Pricing strategy - A market has only two sellers. They are both trying to decide on a pricing strategy. If both firms charge a high price

Pricing strategy - A market has only two sellers. They are both trying to decide on a pricing strategy. If both firms charge a high price, then each firm will experience a 10% increase in profits. If both firms charge a low price, then each firm will experience a 5% decrease in profits. If Firm 1 charges a low price and Firm 2 charges a high price, then Firm 1 will experience a 6% increase in profits and Firm 2 will experience a 2% decrease in profits. If Firm 2 charges a low price and Firm 1 charges a high price, then Firm 2 will experience a 7% increase in profits and Firm 1 will experience a 3% decrease in profits.

(i) Construct a payoff matrix for this game.

(ii) Determine whether each firm has a dominant strategy and, if it does, identify the strategy.

(iii) Determine the optimal strategy for each firm.

(iv) Determine the Nash equilibrium.

(v) Is this a prisoners' dilemma? How do you know?

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Pricing strategy - A market has only two sellers. They are both trying to decide on a pricing strategy. If both firms charge a high price

Pricing strategy - A market has only two sellers. They are both trying to decide on a pricing strategy. If both firms charge a high price, then each firm will experience a 10% increase in profits. If both firms charge a low price, then each firm will experience a 5% decrease in profits. If Firm 1 charges a low price and Firm 2 charges a high price, then Firm 1 will experience a 6% increase in profits and Firm 2 will experience a 2% decrease in profits. If Firm 2 charges a low price and Firm 1 charges a high price, then Firm 2 will experience a 7% increase in profits and Firm 1 will experience a 3% decrease in profits.

(i) Construct a payoff matrix for this game.

(ii) Determine whether each firm has a dominant strategy and, if it does, identify the strategy.

(iii) Determine the optimal strategy for each firm.

(iv) Determine the Nash equilibrium.

(v) Is this a prisoners' dilemma? How do you know?

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Where Q is quantity demanded per month in thousands, P is product price, I is an index of consumer income, and A is advertising expenditures per month in thousands.

Where Q is quantity demanded per month in thousands, P is product price, I is an index of consumer income, and A is advertising expenditures per month in thousands. Assume that P=$200, I=150, and A=30. Use the point formulas to complete the elasticity calculations indicated below.

A firm has estimated the following demand function for its product:

Q = 100 - 5 P + 5 I + 15 A

Where Q is quantity demanded per month in thousands, P is product price, I is an index of consumer income, and A is advertising expenditures per month in thousands. Assume that P=$200, I=150, and A=30. Use the point formulas to complete the elasticity calculations indicated below.

(i) Calculate quantity demanded.

(ii) Calculate the price elasticity for demand. Is demand elastic, inelastic, or unit elastic?

(iii) Calculate the income elasticity of demand. Is the good normal or inferior? Is it a necessity or a luxury?
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Kohler Clothiers manufactures women’s business suits.

P11-3A Kohler Clothiers manufactures women’s business suits. The company uses a standard cost accounting system. In March 2005, 11,800 suits were made. The following standard and actual cost data applied to the month of March when normal capacity was 15,000 direct labor hours. All materials purchased were used in production.

Cost element	Standard(per unit)	Actual
Direct materials	5 yards at $7.00 per yard	$410,400 for 57,000 yards($8.20 per yard)
Direct labor	1.0 hours at $12.00 per hour	$125,440 for 11,200 hours ($11.20 per hour)
Overhead	1.0 hours at $9.30 per hour (fixed $6.30; variable $3.00)	$42,000 variable overhead

Overhead is applied on the basis of direct labor hours. At normal capacity, budgeted fixed overhead costs were $94,500, and budgeted variable overhead costs were $45,000.

Instructions

(a) Compute the total, price, and quantity variances for (1) materials and (2) labor, and (3) the total, controllable, and volume variances for manufacturing overhead.

(b) Which of the materials and labor variances should be investigated if management considers a variance of more than 6% from standard to be significant? Discuss the potential causes of this variance.

TUTORIAL PREVIEW

(a) Compute the total, price, and quantity variances for (1) materials and (2) labor, and (3) the total, controllable, and volume variances for manufacturing overhead.

