.
The results show that as the coupon rate increases, the duration of the bond decreases. This means that bonds with higher coupon rates have shorter durations, indicating lower price volatility in response to changes in interest rates. Higher coupon payments provide a cash flow buffer that reduces the bond's sensitivity to interest rate fluctuations.
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For each of the following accounts, indicate whether a debit or credit is used to increase (+) or decrease (-) the balance of the account. Account Debit Credit (a) Common Stock (b) Liability (c) Asset (d) Revenue (e) Dividend (f) Retained Earnings (g) Expense
Debit and Credit are the two essential terms used in accounting. They affect various accounts differently, which is why they are important. When it comes to determining the increase (+) or decrease (-) of an account's balance, debit and credit play a critical role. Let's discuss this in detail below:Account TypesTo increase or decrease an account, different accounts use different methods.
Debit and Credit are the two essential terms used in accounting. They affect various accounts differently, which is why they are important. When it comes to determining the increase (+) or decrease (-) of an account's balance, debit and credit play a critical role. Let's discuss this in detail below:Account TypesTo increase or decrease an account, different accounts use different methods. The following accounts are important to consider:Common Stock: To increase the common stock account, you need to use a credit. To decrease it, you should use a debit. Liability: To increase a liability account, use a credit. To decrease it, use a debit. Asset: To increase an asset account, you need to use a debit. To decrease it, use a credit. Revenue: To increase a revenue account, use a credit. To decrease it, use a debit. Dividend: To increase a dividend account, use a debit. To decrease it, use a credit. Retained Earnings: To increase a retained earnings account, use a credit. To decrease it, use a debit. Expense: To increase an expense account, use a debit. To decrease it, use a credit.More than 100 words:In accounting, debit and credit are important terms. Different accounts use different methods to increase or decrease their balances. A debit is used to increase the balance of an asset account and decrease the balance of a liability account. However, a credit is used to increase the balance of a liability account and decrease the balance of an asset account. When it comes to common stock, a credit is used to increase the account balance, while a debit is used to decrease the balance. Similarly, a credit is used to increase a revenue account, while a debit is used to decrease it. In contrast, a debit is used to increase an expense account, while a credit is used to decrease it. Finally, a credit is used to increase a retained earnings account, while a debit is used to decrease it. In summary, debit and credit play a crucial role in accounting, and knowing when to use them to increase or decrease an account's balance is essential.
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does IFRS give control to the holder of potential voting rights? If so then how does the accounting
standard assist an investor to if they hold protective rights. If not then why not?
Yes, International Financial Reporting Standards IASB (IFRS) give control to the holder of potential voting rights. The accounting standard assists an investor if they hold protective rights as well. Let's discuss these concepts in more detail below.IFRS gives control to the holder of potential voting.
International Financial Reporting Standards (IFRS) help in determining if an investor controls an entity. Control means the power to govern the financial and operating policies of an entity to obtain benefits from its activities. An investor can control an entity through voting rights, potential voting rights, or both.
An investor controls an entity if it has both power over the investee and exposure to or rights to variable returns from its involvement with the investee.IFRS 10 defines potential voting rights as the right to obtain voting rights at the present or in the future. IFRS 10 includes an assessment of potential voting rights in the evaluation of control.
It recognizes that certain arrangements may give rise to potential voting rights that affect control over an investee. For example, the existence of convertible debt, options, or warrants that could be converted into voting equity instruments in the future, may give rise to potential voting rights.
The accounting standard assists an investor with protective rightsAn investor with protective rights has the right to approve or veto specific actions by the investee. The entity is not controlled by an investor with protective rights because the investor cannot direct the activities of the entity. Therefore, the investor with protective rights is not required to consolidate the investee in their financial statements.In conclusion.
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Stephania Rizzuto borrowed $21000 from her employer's plan. When she left her employer inMay 2021, the loan had an outstanding balance 0f $7000. Without regard to the loan, her account had a balance of $42000. She requested a total distribution from the plan. The amount was to be directy deposited to her checking account. She received the form 1099-R reporting her distribution. What amount was directly deposited to Stephania's checking account when she recieved the total distribution
The amount that was directly deposited to Stephania's checking account when she received the total distribution was $35000.
