Adam and Catherine are choosing between two ice cream shops, Icy and Frosty, located at either end of a 1-mile long beach.

Adam and Catherine are choosing between two ice cream shops, Icy and Frosty, located at either end of a 1-mile long beach. Adam is standing in front of Icy, while Catherine is standing in front of Frosty. Both Adam and Catherine are each willing to pay, at most, $6 for one ice cream cone. It costs them $1 to walk the 1-mile distance between the shops. Icy is government-run, so the price is fixed at exactly $4/cone and will not change. The shops face costs of $0.25/cone. What price should Frosty charge if it is to maximize its total profits from Adam and Catherine?

 
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What is your estimate of the stock's current price?

A company currently pays dividend of $2 per share, Do=$2. It is estimated that the company’s dividend will grow at rate of 20% per year for the next 2 years; then the dividend will grow at a constant rate of 7% thereafter. The company’s stock has a beta equal 1.2, the risk-free is 7.5%, and the market premium is 4%.

Question:
What is your estimate of the stock’s current price?

 

 
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1)  What is the sales mix?

Cost-Volume-Profit Models

Part I

Bennis Shafts produces three types of golf club shafts which it sells to golf club manufacturers.  Prepare ONE worksheet to answer the following questions and to determine the outcomes of the different scenarios below.

The computation section of your spreadsheet should have two sections:

Section A.

Answer the following questions based on the information as given:

1)  What is the sales mix?

2)  What is the contribution margin per unit for each type of shaft?

3)  What is the weighted average unit contribution margin for this mix of shafts (show both the CMU method and the total CM method)

4)  How many of each type of shaft must Bennis sell to breakeven?

5)  Given the limited production time, which type of shaft is most profitable?

Section B.

  1. Prepare a variable costing income statement for each scenario below.  The assumptions/changes for each scenario should be shown in the input section and clearly labeled for that scenario.  The changes in scenarios 2, 3 and 4 are based on scenario 1 which is the information as given.  This means that all items should be at the values used in scenario 1 except the item(s) that are indicated to change for that particular scenario.  Prepare and clearly label a separate income statement for each scenario.

  2. Prepare a Word document with a short memo  (1/2 page single spaced) to Bennis Shafts management explaining the effects of scenarios 2, 3 and 4 on their operating income compared to scenario 1.  Please be clear but concise.

Scenario 1– Bennis sells shafts in the quantities, prices and costs as indicated in the given information.

Scenario 2– Due to a decrease in orders by 10%, management attempts to compensate for lower sales by increasing all prices by 10%.

Scenario 3 – Bennis hires a new production supervisor at $50,000 in response to an increase in orders of 10%.

Scenario 4– Bennis changes its sales mix to Steel – 20%, Titanium – 60% and Beryllium – 20% while producing the same total number of golf club shafts.

  Steel Titanium Beryllium Total
Number of sets 6000 2000 1000  
Price per set $120.00 $150.00 $192.00  
Direct material per set $18.00 $33.00 $42.00  
Direct labor per set $12.00 $12.00 $12.00  
Time to produce each shaft 0.5 0.4 0.7  
Fixed costs       $300,000

Part II

Excel Spreadsheet

  1. Using the following information, perform a sensitivity analysis and indicate to which variable would have the greatest effect on operating income.  Present the complete table.
  Base High Low
Quantity Produced                 6,000               7,000               5,000
Price $120.00 $130.00 $80.00
DM $18.00 $25.00 $12.00
DL $12.00 $30.00 $7.25
FC  $      20,000.00  $    23,000.00  $    15,000.00

Additional Information:

The question in finance deals with the Cost Volume Profit Models. The question is divided in 2 parts. 1st part deals with the golf club manufacturing company.  Questions such as sales mix, contribution margin per unit, weighted average unit contribution margin, the breakeven point, etc have been computed.  The 2nd part is to perform sensitivity analysis upon given data and compute greatest effect on operating income. Refer to the Excel document for the computations.

 
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The large turbine generator industry is a duopoly.

The large turbine generator industry is a duopoly. The two firms, GE and Westinghouse, compete through Cournot quantity setting competition. The demand curve for the industry is P=100-Q, where P is the price (in $millions) and Q is the total quantity produced by GE and Westinghouse. Currently, each firm has marginal cost of $40 and no fixed costs. Show that the equilibrium price is $60 with each firm producing 20 machines and earning profits of $400.

 
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a. Determine whether interest rate parity is currently holding.

Currently, the spot exchange rate is $1.50/£ and the three-month forward exchange rate is $1.52/£. The three-month interest rate is 8.0 percent per annum in the U.S. and 5.8 percent per annum in the U.K. Assume that you can borrow as much as $1,500,000 or £1,000,000.

a. Determine whether interest rate parity is currently holding.

b. If IRP is not holding, how would you carry out covered interest arbitrage? Show all the steps and determine the arbitrage profit.

c. Explain how IRP will be restored as a result of covered arbitrage activities.

 
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The dancing machine industry is a duopoly.

The dancing machine industry is a duopoly. The two firms, Chuckie B Corp. and Gene Gene Dancing Machines, compete through Cournot quantity-setting competition. The demand curve for the industry is P = 100 – Q, where Q is the total quantity produced by Chuckie B and Gene Gene. Currently, each firm has marginal cost of $40 and no fixed cost. Show that the equilibrium price is $60, with each firm producing 20 machines and earning profits of $400.

 
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Consider a market with two horizontally differentiated firms X and

Consider a market with two horizontally differentiated firms, X and Y. Each has a constant marginal cost of $20. Demand functions are:

Qx = 100 – 2Px + 1Py

Qy = 100 – 2Py + 1Px

Calculate the Bertrand equilibrium in prices in the market.

Consider a market with two horizontally differentiated firms X and

 
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How does firm-level price elasticity of demand shape the opportunities for making profit in an industry?

How does industry-level price elasticity of demand shape the opportunities for making profit in an industry? How does firm-level price elasticity of demand shape the opportunities for making profit in an industry?

 
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what should be the price of Baldwin stock today?

Baldwin Corp. just paid a dividend of $2.00. Over the next two years this dividend is expected to grow by 20% per year. After two years, dividend growth is expected to level off at 10%. If the required rate of return on Baldwin stock is 12%, what should be the price of Baldwin stock today?

$31.68

$130.71

$158.40

$128.57

$119.75

 

 

 
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What intuition can you draw from this about the magnitude of price competition

How does the calculation of demand responsiveness in Linesville change if customers rent two videos at a time? What intuition can you draw from this about the magnitude of price competition in various types of markets?

 
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