(a)        (1)        Total materials variance:

(  AQ  X  AP ) (57,000 X $7.20) $410,400

– –

(  SQ  X  SP ) (59,000* X $7.00) $413,000

=

$2,600 F

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The New York Stock Exchange trades many Oregon Timber bonds. With identical coupon rates of 8.075%, Oregon Timber has one issue that matures in 1 year, one in 7 years, and the third in 15 years.

The New York Stock Exchange trades many Oregon Timber bonds.   With identical coupon rates of 8.075%, Oregon Timber has one issue that matures in 1 year, one in 7 years, and the third in 15 years. A coupon payment was made yesterday. (Set up a spreadsheet or a table to calculate these in an easier manner. Each question a-c below has a 1, 7 and 15 year answer.)

a. If the yield to maturity for all three bonds is 8.25%, what is the fair price of each bond?

b. Suppose that the yield to maturity for all of these bonds changed instantaneously to 7.5%.  What is the fair price of each bond now?

c. Suppose that the yield to maturity for all of these bonds changed instantaneously again, this time to 9.95%. Now what is the fair price of each bond?

d. Given the fair prices at the various yields to maturity, can you assume interest-rate risk the same, higher, or lower for longer- versus shorter-maturity bonds?

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The following transactions, adjusting entries and closing entries were completed by Trailways Furniture Co

P9-5A The following transactions, adjusting entries and closing entries were completed by Trailways Furniture Co. during a 3yr period

Financial Accounting: An Integrated Statements Approach

By Jonathan E. Duchac, James M. Reeve, Carl S. Warren

Transactions for fixed assets

Problem 9-5A The following transactions, adjusting entries and closing entries were completed by Trailways Furniture Co. during a 3yr period. all are related to the use of delivery equipment. The declining balance method (at twice the straight line method) of depreciation is used

2005                                                                                                 

Jan       2          Purchased a used delivery truck paying $39,000 cash

Jan       5          Paid $1,250 for a new engine (debit delivery equipment)

April    7          Paid garage $125 for oil change and other repairs

Dec      31        Recorded depreciation on the truck for the fiscal yr the estimated useful life

of the truck is 8yrs w/ a residual value of $250

2006

Jan       1          Purchased a new truck for $80,000 paying cash

Mar      13        Paid garage $180 for tune up and other small repairs to the truck

Mar      31        Sold used truck for $24,500 (record depreciation to date for the 2006 truck)

Dec      31        Recorded depreciation on the remaining truck. It has an estimated residual

value of $2,000 and an estimated life of 10yrs          

2007
July      1          Bought a new truck for $45,000 paid cash

Oct.      2          Sold the truck bought 1/1/06 for $69,075 (record depreciation for the yr

Dec      31        Recorded depreciation on the remaining truck. it has an estimated residual

value of $4,500 and an estimated life of 10yrs

Instructions

Record the transactions and the adjusting entries

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The management of Caribbean Sugar Company is considering whether to process further raw sugar into refined sugar.

PR 25-4B The management of Caribbean Sugar Company is considering whether to process further raw sugar into refined sugar.

ACCOUNTING QUESTION

Financial Accounting, Managerial Accounting Warren, Reeve and Duchac Carl Warren, James M. Reeve, Jonathan E. Duchac

PR 25-4B The management of Caribbean Sugar Company

PR 25-4B Caribbean Sugar Company

Chapter 25

PR 25-4B The management of Caribbean Sugar Company is considering whether to process further raw sugar into refined sugar. Refined sugar can be sold for $1.90 per pound, and raw sugar can be sold without further processing for $1.10 per pound. Raw sugar is produced in batches of 27,000 pounds by processing 90,000 pounds of sugar cane, which costs $0.25 per pound. Refined sugar will require additional processing costs of $0.35 per pound of raw sugar, and 1.2 pounds of raw sugar will produce 1pound of refined sugar.

Instructions

1. Prepare a report as of January 30, 2010, presenting a differential analysis of the further processing of raw sugar to produce refined sugar.