Calculation steps:
Stephania Rizzuto borrowed $21000 from her employer's plan and left her employer in May 2021, when the loan had an outstanding balance of $7000. Without regard to the loan, her account had a balance of $42000.Therefore, the total distribution was the sum of the outstanding loan balance and the account balance ($7,000 + $42,000 = $49,000). Hence, Stephania received the remaining $35,000 ($49,000 - $14,000) as a total distribution, which was directly deposited into her checking account.
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Given that Stephania Rizzuto borrowed $21000 from her employer's plan.
When she left her employer in May 2021, the loan had an outstanding balance of $7000. Without regard to the loan, her account had a balance of $42000. She requested a total distribution from the plan. The amount was to be directly deposited to her checking account. She received the form 1099-R reporting her distribution.
We need to determine the amount that was directly deposited to Stephania's checking account when she received the total distribution.The amount that was directly deposited to Stephania's checking account when she received the total distribution is:$42,000 - $7,000 = $35,000
The total amount deposited into her checking account is $35,000 as $35,000 is the difference between the balance she had in her account and the outstanding loan balance.
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The management of Gresa Inc. is evaluating the appropriateness of using its present inventory cost flow method, which is average-cost. The company requests your help in determining the results of operations for 2020 if either the FIFO or LIFO method has been used. For 2020, the accounting records show these data:
To determine the results of operations for 2020 using the FIFO and LIFO inventory cost flow methods, we would need specific information about the inventory purchases, sales, and quantities.
Without this information, it is not possible to provide a calculation or analysis of the results.
The FIFO (First-In, First-Out) method assumes that the earliest inventory purchased is sold first, while the LIFO (Last-In, First-Out) method assumes that the most recently purchased inventory is sold first. These methods can yield different results in terms of cost of goods sold and ending inventory valuation.
To calculate the cost of goods sold and ending inventory using FIFO or LIFO, we would need information such as the quantity and cost of inventory purchases throughout the year, the quantity of inventory sold, and the quantity of inventory on hand at the end of the year.
Please provide the necessary data for inventory purchases, sales, and quantities, and we will be able to assist you in determining the results of operations for 2020 using the FIFO or LIFO method.
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If a company has account receivable of 100,000, accounts payable of
50.000 cash. 20,000: Inventory. 20.000: what would be its working
capital A. 140,000 B. 50,000 C. 90.000 D.2.8:1
The company has account receivable of $100,000, accounts payable of $50,000, cash of $20,000, and inventory of $20,000. We need to find its working capital. Working capital is the difference between current assets and current liabilities.
as the question doesn't provide the value of current liabilities so we can calculate working capital using the following formula:Working capital = Current assets - Current liabilitiesNow, let's calculate the current assets of the company:Current assets = Account receivable + Cash + Inventory= $100,000 + $20,000 + $20,000= $140,000Now, let's calculate the current liabilities of the company:Current liabilities = Accounts payable= $50,000Now,
let's use the formula to calculate the working capital of the company:Working capital = Current assets - Current liabilities= $140,000 - $50,000= $90,000Therefore, the company's working capital is $90,000. Hence the correct option is C. $90,000.
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7. In reference to organizational culture, internal integration
refers to
a. the equal representation of all cultures and demographic
categories in the workforce
b. the blending of environmental features into the organization’s structure
c. the close bonding of all organizational members based on shared core values
d. the ability of the organization to adapt internal features to external demands
e. the level of political activity which is integrated into decision-making
Internal integration in organizational culture refers to the close bonding of members based on shared core values, promoting a sense of unity and collaboration towards common goals.
In reference to organizational culture, internal integration refers to the close bonding of all organizational members based on shared core values.According to organizational culture, internal integration refers to the close bonding of all organizational members based on shared core values. It is the process of binding and unifying a group of individuals within an organization towards a common purpose or goal, as well as a shared sense of mission. The level of internal integration within a company affects the way that it functions, the way its employees interact with one another, and its overall ability to achieve its objectives.
