ans_practice-2 summer 1 2012

Week 1

E2.1.

Category

Financial

Statement(s) Cash A BS

Accounts payable... L BS

Common stock OE BS

Depreciation expense.. E IS

Net sales.. R IS

Income tax expense. E IS

Short-term investments... A BS

Gain on sale of land. G IS

Retained earnings OE BS

Dividends payable.. L BS

Accounts receivable A BS

Short-term debt L BS

E2.2.

Category

Financial

Statement(s) Accumulated depreciation... A BS

Long-term debt L BS

Equipment A BS

Loss on sale of short-term investments... LS IS

Net income OE IS

Merchandise inventory A BS

Other accrued liabilities L BS

Dividends paid. OE Neither*

Cost of goods sold E IS

Additional paid-in capital. OE BS

Interest income. R IS

Selling expenses.. E IS

* Trick question! Dividends paid appears only on the Statement of Changes in Owners Equity. Dividends paid are distributions of earnings that reduce retained earnings on the balance sheet. Dividends paid are not expenses, and do not

appear on the income statement.

E2.4.

Use the accounting equation to solve for the missing information

Firm A:

A = L + PIC + ( Beg. RE + NI - DIV = End. RE )

$ ? = $80,000 + $55,000 + ( $50,000 + 68,000 - $12,000 = ? )

In this case, the ending balance of retained earnings must be determined first:

$50,000 + $68,000 - $12,000 = End. RE.

Retained earnings, 12/31/09 = $106,000

Once the ending balance of retained earnings is known, total assets can be determined:

A = $80,000 + $55,000 + $106,000

Total assets, 12/31/09 = $241,000

Firm B:


$435,000 = ? + $59,000 + ( $124,000 + $110,000 - ? = $186,000 )

$435,000 = L + $59,000 + $186,000

Total liabilities, 12/31/09 = $190,000

$124,000 + $110,000 - DIV = $186,000

Dividends declared and paid during 2009 = $48,000

Firm C:


$155,000 = $75,000 + $45,000 + ( ? + $25,500 - $16,500 = ? )

In this case, the ending balance of retained earnings must be determined first:

$155,000 = $75,000 + $45,000 + End. RE


Once the ending balance of retained earnings is known, the beginning balance of retained

earnings can be determined:

Beg. RE + $25,500 - $16,500 = $35,000


Week 2

E3.8.

a. Margin * 2.4 Turnover = 12% ROI

Margin = 5%

5% Margin = (Net Income / Sales $96,000,000)

Net Income = $4,800,000 (or $4.8 million)

b. ROE = ($4,800,000 Net income / $32,000,000 Average owners' equity) = 15%

P3.11.

a. ROI = Margin * Turnover

= (Net income / Net revenues) * (Net revenues / Average total assets)

= ($5,044 / $35,382) * ($35,382 / (($48,314 + $48,368) / 2))

= (14.3% Margin * 0.73 turnover) = 10.4%

b. ROE = Net income / Average stockholders' equity

= $5,044 / (($36,182 + $36,752) / 2) = 13.8%

c. Working capital = Current assets - Current liabilities

12/30/06 12/31/05 Current assets ......... ........... ........... ........... ........... ........... $18,280 $21,194

- Current liabilities .... ........... ........... ........... ........... ........... 8,514 9,234

= Working capital ...... ........... ........... ........... ........... ........... $ 9,766 $11,960

d. Current ratio = Current assets / Current liabilities

12/30/06 12/31/05 Current assets ......... ........... ........... ........... ........... $18,280 $21,194

/ Current liabilities .... ........... ........... ........... ........... 8,514 9,234 = Current ratio ........... ........... ........... ........... ........... 2.1 2.3

e. Acid-test ratio = (Cash + Short-term securities + Accounts and Notes receivable)

Current liabilities

12/30/06 12/31/05 Cash and cash equivalents ..... ........... ........... ........... $ 6,598 $ 7,234 Short-term investments ......... ........... ........... ........... ........... 2,270 3,990

Trading assets ........... ........... ........... ........... ........... 1,134 1,458 Accounts receivable, net ....... ........... ........... ........... ........... 2,709 3,914

Total (quick assets) ... ........... ........... ........... ........... $12,711 $16,596

Total (quick assets) ........... ........... ........... ........... $12,711 $16,596 / Current liabilities.... ........... ........... ........... ........... ........... 8,514 9,234

= Acid-test ratio ........ ........... ........... ........... ........... ........... 1.5 1.8

E4.1.