2. Briefly report your recommendations.

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PR 25-1A On March 1, Midway Distribution Company is considering leasing a building and buying the necessary equipment to operate a public warehouse

PR 25-1A On March 1, Midway Distribution Company is considering leasing a building and buying the necessary equipment to operate a public warehouse

 

Financial Accounting, Managerial Accounting Carl Warren, James M. Reeve, Jonathan E. Duchac

 

Answer Key PR 25-1A Midway Distribution Company

 

PR 25-1A On March 1, Midway Distribution Company is considering leasing a building and buying the necessary equipment to operate a public warehouse. Alternatively, the company could use the funds to invest in $750,000of 7% U.S.Treasury bonds that mature in 14 years. The bonds could be purchased at face value. The following data have been assembled: Cost of equipment $750,000 Life of equipment 14 years Estimated residual value of equipment $76,000 Yearly costs to operate the warehouse, excluding depreciation of equipment $195,000 Yearly expected revenues—years 1–7 $330,000 Yearly expected revenues—years 8–14 $280,000

 

Instructions

1. Prepare a report as of March 1, 2010, presenting a differential analysis of the proposed operation of the warehouse for the 14 years as compared with present conditions.

2. Based on the results disclosed by the differential analysis, should the proposal be accepted?

3. If the proposal is accepted, what is the total estimated income from operations of the warehouse for the 14 years?

File name: PR-25-1A-Midway-Distribution-Company.doc File type: application/msword Price: $4

Seattle Roast Coffee Company produces Columbian coffee in batches of 8,000 pounds.

25-11 Seattle Roast Coffee Company produces Columbian coffee in batches of 8,000 pounds.

Financial Accounting    Warren, Reeve and Duchac

Managerial Accounting Carl Warren, James M. Reeve, Jonathan E. Duchac

Chapter 25 EX 25-11 Seattle Roast Coffee Company

E25-11 Seattle Roast Coffee Company produces Columbian coffee in batches of 8,000 pounds. The standard quantity of materials required in the process is 8,000 pounds, which cost $5.00 per pound. Columbian coffee can be sold without further processing for $10.80 per pound. Columbian coffee can also be processed further to yield Decaf Columbian, which can be sold for $12.50per pound. The processing into Decaf Columbian requires additional processing costs of $10,500 per batch. The additional processing will also cause a 5% loss of product due to evaporation.

a. Prepare a differential analysis report for the decision to sell or process further.

b. Should Seattle Roast sell Columbian coffee or process further and sell Decaf Columbian?

c. Determine the price of Decaf Columbian that would cause neither an advantage or disadvantage for processing further and selling Decaf Columbian.

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Seattle Roast Coffee Company produces Columbian coffee in batches of 8,000 pounds.

Seattle Roast Coffee Company produces Columbian coffee in batches of 8,000 pounds.

Financial Accounting    Warren, Reeve and Duchac

Managerial Accounting Carl Warren, James M. Reeve, Jonathan E. Duchac

EX 25-11 Seattle Roast Coffee Company produces Columbian coffee in batches of 8,000 pounds. The standard quantity of materials required in the process is 8,000 pounds, which cost $5.00 per pound. Columbian coffee can be sold without further processing for $10.80 per pound. Columbian coffee can also be processed further to yield Decaf Columbian, which can be sold for $12.50per pound. The processing into Decaf Columbian requires additional processing costs of $10,500 per batch. The additional processing will also cause a 5% loss of product due to evaporation.

a. Prepare a differential analysis report for the decision to sell or process further.

b. Should Seattle Roast sell Columbian coffee or process further and sell Decaf Columbian?

c. Determine the price of Decaf Columbian that would cause neither an advantage or disadvantage for processing further and selling Decaf Columbian.

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A11. (Expected return) Northern States Power has a projected dividend of $3.60 next year.

LEVEL A BASIC A1-A17 - A1. (Bond valuation) A $1,000 face value bond has a remaining maturity of 10 years

 

A1. (Bond valuation) A $1,000 face value bond has a remaining maturity of 10 years and a required return of 9%. The bond’s coupon rate is 7.4%. What is the fair value of this bond?