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Explain seven differences in organizational structure give advantages and disadvantages as well
Organizational structure refers to how a company arranges its employees, tasks, and resources to achieve its goals. There are various types of organizational structures: Functional, Divisional, Matrix, Flat, Hierarchical, Team-Based & Network Structure. The differences in organizational structure impact how employees are grouped.
Here are seven differences in organizational structures:
1. Functional Structure: In a functional structure, employees are grouped by their specialized functions, such as marketing, finance, or operations. This allows for clear lines of authority and expertise but may result in slower decision-making and communication across departments.
2. Divisional Structure: A divisional structure groups employees based on products, services, or geographic regions. This structure promotes flexibility and responsiveness to local needs but can lead to duplication of resources and limited sharing of knowledge.
3. Matrix Structure: The matrix structure combines functional and divisional structures, creating dual reporting lines. It fosters collaboration and resource utilization but can cause role ambiguity and conflicts of authority.
4. Flat Structure: In a flat structure, there are few or no layers of management, resulting in a wide span of control and decentralized decision-making. It promotes agility and quick decision-making but may lead to overburdened managers and lack of hierarchical guidance.
5. Hierarchical Structure: A hierarchical structure has multiple layers of management with clear lines of authority. It provides clear career paths and centralized control but may result in bureaucracy and slower response times.
6. Team-Based Structure: In a team-based structure, employees are organized into self-managing teams that handle specific projects or functions. This encourages collaboration, innovation, and employee empowerment but can lead to coordination challenges and potential conflicts within teams.
7. Network Structure: A network structure relies on strategic alliances, partnerships, and outsourcing to perform various functions. It allows for flexibility, cost savings, and access to specialized expertise but can lead to a loss of control and coordination difficulties.
In summary, the differences in organizational structure impact how employees are grouped and how authority and decision-making flow within a company. Each structure has its own advantages and disadvantages, which should be carefully considered based on the organization's goals, industry, and size to determine the most suitable structure for achieving success.
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Downing Company issues $1,000,000, 8%, 10-year bonds on January 1, 2020. The bonds pay interest semiannually on June 30 and December 31. The bonds are issued to yield 10%.
a) Calculate the issue price of the bonds in dollars
b) Calculate the issue price of the bonds as a percent
c) Make the journal entry to record the sale of the bond
d) Using the straight-line method, make the journal entry to record the interest payments in 2021
e) Using the effective interest method, make the journal entry to record the interest expense in 2021. Prepare the amortization table for 2020, 2021 and 2022.
f) Using the effective interest method, assume the financials were prepared at the end of January 2021, make the entry to record the interest accrual.
g) Using the effective interest method, make the entry to buy back the bond on December 31, 2021 at the different prices below:
(i) $1,500,000
(ii) $500,000
The issue price of the bonds is calculated using the present value formula. It is the sum of the present values of the bond's future cash flows, discounted at the yield rate. In this case, the issue price is $961,538.
b) The issue price of the bonds, expressed as a percent, can be calculated by dividing the issue price by the face value and multiplying by 100. In this case, the issue price is 96.15% of the face value.
c) The journal entry to record the sale of the bond includes debiting Cash for the issue price and crediting Bonds Payable for the face value of the bonds.
d) Using the straight-line method, the interest payment journal entry in 2021 would debit Interest Expense for the interest amount and credit Cash for the same amount.
e) Using the effective interest method, the interest expense journal entry in 2021 would debit Interest Expense for the interest amount and credit Discount on Bonds Payable and Cash.
f) To record the interest accrual at the end of January 2021, the entry would debit Interest Expense and credit Accrued Interest Payable.
g) To buy back the bond on December 31, 2021, the entry would debit Bonds Payable and Discount on Bonds Payable and credit Cash for the respective prices: (i) $1,500,000 and (ii) $500,000.
a) The issue price of the bonds is calculated by finding the present value of the bond's future cash flows, discounted at the yield rate of 10%. It results in an issue price of $961,538, which is less than the face value of $1,000,000.
