Question 1
1. You are a coffee dealer anticipating the purchase of 82,000 pounds of coffee in three months. You are concerned that the price of coffee will rise, so you take a long position in coffee futures. Each contract covers 37,500 pounds, and so, rounding to the nearest contract, you decide to go long in two contracts. The futures price at the time you initiate your hedge is 55.95 cents per pound. Three months later, the actual spot price of coffee turns out to be 58.56 cents per pound and the futures price is 59.20 cents per pound. a. Determine the effective price at which you purchased your coffee. How do you account for the difference in amounts for the spot and hedge positions? b. Describe the nature of the basis risk in this long hedge. 2. Suppose that one day in early April, you observe the following prices on futures contracts maturing in June: 93.35 for Eurodollar and 94.07 for T-bill. These prices imply three-month LIBOR and T-bill settlement yields of 6.65 percent and 5.93 percent, respectively. You think that over the next quarter the general level of interest rates will rise while the credit spread built into LIBOR will narrow. Demonstrate how you can use a TED (Treasury/Eurodollar) spread, which is a simultaneous long (short) position in a Eurodollar contract and short (long) position in the T-bill contract, to create a position that will benefit from these views. Please show calculations. 3. In Mid-May, there are two outstanding call option contracts available on the stock of ARB Co.: Call #1 : Exercise price = $50, Expiration Date = Aug. 19, Market price = $8.40 Call #2: Exercise price = $60, Expiration Date = Aug 19, Market price = $3.34 a. Assuming that you form a portfolio consisting of one Call#1 held long and two Call#2 held short, complete the following table showing your intermediate steps. In calculating net profit, be sure to include the net initial cost of the options. Price of ARB Stock at expiration: 40, 45, 50, 55, 60, 65, 70, 75 Profit on Call#1 position for each price? Profit on Call#2 position for each price? Net Profit on Total position for each price? b. Graph the net profit relationship in Part a, using stock price on the horizontal axis. What is (are) the breakeven stock price(s)? What is the point of maximum profit? c. Under what market conditions will this strategy (which is known as a call ratio spread) generally make sense? Does the holder of this position have limited or unlimited liability?
Question 2
15. Magpie Corporation uses the total cost concept of product pricing. Below is cost information for the production and sale of 60,000 units of its sole product. Magpie desires a profit equal to a 25% rate of return on invested assets of $700,000. Fixed factory overhead cost $38,700 Fixed selling and administrative costs 7,500 Variable direct materials cost per unit 4.60 Variable direct labor cost per unit 1.88 Variable factory overhead cost per unit 1.13 Variable selling and administrative cost per unit 4.50 The unit selling price for the company's product is: A) $14.76 B) $15.00 C) $13.82 D) $15.80 16. When using the variable cost concept of applying the cost-plus approach to product pricing, what is included in the markup? A) Desired profit B) Total selling and administrative expenses plus desired profit C) Total fixed manufacturing costs, total fixed selling and administrative expenses, and desired profit D) Total costs plus desired profit 17. The condensed income statement for a business for the past year is as follows: Product T U Sales $660,000 $320,000 Less variable costs 540,000 220,000 Contribution margin $ 120,000 $100,000 Less fixed costs 145,000 40,000 Income (loss) from operations $ (25,000) $ 60,000 Management is considering the discontinuance of the manufacture and sale of Product T at the beginning of the current year. The discontinuance would have no effect on the total fixed costs and expenses or on the sales of Product U. What is the amount of change in net income for the current year that will result from the discontinuance of Product T? A) $120,000 increase B) $120,000 decrease C) $25,000 decrease D) $250,000 increase
Question 3
Horizontal and Vertical Analysis Sanborn Corporation's condensed comparative income statements for 20x8 and 20x7 appear below. The corporation's condensed comparative balance sheets for 20x8 and 20x7 appear on the next page. Sanborn Corporation Comparative Income Statements For the Years Ended December 31, 20x8 and 20x7 (in thousands of dollars) 20x8 20x7 Net sales $3,276,800 $3,146,400 Cost of goods sold 2,088,800 2,008,400 Gross margin $1,188,000 $1,138,000 Operating expenses Selling expenses $ 476,800 $ 518,000 Administrative expenses 447,200 423,200 Total operating expenses $ 924,000 $ 941,200 Income from operations $ 264,000 $ 196,800 Interest expense 65,600 39,200 Income before income taxes $ 198,400 $ 157,600 InNet income $ 136,000 $ 100,800 Earnings per share $3.40 $2.52 Sanborn Corporation Comparative Balance Sheets December 31, 20x8 and 20x7 20x8 20x7 Assets Cash $ 81,200 $ 40,800 Accounts receivable (net) 235,600 229,200 Inventory 574,800 594,800 Property, plant, and equipment (net) 750,000 720,000 Total assets $1,641,600 $1,584,800 Liabilities and Stockholders' Equity Accounts payable $ 267,600 $ 477,200 Notes payable (short-term) 200,000 400,000 Bonds payable 400,000, Common stock, $10 par value 400,000 400,000 Retained earnings 374,000 307,600 Total liabilities and stockholders' equity $1,641,600 $1,584,800 1. Prepare schedules showing the amount and percentage changes from 20x7 to 20x8 for the comparative income statements and the balance sheets. You may use the forms below. (40 points) Sanborn Corporation Comparative Income Statements For the Years Ended December 31, 20x8 and 20x7 (in thousands of dollars) 20x8 20x7 Increase or Decrease Amount Percentage Net sales $3,276,800 $3,146,400 Cost of goods sold 2,088,800 2,008,400 Gross margin $1,188,000 $1,138,000 Operating expenses Selling expenses $ 476,800 $ 518,000 Administrative expenses 447,200 423,200 Total operating expenses $ 924,000 $ 941,200 Income from operations $ 264,000 $ 196,800 Interest expense 65,600 39,200 Income before income taxes $ 198,400 $ 157,600 Income taxes expense 62,400 56,800 Net income $ 136,000 $ 100,800 Earnings per share $3.40 $2.52 Sanborn Corporation Comparative Balance Sheets December 31, 20x8 and 20x7 20x8 20x7 Increase or Decrease Amount Percentage Assets Cash $ 81,200 $ 40,800 Accounts receivable (net) 235,600 229,200 Inventory 574,800 594,800 Property, plant, and equipment (net) 750,000 720,000 Total assets $1,641,600 $1,584,800 Liabilities and Stockholders' Equity Accounts payable $ 267,600 $ 477,200 Notes payable (short-term) 200,000 400,000 Bonds payable 400,000 Common stock, $10 par value 400,000 400,000 Retained earnings 374,000 307,600 Total liabilities and stockholders' equity $1,641,600 $1,584,800 2. Using the forms below, prepare common-size income statements and balance sheets for 20x7 and 20x8 (40 points) Sanborn Corporation Common-Size Income Statements For the Years Ended December 31, 20x8 and 20x7 20x8 20x7 Net sales Cost of goods sold Gross margin Operating expenses Selling expenses Administrative expenses Total operating expenses Income from operations Interest expense Income before income taxes Income taxes expense Net income Sanborn Corporation Common-Size Balance Sheets December 31, 20x8 and 20x7 20x8 20x7 Assets Cash Accounts receivable (net) Inventory Property, plant, and equipment (net) Total assets Liabilities and Stockholders' Equity Accounts payable Notes payable (short-term) Bonds payable Common stock, $10 par value Retained earnings Total liabilities and stockholders' equity 3. Comment on the results in requirements 1 and 2 by indentifying favorable and unfavorable changes in the components and composition of the statements. (30 points)
