1.) What is the EOQ for a firm that annually sells 8,000 units when the cost of
ID: 2755536 • Letter: 1
Question
1.) What is the EOQ for a firm that annually sells 8,000 units when the cost of placing an order is $4 and the carrying costs are $3 a unit.
2.) DEF stock cost $80 and pays a $4 annual dividend. If you expect to sell the stock after 5 years for $100, what is your anticipated holding period return on this investment?
3.) Given the following marginal tax schedule, what would be the tax on $95,000 of taxable income?
$0 to 50,000 15%
50,001 to 75,000 25%
75,001 to 100,000 34%
100,001 to 335,000 39%
4.) What is the maximum price you would pay for a bond given the following information? The bond has a 7.5% coupon rate, it matures in 20 years, it pays interest annually, and it will pay the holder $1,000 upon maturity. You require a rate of return of 5% compounded annually.
Explanation / Answer
Answer (1)
Annual Sales = 8000 units = Demand quantity
Cost per order = $ 4
Carrying cost = $ 3 per unit
Economic Order Quantity (EOQ) = Square root [ (2 *Annual Sales * cost per order) / carrying cost]
EOQ = Square root [2*8000*4/3]
= Square root[64000/3]
= Square root [21333.33333]
= [21333.33333]^0.5
= 146.0593
Economic Order Quantity = 146
Answer (2)
Annual dividend = $ 4
Purchase price = $ 80
Expected sale price after 5 years = $ 100
Dividend income for 5 years = $ 4 * 5 = $ 20
Expected capital appreciation = $ 100 - $ 80 = $20
Holding period return = (dividend income + capital appreciation)/purchase price
= ($20+$20)/$80 = $40/$80 = 0.5 or 50%
Annualised Holding period return = (1+Holding Period return) ^ (1/holding period) – 1
= (1+0.50)^(1/5) - 1
= 1.50^0.20 – 1
= 1.08447177 – 1 = 0.08447177 or 8.45% (rounded off)
Answer (3)
Taxable income = $ 95000
Tax on income = $ 50000 * 15% + ($75000-$50000)*25% + (95000-75000) * 34%
= $ 7500 + 25000 * 25% + 20000 * 34%
= $7500 + $ 6250 + $ 6800
= $ 20,550
Tax payable on taxable income of $ 95000 = $ 20,550
Answer (4)
Coupon rate = 7.5%
Coupon payment = Annual
Time to Maturity, n = 20 years
Face value = $ 1000
Required rate of return, r = 5% or 0.05
Annual coupon amount = $ 1000 * 7.5% = $ 75
Current Price of the Bond = Annual coupon amount * [(1-(1/(1+r)^n)/r] + Face value /(1+r)^n
Current Price of Bond = $ 75 * [(1-(1/(1+0.05)^20)/0.05]+ 1000/(1+0.05)^20
= $ 75 * [(1-(1/2.653298))/0.05] + 1000/2.653298
= $ 75 * [(1-0.376889)/0.05] + 1000 * 0.376889
= $ 75 * (0.623111/0.05) + 1000 * 0.376889
= $ 75 * 12.46221 + 1000 * 0.376889
= $ 934.6658 + $ 376.8895
= $ 1311.555 or $ 1311.56 (rounded off)
Maximum price to pay for the bond = $ 1311.56
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.