ASSETS = LIABILITIES + OWNERS' EQUITY Accounts Merchandise Notes Accounts Paid in Retained

Cash + Receivable + Inventory + Equipment = Payable + Payable + Capital + Earnings + Rev - Exp

a. +8,000 +8,000

b. +5,000 +5,000

c. -1,750 +1,750

d. -1,400 -1,400

e. -9,000 +15,000 +6,000

f. +6,500 -4,000 +6,500 -4,000

g. +100 -100

h. -1,200 +4,200 +3,000

i. +3,900 +9,600 -9,000 +13,500 -9,000

j. +1,850* -1,850

k. +3,160 -3,160

l. -4,720 -4,720

______ _____ _____ _____ _____ _____ _____ _____ ______ _____

8,490 + 6,440 + 6,200 + 1,750 = 5,000 + 6,230 + 8,000 + + 20,000 - 16,350

Month-end totals: Assets $22,880 = Liabilities $11,230 + Owners' equity $11,650

Net income for the month: Revenues $20,000 - Expenses $16,350 = Net income $3,650

* Ordinarily, the Wages Payable account would be increased for employee wage expense

that has been incurred but not yet paid.

Optional Continuation:

BLUE CO. STORES, INC.

Income Statement

Sales.. $20,000

Cost of goods sold. (13,000) Gross profit $ 7,000

Rent expense. (1,400) Wages expense.. (1,850)

Advertising expense.. (100) Net income (this exercise ignores income taxes).. $ 3,650

E4.1. (continued)

BLUE CO. STORES, INC.

Balance Sheet

Assets:

Cash... $ 8,490 Accounts receivable.. 6,440

Merchandise inventory.. 6,200 Total current assets $21,130

Equipment (this exercise ignores depreciation) 1,750 Total assets $22,880

Liabilities:

Notes payable $ 5,000 Accounts payable.. 6,230

Total liabilities.. $11,230

Owners Equity: $ 8,000

Paid-in Capital... 3,650

Retained earnings *... $11,650 Total owners equity.. $22,880

Total liabilities and owners equity...

* Since this was the first month of operations, the Retained Earnings account would have

a $0 beginning balance. Thus, the net income for the month creates a positive balance in

retained earnings.

P4.17.

Balance Sheet Income Statement .

Assets = Liabilities + Owners Equity Net income = Revenues - Expenses a.

b.

c.

d.

e.

Cash Common Stock

+1,000,000 +1,000,000

Cash Notes Payable

+500,000 +500,000

Cash Salaries Exp

-380,00 -380,000

Merchandise Accounts

Inventory Payable

+640,000 +640,000

Accounts Rec Sales

+910,000 +910,000 Cost of

Merchandise Inv Goods Sold

-580,000 -580,000

Balance Sheet Income Statement .

Assets = Liabilities + Owners Equity Net income = Revenues - Expenses

f.

g.

h.

i.

j.

Cash Rent Exp

-110,000 -110,000

Equipment Accounts

+150,000 Payable

Cash +100,000

-50,000

Cash Accounts

-720,000 Payable

-720,000

Cash Utilities Exp

-36,000 -36,000

Cash

+825,000

Accounts Rec

-825,000

k.

l.

Interest Pay Interest Exp

+60,000 -60,000

Rent Payable Rent Exp

+10,000 -10,000

a.

b.

c.

d.

Journal entries:

Dr. Cash ....... ........... ........... ........... ........... ........... ........... ........... 1,000,000

Cr. Common Stock ........ ........... ........... ........... ........... ........... 1,000,000

Dr. Cash ....... ........... ........... ........... ........... ........... ........... ........... 500,000

Cr. Notes Payable .......... ........... ........... ........... ........... ........... 500,000

Dr. Salaries Expense ........... ........... ........... ........... ........... ........... 380,000

Cr. Cash . ........... ........... ........... ........... ........... ........... ........... 380,000

Dr. Merchandise Inventory .. ........... ........... ........... ........... ........... 640,000

Cr. Accounts Payable .... ........... ........... ........... ........... ........... 640,000

e.

f.

g.

h.

i.

j.

k.

l.