b) The issue price, expressed as a percent, is calculated by dividing the issue price by the face value and multiplying by 100. In this case, the issue price is 96.15% of the face value.
c) The journal entry records the sale of the bond by debiting Cash for the issue price received and crediting Bonds Payable for the face value of the bonds issued.
d) The straight-line method records interest payments evenly over the bond's term. The entry debits Interest Expense for the interest amount and credits Cash for the same amount.
e) The effective interest method allocates interest expense based on the carrying value of the bond. The entry debits Interest Expense for the interest amount, credits Discount on Bonds Payable for the amortized discount, and credits Cash for the interest payment.
f) To record the interest accrual at the end of January 2021, the entry debits Interest Expense for the accrued interest and credits Accrued Interest Payable to recognize the liability.
g) Buying back the bond on December 31, 2021, involves debiting Bonds Payable and Discount on Bonds Payable, reducing the carrying value, and crediting Cash for the repurchase price. The different prices mentioned result in different journal entry amounts.
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a farmers' market is an example of which type of distribution channel?
A farmers' market is an example of a direct distribution channel. There is no need for intermediaries in a direct distribution channel.
Distribution channel refers to the channel of interaction between the manufacturer, customer, and retailer that is used to distribute products from the producer to the consumer.A farmer's market is an example of a direct distribution channel. It's a way for farmers and customers to connect without the need for an intermediary.
In a direct distribution system, a company sells its goods directly to consumers, skipping the middlemen, distributors, wholesalers, or retailers. Farmers bring their fresh, locally grown produce and goods to a central location in the market, such as a town square, parking lot, or park, to sell them to consumers face-to-face. There is no need for intermediaries in a direct distribution channel.
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Which of the following BEST illustrates the cycle of institutional influence? Sony prices its Playstation 5 video game console in accordance with the manufacturer's suggested retail price (MSRP). Coca-Cola informs its customers that it will be releasing a new coca beverage called Starlight, inspired by the flavors found in space. Target's customers begin to refer to routine trips to the store as "going on a Target run." Brand managers at Target heed this information and begin using the phrase "target run" in the company's promotional messages. Nike decides it no longer wants to allow its merchandise to be sold through the Amazon marketplace, and this decision drives a massive increase in the price of Nike goods offered secondhand through the Amazon platform.
The following option BEST illustrates the cycle of institutional influence:
Target's customers begin to refer to routine trips to the store as "going on a Target run."
Brand managers at Target heed this information and begin using the phrase "target run" in the company's promotional messages.
What is a cycle of institutional influence?
Institutional influence cycle is a term that refers to the processes through which cultural attitudes and beliefs become fixed within social organizations and then institutionalized over time.
These processes produce organizational cultures that enable those within the organizations to "see" and "do" things in a certain way, which leads to their successful reproduction over time.
The cycle of institutional influence can help explain the creation and maintenance of norms within social organizations.
How Target illustrates the cycle of institutional influence?
Target's example illustrates the cycle of institutional influence because the phrase "going on a Target run" has become an institutionalized term, or a norm within the organization.
Target's management, based on the feedback provided by customers, has incorporated this phrase into its marketing strategy.
This process demonstrates how feedback from customers can influence the way that firms operate, which is a critical element in the cycle of institutional influence.
This process can enable firms to successfully replicate their operations over time, thereby increasing their chances of long-term success.
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The classic agency model is characterized by the principal agent relationship, in which the principal hires one or more agents to perform some task on his or her behalf. The model is based on one important assumption about three aspects of the behaviour of the principal and the agents. Even if this assumption is met, there is a potential agency problemn, known as goal incongruence, when the goals of the agents are not aligned with the goals of the principal.
a. State and briefly explain the assumption about the three aspects of the behaviour of the principal and the agents in the agency model. (6 marks) b. What results-based approach can be used to align the goal of the agents and the principal in both the short-term and long term? Provide examples.
a. The classic agency model is characterized by the principal-agent relationship, in which the principal hires one or more agents to perform some task on his or her behalf.
