MGF 405 Lecture Notes - Lecture 3: Demand Curve

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violetox361

4 Oct 2016

School

University at Buffalo

Department

Management Finance

Course

MGF 405

Professor

Haekwon Lee

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Document Summary

Cross price elasticity % change in quantity demanded of a given product due to the % change in the price in another product. The demand in product a changes when the price of product b changes. Example: the price of cd players goes down; the demand of cd"s does up. When cross price elasticity positive + then two goods are substitutes. When cross price elasticity negative then two goods are complements. When cross price elasticity equal = then two goods are independent (do not. Price elasticity of demand % change in quantity demanded/ % change in price. The measure of the relationship between a change in the quantity demanded of a specific good and a change in its price. *example: gas prices increase by 50%, gas purchases decrease by 25% Ped = 0 (perfectly inelastic) demand does not change when price change vertical on demand curve .

Related Questions

1. SCI is looking at a new security system with an installed cost of $375,000. The cost will be depreciated straight-line to zero over the projectâs five-year life, at the end of which the system can be sold for $40,000. The security system will save the firm $105,000 per year in pretax operating costs, and it requires an initial investment in net working capital of $28,000, which will be fully recovered at the end of the projectâs life. If tax rate is 34% and discount rate is 10%, what is the NPV of the project?

2. Blur Cream is considering a new project. The machine required for the project costs $3.8 million. The sales related to the project will be $2.5 million per year for the next four years, after which the market will cease to exist. The machine will be depreciated down to zero using the straight-line method. Costs of goods sold will be 25% of sales. Blur also needs to add net working capital of $150,000 immediately. From year one to year four, Blur needs to increase net working capital by $1,000 per year. The net working capital will be recovered in full at the end of the projectâs life. If tax rate is 35% and discount rate is 16%, should Blur accept the project?

3. You are evaluating two machines. The Zig costs $215,000, has a three-year life, and has pretax operatingcosts of $35,000 per year. The Zag costs $270,000, has five-year life, and has pretax operating costs of $44,000 per year. For both machines, use straight-line depreciation to zero over the projectâs life and assume a salvage value of $20,000. If tax rate is 35% and discount rate is 12%, compute the EAC for both machines. Which do you prefer?

4. You are evaluating a project that costs $644,000, has an eight-year life, and has no salvage value. Assume that the depreciation is straight-line to zero over the projectâs life. Sales will be 70,000 units per year. Price per unit is $37, variable cost per unit is $21, and fixed costs are $725,000 per year. Tax rate is 35% and discount rate is 15%.

a) What is the NPV of the project?
b) If sales increase to 77,000, what is the sensitivity of NPV to changesin sales?
c) If variable cost increases to $23.1, what is the sensitivity of OCF to changes in variable cost?

5. Led Inc. has developed a new aircraft. If the aircraft is successful, the present value of the payoff when the product is brought to market is $34 million. If the aircraft fails, the present value of the payoff is $12 million. If the aircraft goes directly to the market, there is a 50% chance of success. Alternatively, Led can delay the launch by one year and spend $1.3 million to test the market. Test marketing would allow the firm to improve the product and increase the probability of success to 80%. If discount rate is11%, should the firm test the market?

6. You are examining a new project that will last for 10 years. The annua loperating cash flow will be $315,000. The discount rate is 16%. The initial investment is $1,350,000.

a) What is the NPV of the project?
b) After first year, the project can be sold for $950,000. At what level of operating cash flow would it make sense to sell the project?

7. Cohen has issued a bond with the following characteristics: Par: $1,000; Time to maturity: 15 years; Coupon rate: 7%; Semiannual payment. What is the price of the bond if the YTM is 9%?

8. The Pane bond has 11.5 years to maturity, a YTM of 7.6%, and a current price of $1,060. The bond makes semiannual payments. What is the coupon rate on this bond?

9. What is the inflation rate if nominal return is 14% and real return is 10%?

10. Jay, Inc. and Nic Corp. both have 7% coupon bonds outstanding with semiannual payments and both are priced at par value. The Jay, Inc. bond has 2 years to maturity, while the Nic Corp. bond has 15 years to maturity. If interest rate suddenly rises from 7% to 9%, what is the percentage change in the price of these bonds? If interest rate suddenly decreases by 2%, what is the percentage change in the price of these bonds?