 

A2. (Bond valuation) Find the missing information for each of the following bonds. The coupons are paid in semiannual installments, so the number of payments is equal to twice the bond’s life in years. The YTM is compounded semiannually. N YIELD TO PRESENT COUPON FACE BOND (YEARS) MATURITY VALUE RATE VALUE 1 8 10.2% — 8.0% $1,000 2 7 8.0% — 9.0% $1,000 3 15 9.5% — 7.5% $1,000 4 20 — $1,075.00 8.5% $1,000 5 — 7.0% $963.80 6.49% $1,000 6 13 7.8% $1,140.60 — $1,000

 

A3. (Bond valuation) General Electric made a coupon payment yesterday on its 6.75% bonds that mature in 8.5 years. If the required return on these bonds is 8% APR, what should be the market price of these bonds?

 

A4. (Bond valuation) RCA made a coupon payment yesterday on its 6.25% bonds that mature in 11.5 years. If the required return on these bonds is 9.2% nominal annual, what should be the market price of these bonds?

 

A5. (Yield to maturity) New Jersey Lighting has a 7% coupon bond maturing in 17 years. The current market price of the bond is $975. What is the bond’s yield to maturity?

 

A7. (Yield to maturity) Kraft’s 5.75% coupon bond that matures in five years is selling for 98. a. What is the yield to maturity? b. What is the urrent yield?

 

A8. (One-period dividend discount model) Mead is expected to pay a $1.40 dividend in the next year and to sell for $68.00 in one year. Discounted at a required return of 12%, what is the value of one share of Mead today?

 

A9. (Two-period dividend discount model) New England Electric has projected dividends of $2.72 in one year and $3.10 in two years. If the stock is projected to sell for $48.00 in two years, what is the value of the stock today if the required return is 10%?

 

A10. (Dividend discount model) Assume RHM is expected to pay a total cash dividend of $5.60 next year and its dividends are expected to grow at a rate of 6% per year forever. Assuming annual dividend payments, what is the current market value of a share of RHM stock if the required return on RHM common stock is 10%?          

             

A11. (Expected return) Northern States Power has a projected dividend of $3.60 next year. Thecurrent stock price is $50.50 per share. If the dividend is projected to grow at 3.5% annually, what is the expected return on Northern States stock?

 

A12. (Required return for a preferred stock) James River $3.38 preferred is selling for $45.25. The preferred dividend is nongrowing. What is the required return on James River preferred stock?

 

A13. (Required return for a preferred stock) Sony $4.50 preferred is selling for $65.50. The preferred dividend is non-growing. What is the required return on Sony preferred stock?

 

A14. (Stock valuation) Suppose Toyota has nonmaturing (perpetual) preferred stock outstanding that pays a $1.00 quarterly dividend and has a required return of 12% APR (3% per quarter). What is the stock worth?

 

A15. (Stock valuation) Let’s say the Mill Due Corporation is expected to pay a dividend of $5.00 per year on its common stock forever into the future. It has no growth prospects whatsoever. If the required return on Mill Due’s common stock is 14%, what is a share worth?

 

A16. (Growth rate) Suppose Toshiba has a payout ratio of 55% and an expected return on its future investments of 15%. What is Toshiba’s expected growth rate?

A17. (Valuing a perpetual bond) Suppose a bond pays $90 per year forever. If the bond’s required return is 10.3%, what is the bond selling for in the capital markets?

SOLUTION PREVIEW

A2. (Bond valuation) Find the missing information for each of the following bonds. The coupons are paid in semiannual installments, so the number of payments is equal to twice the bond’s life in years. The YTM is compounded semiannually. N YIELD TO PRESENT COUPON FACE BOND (YEARS) MATURITY VALUE RATE VALUE 1 8 10.2% — 8.0% $1,000 2 7 8.0% — 9.0% $1,000 3 15 9.5% — 7.5% $1,000 4 20 — $1,075.00 8.5% $1,000 5 — 7.0% $963.80 6.49% $1,000 6 13 7.8% $1,140.60 — $1,000

N	Bond (years)	Yield to maturity	Present value	Coupon rate	Face value
1	8	10.20%	-	8%	1,000
2	7	8.00%	-	9.00%	1,000
3	15	9.50%	-	7.50%	1,000
4	20	-	1,075	8.50%	1,000

 

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Chapter 5 - A10. (Dividend discount model) Assume RHM - Solutions in excel

A10. (Dividend discount model) Assume RHM is expected to pay a total cash dividend of $5.60

Corporate Financial Management, Third Edition –

Chapter 5 - A10. (Dividend discount model) Assume RHM - Solutions in excel

LEVEL A (BASIC)

A10. (Dividend discount model) Assume RHM is expected to pay a total cash dividend of $5.60

next year and its dividends are expected to grow at a rate of 6% per year forever. Assuming annual dividend payments, what is the current market value of a share of RHM stock if the required return on RHM common stock is 10%?