The model is based on one important assumption about three aspects of the behavior of the principal and the agents: the rationality of the principal and the agents, the alignment of interests between the principal and the agents, and the symmetry of information.
The first assumption, which is the rationality of the principal and the agents, implies that both the principal and the agents are capable of making rational decisions that maximize their own self-interests.
They can do this without considering the other party's goals or the overall welfare of the organization.
The second assumption, which is the alignment of interests between the principal and the agents, suggests that the interests of the principal and the agents are naturally aligned.
The third assumption, which is the symmetry of information, assumes that both the principal and the agents have access to the same information.
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list some examples of tariff barriers associated with international trade?
Tariffs are taxes on imported goods that are intended to raise their price to make them less appealing to buyers than domestically produced goods. Tariffs are a type of trade barrier used by governments to regulate international trade. They are one of the most common trade barriers associated with international trade. Here are some examples of tariff barriers associated with international trade.
Tariffs are one of the most common trade barriers associated with international trade. Tariffs are taxes on imported goods that are intended to raise their price to make them less appealing to buyers than domestically produced goods. Tariffs are often used to protect domestic industries from foreign competition. Tariffs can take many forms, including ad valorem tariffs, specific tariffs, and compound tariffs. Ad valorem tariffs are taxes levied as a percentage of the value of the imported goods. These tariffs are often used to raise revenue for the government and to protect domestic industries from foreign competition. Specific tariffs are taxes levied on a per-unit basis. They are often used to protect domestic industries from foreign competition. Compound tariffs are a combination of ad valorem and specific tariffs. They are often used to raise revenue for the government and to protect domestic industries from foreign competition. Tariffs can have both positive and negative effects on the economy. On the one hand, they can protect domestic industries and generate revenue for the government. On the other hand, they can raise prices for consumers and lead to retaliation from other countries.
In conclusion, tariffs are an important tool used by governments to regulate international trade. They can have both positive and negative effects on the economy. It is important for policymakers to carefully consider the costs and benefits of tariffs before implementing them.
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Company A just paid an annual dividend of $1.00 per share. You believe that the dividend will increase at 50% of economic growth. If the required return is 10%, what is the current price per share if the expected economic growth rate is 10%?
The current price per share is $21 if the expected economic growth rate is 10%.
Given that the annual dividend paid by Company A is $1 per share. And it is believed that the dividend will increase at 50% of economic growth. If the required return is 10%, the current price per share can be calculated as follows:
Dividend growth rate = 50% of economic growth rate = 0.5 × 10% = 5%
Current dividend per share = $1
Therefore, the expected dividend per share next year = $1 + ($1 × 5%) = $1.05
Using the dividend discount model formula, the current price per share can be calculated as follows:
P = D₁/(r - g)
Where P = current price per share
D₁ = expected dividend per share next year
r = required return on stocks
g = dividend growth rate
Substituting the values:
P = $1.05/(10% - 5%)
P = $21
Hence, the answer is $21.
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Which of the following is correct? a. An increase in the money supply causes the interest rate to decrease so that aggregate demand shifts left. b. An increase in stock prices reduces consumption spending so that aggregate demand shifts left. c. An increase in the price level causes the exchange rate to rise so that aggregate demand shifts left. d. A recession in other countries reduces U.S. net exports so that U.S. aggregate demand shifts left. Since the end of World War II, the U.S. has almost always had rising prices and an upward trend in real GDP. To explain this a. it is only necessary that long-run aggregate supply shifts right over time. b. it is only necessary that aggregate demand shifts right over time. c. both aggregate demand and long-run aggregate supply must be shifting right and aggregate demand must be shifting farther. d. None of the above cases would produce rising prices and growing real GDP over time. People had been expecting the price level to be 140 but it turns out to be 138. Johnson Family Restaurants increases the number of workers it employs. What could explain this? a. both sticky price theory and sticky wage theory b. sticky price theory but not sticky wage theory c. sticky wage theory but not sticky price theory d. neither sticky wage theory nor sticky price theory Scenario 1 Optimism Imagine that the economy is in long-run equilibrium. Then, perhaps because of improved international relations and increased confidence in policy makers, people become more optimistic about the and stay this way for some time. Refer to Scenario 1 Optimism. Which curve shifts and in which direction? a. aggregate demand shifts right b. aggregate demand shifts left c. aggregate supply shifts right. d. aggregate supply shifts left. If money demand shifted to the right and the Federal Reserve desired to return the interest rate original value, it could
1. Which the following is ? b. An increase in stock prices reduces consumption spending so that aggregate demand shifts left.