11. You purchase a bond with an invoice price of $950. The bond has a coupon rate of 6.8%, and there are 2 months to the next semiannual coupon date. What is the clean price of the bond?

bluekoala262

Question 18

1. Which of the following does an efficient portfolio do?

1. Maximizes risk for a given return.

2. Minimizes risk for a given return.

3. Maximizes return for a given level of risk.

4. Minimizes return for a given level of risk.

	a.	1 and 3.
	b.	1 and 4.
	c.	2 and 3.
	d.	2 and 4.

3 points

Question 19

1. The security market line does not:

	a.	Indicate the relationship between risk and return.
	b.	Relate the market return and beta to a stock's return.
	c.	Identify the optimal portfolio for the investor.
	d.	Use beta coefficients as a measure of risk.

3 points

Question 20

1. Mutual funds ____ realized capital gains and income (for example, dividends received):

	a.	Retain.
	b.	Reinvest.
	c.	Distribute.
	d.	Distribute or reinvest.

2 points

Question 21

1. An index fund limits its portfolio to:

	a.	High quality securities.
	b.	Stocks that respond to changes in the consumer price index.
	c.	Stocks included in an aggregate measure of stock prices.
	d.	Stocks of firms in a particular industry.

2 points

Question 22

1. Mutual funds with beta coefficients greater than 1.0:

	a.	Have outperformed the market.
	b.	Have underperformed the market.
	c.	Have more systematic risk than the market.
	d.	Have less systematic risk than the market.

3 points

Question 23

1. Which of the following will tend to cause a stock's price to fall?

1. The firms beta declines.

2. The firms beta increases.

3. The risk-free rate declines.

4. The risk-free rate increases.

	a.	1 and 3.
	b.	1 and 4.
	c.	2 and 3.
	d.	2 and 4.

2 points

Question 24

1. The use of P/E ratios to select stocks suggests that:

	a.	High P/E stocks should be purchased.
	b.	Low P/E ratio stocks are overvalued.
	c.	A stock should be purchased if it is selling near its historic low P/E.
	d.	A stock should be purchased if it is selling near its historic high P/E.

2 points

Question 25

1. What does the efficient market hypothesis require?

1. Financial markets to be competitive.

2. Prices to adjust rapidly.

3. Prices of undervalued securities to fall.

	a.	1 and 2.
	b.	1 and 3.
	c.	2 and 3.
	d.	All of these choices.

3 points

Question 26

1. Which of the following does the strong form of the efficient market hypothesis suggest?

1. Inside information will not lead to superior investment results.

2. Inside information will lead to superior investment results.

3. Studying financial statements will not lead to superior investment results.

4. Studying financial statements will lead to superior investment results.

	a.	1 and 3.
	b.	1 and 4.
	c.	2 and 3.
	d.	2 and 4.

3 points

Question 27

1. Which of the following is the least broad-based measure of stock prices?

	a.	NASDAQ market index.
	b.	Dow Jones industrial average.
	c.	S&P 500 stock index.
	d.	AMEX market value index.

3 points

Question 28

1. What is dollar-cost averaging?

	a.	Periodically buying a round lot of stock.
	b.	Periodically investing a specified dollar amount in a stock.
	c.	A means to increase the average cost basis.
	d.	A means to ensure a positive return.

2 points

Question 29

1. Stock dividends cause:

	a.	The price of a share of stock to rise.
	b.	The price of a share of stock to fall.
	c.	The value of the firm to rise.
	d.	The value of the firm to fall.

2 points

Question 30

1. Which of the following occurs when a stock has a two-for-one split?

	a.	The price of the stock doubles.
	b.	The firm's assets increase.
	c.	The firm's liabilities decrease.
	d.	The par value of the stock is reduced.

3 points

Question 31

1. Dividend reinvestment plans offer which of the following advantages?

1. Deferment of federal income taxes.

2. A convenient means to accumulate shares.

3. Dollar-cost averaging.

	a.	1 and 2.
	b.	1 and 3.
	c.	2 and 3.
	d.	2.

3 points

Question 32

1. When the Federal Reserve seeks to expand the money supply, it:

	a.	Sells securities.
	b.	Buy securities.
	c.	Runs a deficit.
	d.	Runs a surplus.

2 points

Question 33

1. The sum of cash, currency, and demand deposits is:

	a.	M1.
	b.	M2.
	c.	M3.
	d.	M4.

