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Question 1
Under the tax rate of 40%, an unlevered firm Pacific Company’s WACC is currently 15 percent. The company can borrow at 6 percent.
a. What is Pacific Company’s cost of equity?
b. If the firm converts to 30 percent debt, what will its cost of equity be?
c. If the firm converts to 55 percent debt, what will its cost of equity be?
d. What is Pacific Company’s WACC in part (b)? In part (c)?
Q 2
Smart Toys, currently has no debt, expects an EBIT of $45,000 every year forever. Its cost of equity is 16 percent. The corporate tax rate is 30 percent. The company can borrow at 8 percent.
a.What is the current value of the company?
b.What will the value of the firm be if the company takes on debt equal to 20 percent of its unlevered value? What if it takes on debt equal to 60 percent of its unlevered value?
c. What will the value of the firm be if the company takes on debt equal to 55 percent of its levered value? What if the company takes on debt equal to 40 percent of its levered value?
Discuss, using the IS-LM model, what happens to interest rates as prices change along a
given AD schedule.
Ford Motor, an auto manufacturer, is debating whether to convert its all-equity capital structure to one that is 40 percent debt. Currently there are 8,000 shares outstanding and the price per share is $60. EBIT is expected to remain at $64,000 per year forever. The interest rate on new debt is 5.5 percent, and there are no taxes.
a. If the firm has a 100% dividend payout rate, what is the cash flow under the current capital structure to David who owns 160 shares of Ford Motor stock?
b. Assume David keeps all 160 of his shares. What will his cash flow be under the proposed capital structure of the firm?
c. Suppose David prefers the current all-equity capital structure, but Ford Motor does convert. Show how he could unlever his shares of stock to recreate the original capital structure.
d. Using your answer to part (c), is Ford Motor’s choice of capital structure relevant? Explain.
A German worker takes 400 hours to produce a car and 2 hours to produce a case of wine.A French worker takes 600 hours to produce a car and X hours to produce a case of wine.
a.for what value of x will gains from trade be possible ? Explain.
b . For what values of X will Germany export cars and import wine? Explain.
In its first year, “Helen Trading” had the following experience:
Unit selling price birr 100 Sales 50,000 units
Total fixed cost birr 400,000 TVC birr 3,000,000
Required:
a) Develop TR, TC and profit functions for the company in terms of quantity
b) Find the breakeven point in terms of quantity and sales volume.
c) If profit had been br. 500,000 what would have been the sales volume (Revenue) and quantity of sales.
d) What would have been the profit if sales are br. 2,000,000
e) Draw Breakeven chart and discuss about it
in 2021, Kante, a typical consumer, goes into a super market in central London, wehre he has four cups of coffee from the coffee shop section
a) Explain what we might observe about the toltal utility and marginal utility of the individual. how does your explanation illustrate the law of diminishing returns?
b) upon leaving he buys only orange juice and yoghurt for his family. Kante earns $100, orange juice is priced at $2 a carton and yoghurt is priced at $4 a tub. Draw Kante's budget constraint.
c) Now suppose that all prices increase by 10 per cent in 2022 and that Kante's salary increases by 10 per cent as well. Draw his new budget constraint
d) Explain your diagram in (C) above and indicate what account for the shift of Kante's budget constraint and the implication(s) of this shift in the budget line.
suppose that a borrower and a lender agree on the nominal interest rate to be paid on a loan. Then inflation turns out to be higher than they both expected
16. The research department of the NEBICO Biscuit Company (NBC) estimate the following regression for the demand of the biscuit it sells: Qx = 1.0 – 2Px + 1.5Y + 0.8Py – 3 Pm + 1A. a. Estimate the demand for NEBICO biscuit when price of biscuit (Px) = Rs 20, income of the consumers (Y) = Rs 400, price of Substitute (Py) = Rs 22, Price of complements (Pm) = Rs 50 and advertising expenditure of biscuit (A) = Rs 30. 5 b. Using elasticities, estimate the level of demand for next year if the NBC reduces Px by 10 percent, increases advertising expenditure by 20 percent. Similarly, income of the consumer increases by 5 percent, price of substitute increases by 10 percent and price of complement decreases by 8 percent.
14. The demand equation faced by Mercantile Communication for its personal computer is given by P = 10,000 – 4Q. a. Write the marginal revenue equation. b. At what price and quantity will marginal revenue be zero? c. At what price and quantity will total revenue be maximized? 4 d. If price is increased from $ 6,000 to $ 7,000, what will be the effect on total revenue? What does this imply about price elasticity?
13. A firm has hired a management consulting firm to analyze demand for its product. The results relating to this demand function are presented below: Qx = 1572 + 2A + 10Y + 3PY – 4Px Where, Qx = quantity demand for x good A = advertisement expenditure in thousands P = price of x good in rupees Py = price of another product in rupees Y = income in thousands a. Interpret the constant parameter and coefficients corresponding to Y and Px in the given demand equation. b. Find the quantity demanded if P =Rs 400, Y = Rs 15000, A = Rs 20000 and Py = Rs 500 c. If price is reduced to Rs 300, what is the change in quantity demand? d. Is the demand elastic or inelastic? What would be the effect of a rise in the price on the total income? e. Are two goods substitutes or complements? Give reason.