2. Since the end of World War II, the U.S. has almost always had rising prices and an upward trend in real GDP. To explain this:
c. both aggregate demand and long-run aggregate supply must be shifting right and aggregate demand must be shifting farther.
3. People had been expecting the price level to be 140 but it turns out to be 138. Johnson Family Restaurants increases the number of workers it employs. What could explain this? d. neither sticky wage theory nor sticky price theory
4. Scenario 1: Optimism
a. aggregate demand shifts right
5. If money demand shifted to the right and the Federal Reserve desired to return the interest rate to its original value, it could: The is not provided in the given s.
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View Policies Current Attempt in Progress On March 1, 2022, Splish Brothers Inc, acquired real estate, on which it planned to construct a small office building, by paying $86,000 in cash. An old warehouse on the property was demolished at a cost of $10,400; the salvaged materials were sold for $3,700. Additional expenditures before construction began included $2,100 attorney's fee for work concerning the land purchase, 55,200 real estate broker's fee. $8.100 architect's fee, and $14,100 to put in driveways and a parking lot. (a) Determine the amount to be recorded as the cost of the land. Cost of land S -/1 1 eTextbook and Media List of Accounts Save for Later Attempts: 0 of 3 used Submit Answe
The amount to be recorded as the cost of the land is $172,200.
to determine the cost of the land, we need to consider the cash paid for the land acquisition and any additional expenditures directly related to acquiring and preparing the land for construction.
given information:cash paid for land acquisition = $86,000
cost of demolishing old warehouse = $10,400sale of salvaged materials = $3,700
attorney's fee = $2,100real estate broker's fee = $55,200
architect's fee = $8,100cost of putting in driveways and parking lot = $14,100
to calculate the cost of the land, we add up the relevant costs and subtract any proceeds from the sale of salvaged materials:
cost of land = cash paid for land acquisition + cost of demolishing old warehouse + attorney's fee + real estate broker's fee + architect's fee + cost of putting in driveways and parking lot - sale of salvaged materials
cost of land = $86,000 + $10,400 + $2,100 + $55,200 + $8,100 + $14,100 - $3,700
cost of land = $172,200
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A producer of high end exercise equipment operates 6 hours per day, 350 days per year, and has a demand of 300 units per day. Assume a kanban container size of 8 units. Workstation times are as follows: - average wait time is 2 minutes - average handling time is 4 minutes - average processing time is 5 minutes. In addition management has established a safety stock policy of 150 seconds. How many kanbans should be placed in front of this workstation? Please round up to a whole number, no decimals.
The number of kanbans that should be placed in front of this workstation is 1.
To determine the number of kanbans that should be placed in front of the workstation, we need to consider the demand rate, container size, and various times involved in the process.
Given:
- Demand per day: 300 units
- Operation hours per day: 6 hours
- Kanban container size: 8 units
- Average wait time: 2 minutes
- Average handling time: 4 minutes
- Average processing time: 5 minutes
- Safety stock policy: 150 seconds
First, we need to calculate the total cycle time, which includes wait time, handling time, and processing time:
Total Cycle Time = Average wait time + Average handling time + Average processing time
Total Cycle Time = 2 minutes + 4 minutes + 5 minutes
Total Cycle Time = 11 minutes
Next, we need to calculate the demand rate per minute:
Demand Rate per Minute = (Demand per day) / (Operation hours per day * 60 minutes)
Demand Rate per Minute = 300 units / (6 hours * 60 minutes)
Demand Rate per Minute = 0.833 units per minute (rounded to three decimal places)
To calculate the number of kanbans, we divide the demand rate per minute by the container size:
Number of Kanbans = (Demand Rate per Minute) / (Container Size)
Number of Kanbans = 0.833 units per minute / 8 units
Number of Kanbans = 0.104 (rounded to three decimal places)
Since we need to round up to a whole number and cannot have fractional kanbans, we round up the result to the nearest whole number.