3 points

Question 34

1. If the Federal Reserve lowers the target federal funds rate:

	a.	The discount rate rises.
	b.	Liquidity in the banking system is increased.
	c.	Security prices fall.
	d.	Required reserves are also decreased.

3 points

Question 35

1. The anticipation of inflation suggests that the investor should:

	a.	Buy bonds.
	b.	Anticipate higher interest rates.
	c.	Avoid real estate investments.
	d.	Sell stocks of gold companies.

3 points

Question 36

1. The current ratio is unaffected by:

	a.	Using cash to pay a dividend.
	b.	The collection of an account receivable.
	c.	Selling inventory for a profit.
	d.	Selling bonds and using the funds to finance inventory.

2 points

Question 37

1. Which of the following are true as the debt ratio increases?

1. Fewer assets are debt financed.

2. More assets are debt financed.

3. The ratio of debt equity increases.

4. The ratio of debt equity decreases.

	a.	1 and 3.
	b.	1 and 4.
	c.	2 and 3.
	d.	2 and 4.

2 points

Question 38

1. The technical approach suggests that future stock prices are forecasted by:

	a.	Past stock rates.
	b.	Financial ratios.
	c.	Accounting statements.
	d.	Monetary policy.

2 points

Question 39

1. The Dogs of the Dow strategy:

	a.	Forecasts the direction of the Dow Jones averages.
	b.	Suggests buying the Dow stocks with the highest dividend yields.
	c.	Outperforms the S&P 500.
	d.	Suggests buying the lowest-priced Dow stocks.

3 points

Question 40

1. Behavioral finance combines aspects from which two fields in an attempt to identify human traits that affect investment decisions?

	a.	Accounting and finance.
	b.	Finance and psychology.
	c.	Physics and finance.
	d.	Finance and marketing.

ultramarineguinea-pig196

Please read the article and answer these questions:

1. How did a government loan guarantee contribute to Solyndra's bankruptcy?

2. How did capital budgeting decisions contribute to Solyndra's bankruptcy?

3. How did changes in the industry contribute to Solyndra's bankruptcy?

4. Does the Solyndra bankruptcy indicate that government loan guarantees for private businesses are a bad idea?

___________

Solyndra Inc. was supposed to be a marquee example of how private and public capital, brought together, could vault innovative companies to commercial success.

Instead, the $535 million government loan guarantee so prized by the solar-panel maker may have ultimately contributed to the company's undoing, say investors with knowledge of the company's operations.

The new factory built with Department of Energy funds foisted fixed costs on a company already struggling through an industry shake-out, they say. What's more, the debt paradoxically made raising more money difficult. Once the government demanded priority in the event of failure, private investors were less likely to prop up the company.

One Solyndra investor said that, in retrospect, "the worst thing that happened to Solyndra was the loan."

The Fremont, Calif.-based company is now in Chapter 11 bankruptcy protection. It is now the target of federal inquiries, including a congressional probe and a criminal investigation by the Justice Department centering on whether the company misled the government in applying for the loans. Republicans, citing emails, say the White House pushed to get the loan approved for political reasons, which the White House denies. Solyndra didn't return calls for comment on that point but has said previously it was cooperating with the investigation.

Behind the political firestorm lies a company with a business case that never quite added up, owing to a fundamental cost problem that quickly got worse after the infusion of taxpayers' money that began in 2009, according to investors, analysts and people familiar with the company.

The company, founded in 2005, was blessed early on with influential backers. They would ultimately pump nearly $1 billion into the company.

Solyndra's largest backer was the family foundation of George Kaiser, a billionaire whose family had made a fortune from natural gas. Other venture-capital luminaries piled in, attracted with the help of Goldman Sachs Group Inc., GS 0.13% Solyndra's financial adviser. Investors included Madrone Capital Partners, which manages money for the Walton family of Wal-Mart Stores Inc. and the Virgin Green Fund, which includes investments from Richard Branson.

The start-up's lure was a clever technology. Solyndra's name, with the play on "cylinder," illustrated its productânot a flat panel but multiple long and thin tubes covered in material to absorb the sun's rays. Other panels relied on a heavy, then-expensive material called polysilicon to turn the sunlight into electricity. Solyndra's product was lighter and potentially easier and cheaper to install.

As subsidies in Europe fueled demand and oil prices soared during 2008, the solar industry seemed poised to take off. But by 2009, the industry was undergoing severe growing pains, and Solyndra was hit hard. Polysilicon prices were in the midst of an 80% dive. That made Solyndra's product less competitive with rivals that used polysilicon.