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VIEW FULL QUESTIONS SET Level A Basic Finance Questions A1 to A17

Lenberg Lens Company believes in the “dividends as a residual” philosophy of dividend policy Answer Key:

Lenberg Lens Company believes in the “dividends as a residual” philosophy of dividend policy

Answer Key:

Lenberg Lens Company believes in the “dividends as a residual” philosophy of dividend policy. Th is year’s earnings are expected to total $10 million. A very conservative company, Lenberg is fi nanced solely with common stock. Th e required rate of return on retained earnings is 12 percent, whereas the cost of newly raised capital is 14 percent because of issuance costs. a. If Lenberg has $6 million of investment projects having expected returns greater than 12 percent, what total amount of dividends should Lenberg pay? b. If Lenberg has $12 million of investment projects having expected returns greater than 14 percent, what total amount of dividends should Lenberg pay? c. What factors, other than its belief in the residual theory of dividends, should Lenberg consider in setting its dividend policy in part b?

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The Mori Egg Noodle Company has the following equity accounts on its balance sheet: Common stock ($10 par, 300,000 shares) $ 3,000,000

The Mori Egg Noodle Company has the following equity accounts on its balance sheet: Common stock ($10 par, 300,000 shares) $ 3,000,000

The Mori Egg Noodle Company has the following equity accounts on its balance sheet: Common stock ($10 par, 300,000 shares) $ 3,000,000 Contributed capital in excess of par 1,500,000 Retained earnings 6,000,000 Total common stockholders’ equity $10,500,000

a. What is the maximum amount of dividends that may be paid by the Mori Company if the capital impairment provisions of state law are limited to the following?

i. The par value of common stock

ii. The par value and the capital in excess of par accounts

b. What other factors may limit Mori’s ability to pay dividends?

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Wolverine Corporation plans to pay a $3 dividend per share on each of its 300,000 shares next year.

Wolverine Corporation plans to pay a $3 dividend per share on each of its 300,000 shares next year. Wolverine anticipates earnings of $6.25 per share over the year. If the company has a capital budget requiring an investment of $4 million over the year and it desires to maintain its present debt to total assets (debt ratio) of 0.40, how much external equity must it raise? Assume that Wolverine’s capital structure includes only common equity and debt, and that debt and equity will be the only sources of funds to finance capital projects over the year.

 

File name: Wolverine-Corporation-plans.doc File type: application/msword Price: $3

A9. (Two-period dividend discount model) New England Electric has projected dividends of$2.72 in one year and $3.10 in two years

A9. (Two-period dividend discount model) New England Electric has projected dividends of$2.72 in one year and $3.10 in two years

Corporate Financial Management, Third Edition –

Chapter 5 - A9. (Two-period dividend discount model) New England Electric - Solutions in excel

LEVEL A (BASIC)

A9. (Two-period dividend discount model) New England Electric has projected dividends of$2.72 in one year and $3.10 in two years. If the stock is projected to sell for $48.00 in two years, what is the value of the stock today if the required return is 10%?

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A8. (One-period dividend discount model) Mead is expected to pay a $1.40 dividend in the next year and to sell for $68.00 in one year

A8. (One-period dividend discount model) Mead is expected to pay a $1.40 dividend in the next year and to sell for $68.00 in one year

Corporate Financial Management, Third Edition –

Chapter 5 - A8. (One-period dividend discount model) Mead is- Solutions in excel

LEVEL A (BASIC)

A8. (One-period dividend discount model) Mead is expected to pay a $1.40 dividend in the next year and to sell for $68.00 in one year. Discounted at a required return of 12%, what is the value of one share of Mead today?

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View full Questions Set Level A Basic Finance Questions A1 to A17