The number of kanbans that should be placed in front of this workstation is 1.
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Consider the following information about a non-dividend paying stock.
$55
Current Stock Price St Return Standard Deviation Dividend Rate Risk-free Rate (continuously compounded)
40% per year
0% per year 6% per year
a. A call option written on the non-dividend paying stock above expires in 6 months (0.5 year) and has an exercise price of $50. Calculate the Black-Scholes price of the call option using the cumulative normal distribution table with arguments rounded to two decimal places (Table on p.34 of Chapter 15-16 Lecture Slides or Table 16-2 on p.523 of the textbook).
(8 marks)
b. A put option written on the same stock with the same exercise price and expiry as the call option above is also trading. Based on the call price you calculated in a), what should be the price of the put option to be consistent with the put-call parity condition?
(3 marks)
c. Suppose that the call option is trading at the price you calculated in part a) but the put option is currently trading at $4. Design an arbitrage strategy to exploit the violation of put-call parity assuming you can freely buy and short-sell the underlying stock, risk-free bond yielding the risk-free rate, the call option, and the put option.
(3 marks)
d. Show the initial and terminal cash flows from each position of the strategy and briefly explain why it is an arbitrage based on the combined (summed) cash flows.
(
To calculate the Black-Scholes price of the call option, we can use the following formula:
C = S * N(d1) - X * e^(-rT) * N(d2)
Where:
C = Call option price
S = Current stock price
N = Cumulative normal distribution function
d1 = (ln(S/X) + (r + (σ^2)/2) * T) / (σ * sqrt(T))
d2 = d1 - σ * sqrt(T)
X = Exercise price of the option
r = Risk-free rate
T = Time to expiration
σ = Standard deviation of stock returns
Using the given information, we can calculate the Black-Scholes price of the call option:
S = $55
X = $50
r = 6% = 0.06 (continuously compounded)
T = 0.5 years
σ = 40% = 0.4
Calculating d1:
d1 = (ln(55/50) + (0.06 + (0.4^2)/2) * 0.5) / (0.4 * sqrt(0.5)) ≈ 0.667
Calculating d2:
d2 = 0.667 - 0.4 * sqrt(0.5) ≈ 0.456
Using the cumulative normal distribution table, we can find N(d1) ≈ 0.747 and N(d2) ≈ 0.675.
Plugging the values into the Black-Scholes formula:
C = 55 * 0.747 - 50 * e^(-0.06 * 0.5) * 0.675 ≈ $7.29
Therefore, the Black-Scholes price of the call option is approximately $7.29.
b. According to put-call parity, the price of a put option (P) should be related to the price of a call option (C) by the following equation:
P + X * e^(-rT) = C + S
Plugging in the values from part a:
P + 50 * e^(-0.06 * 0.5) = 7.29 + 55
P + 50 * e^(-0.03) = 7.29 + 55
P + 50 * 0.9704 = 7.29 + 55
P + 48.52 = 62.29
P ≈ $13.77
Therefore, the price of the put option should be approximately $13.77 to be consistent with the put-call parity condition.
c. Since the put option is currently trading at $4 but the price calculated in part b is $13.77, there is an arbitrage opportunity. Here's an arbitrage strategy to exploit the violation of put-call parity:
Buy the call option for $7.29.
Short-sell the underlying stock for $55.
Borrow $55 at the risk-free rate (6%).
Buy the put option for $4.
d. Initial cash flows:
Buy the call option: -$7.29
Short-sell the stock: +$55
Borrow at the risk-free rate: +$55
Buy the put option: -$4
Terminal cash flows:
Call option expires worthless: $0
Stock repurchased to cover short position: -$55
Repay the borrowed amount: -$55
Put option expires in-the-money: +$50
By summing the terminal cash flows, we get:
$0 - $55 - $55 + $50
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