Solyndra's costs stayed relatively high because of the tricky manufacturing process. In late 2009, Solyndra's tubes cost $4 for every watt of power output to produce, according to company securities filings. The problem was the company could sell them for only $3.24 per watt. One reason for the losses: the company often had to throw out defective or test panels, according to one former production executive.

As it was losing money, competition was getting worse. China's solar panels were dropping in price. U.S. rival First Solar Inc., FSLR 1.86% was making panels at less than a quarter of Solyndra's cost then and today produces panels at about 75 cents per watt. In 2009, Solyndra lost $172.5 million on revenue of $100.5 million.

"The change in expectations was pretty dramatic," said David Miller, spokesman for Solyndra, about the pricing of its panels. He said analysis of what went wrong and what should have been done is easier in retrospect.

The company still exuded optimism. In a July 2009 press release, it said it had a "contractual backlog of more than $2 billion" in orders. The figure was based not on firm orders, however, but largely on "framework agreements" that allowed customers to walk away or renegotiate, according to a filing for an initial public offering from 2010. Its main customer, Phoenix Solar AG, renegotiated in its favor in early 2009, according to Murray Cameron, chief operating officer at the German installer.

In mid-2009, Solyndra had a choice: It could hunker down with its existing factory and try to slash costs to meet competition, drawing on additional private capital as needed, according to the people familiar with the company. Or, with a loan from Uncle Sam, it could gamble and build a brand-new, bigger factory in a bid to gain economies of scale and dominate the market.

The Obama administration was eager to help. The loan-guarantee program dated to the George W. Bush administrationâit was created in a 2005 energy lawâand now was swimming in funds from the economic-stimulus package.

Solyndra's founder and chief executive at the time, Chris Gronet, decided to go for the gamble. "Chris was really a hard driver," said the former executive involved in the production of the solar panels. "The faster you solve problems, the faster you build your infrastructure, the quicker you are to market. You spend money to solve problems."

There was another motivatorâSolyndra's management and investors had an eye on an initial public offering.

"There was a perceived halo around the loan," said an investor with knowledge of the company. "If we get the loan, then we can definitely go public and cash out."

In December 2009, Solyndra made its initial IPO filing, with Goldman Sachs and Morgan Stanley MS -0.47% as lead underwriters.

The company brought in 3,000 workers to build the factory taxpayers had funded, but it quickly realized it had far too much capacity. The old factory alone could be outfitted to produce each year panels with power output of 110 megawatts each year. And the new factory would add another 500 megawatts. Yet sales for 2010 ultimately reached only 65 megawatts.

"The mindset of the management was if we make it, people will buy it," said the former executive. But the new factory added heavy fixed costs such as payroll, lease payments, and utility bills. At the same time, projected revenue wasn't coming in, magnifying the monthly drain of cash, the former executive said.

In June 2010, only weeks after President Barack Obama visited the company, the Solyndra board gave up the IPO plans. The following month Mr. Gronet left his CEO post and became chairman. The new CEO, Brian Harrison, shut down the old factory.

Unruly Campaign Tag : WSJ : Chase INK - Jan 2017

That didn't work either, as the tricky cylinder manufacturing equipment continued to keep costs high. Messrs. Gronet and Harrison couldn't be reached for comment.

And Solyndra realized, too late, that it was a mistake to sell its product mainly through distributors, according to one of the investors and the executive. They say Solyndra could have better pitched its product's advantages, such as a lower installation cost, by speaking directly to customers.

In March, Mr. Harrison said the company made a mistake of not focusing enough on market development. He said it was important to communicate directly to customers, rather than to just resell through distributors.

The new panels also were harder to finance because their performance was difficult to forecast accurately, said Arno Harris, chief executive of solar-project developer Recurrent Energy. He said his team considered purchasing Solyndra panels several times but decided that neither the economics nor the technical design made sense for his company.

Earlier this year, private backers advanced another $75 million in a loan to Solyndra, and, unusually, got ahead of the federal government in the event of a liquidation. This August, Solyndra needed still more money. The government was in talks to restructure its loan but eventually declined.

With no options in sight, the company pulled the plug, filing for bankruptcy and laying off about 1,100 employeesâleaving investors to rue what might have been.

"We had a perfectly good factory," said one of the investors. "That would have been a better size for the market."

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MGF 405 Lecture Notes - Lecture 3: Demand Curve

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