Dr. Accounts Receivable ...... ........... ........... ........... ........... ........... 910,000

Cr. Sales ........... ........... ........... ........... ........... ........... ........... 910,000

Dr. Cost of Goods Sold ........ ........... ........... ........... ........... ........... 580,000

Cr. Merchandise Inventory.......... ........... ........... ........... ........... 580,000

Dr. Rent Expense ..... ........... ........... ........... ........... ........... ........... 110,000

Cr. Cash . ........... ........... ........... ........... ........... ........... ........... 110,000

Dr. Equipment .......... ........... ........... ........... ........... ........... ........... 150,000

Cr. Cash . ........... ........... ........... ........... ........... ........... ........... 50,000

Cr. Accounts Payable .... ........... ........... ........... ........... ........... 100,000

Dr. Accounts Payable ........... ........... ........... ........... ........... 720,000 Cr. Cash . ........... ........... ........... ........... ........... ........... ........... 720,000

Dr. Utilities Expense ........... ........... ........... ........... ........... ........... 36,000

Cr. Cash . ........... ........... ........... ........... ........... ........... ........... 36,000

Dr. Cash ....... ........... ........... ........... ........... ........... ........... ........... 825,000

Cr. Accounts Receivable ........... ........... ........... ........... 825,000

Dr. Interest Expense . ........... ........... ........... ........... ........... ........... 60,000

Cr. Interest Payable ....... ........... ........... ........... ........... ........... 60,000

Dr. Rent Expense ..... ........... ........... ........... ........... ........... ........... 10,000

Cr. Rent Payable (or Accounts Payable) ........... ........... 10,000

P4.18.

a.

Solution approach: Prepare a T-account to determine the Cash account balance, and

then review the results of the horizontal model representations (or journal entries above).

Since there are a limited number of transactions in Problem 4.17., the balances of all of

the other accounts should be easy to determine.

Cash

a. 1,000,000 c. 380,000

b. 500,000 f. 110,000

j. 825,000 g. 50,000

h. 720,000

i. 36,000

1,029,000

a. KISSICK, CO.

Income Statement

Sales .. ........... ........... ........... ........... ........... ........... ........... ........... $ 910,000

Cost of goods sold ..... ........... ........... ........... ........... ........... ........... (580,000)

Gross profit ... ........... ........... ........... ........... ........... ........... ........... $ 330,000

Rent expense . ........... ........... ........... ........... ........... ........... ........... (120,000)

Utilities expense ........ ........... ........... ........... ........... ........... ........... (36,000)

Salaries expense ........ ........... ........... ........... ........... ........... ........... (380,000)

Loss from operations . ........... ........... ........... ........... ........... ........... $(206,000)

Interest expense ......... ........... ........... ........... ........... ........... ........... (60,000)

Net loss (the problem ignores income taxes) ........... ........... ........... $(266,000)

KISSICK, CO.

Balance Sheet

Assets: Cash .. ........... ........... ........... ........... ........... ........... ........... ........... $1,029,000

Accounts receivable .. ........... ........... ........... ........... ........... ........... 85,000

Merchandise inventory .......... ........... ........... ........... ........... ........... 60,000

Total current assets .... ........... ........... ........... ........... ........... ........... $1,174,000

Equipment (the problem ignores depreciation) ......... ........... ........... 150,000

Total assets .... ........... ........... ........... ........... ........... ........... ........... $1,324,000

Liabilities: Accounts payable ...... ........... ........... ........... ........... ........... ........... $ 20,000

Interest payable ......... ........... ........... ........... ........... ........... ........... 60,000

Rent payable .. ........... ........... ........... ........... ........... ........... ........... 10,000

Total current liabilities .......... ........... ........... ........... ........... ........... $ 90,000

Notes payable ........... ........... ........... ........... ........... ........... ........... 500,000

Total liabilities .......... ........... ........... ........... ........... ........... ........... $ 590,000

Owners Equity: Common stock ......... ........... ........... ........... ........... ........... ........... $1,000,000

Deficit * ......... ........... ........... ........... ........... ........... ........... ........... (266,000)

Total owners equity . ........... ........... ........... ........... ........... ........... $ 734,000 Total liabilities and owners equity ... ........... ........... ........... ........... $1,324,000

Since this was the first year of operations, the Retained Earnings account would have a

$0 beginning balance. Thus, the net loss for the year creates a deficit.

b. Note to Instructor: Students should be able to determine the net loss amount

because there are so few transactions to analyze in Problem 4-17 (the solution to these

transactions is provided on the texts website). Begin the in-class discussion by asking, What do you think went wrong that caused such a large net loss?

Point out that it is not unusual for a start-up company to show a significant net loss in the first year of operationsbecause of the cost of organizing the business, and because the revenue-generating process may be delayed for several

months (or longer) until the firms products can be successfully marketed.

Kissisk Co. is a merchandising firm (not a manufacturer) because it has purchased $640,000 of Merchandise Inventory. The company must be renting its

store location because it has incurred rent expense of $120,000, but owns no land

or buildings.

Note that the Cash account represents approximately 78% of Kissick Co.s total assets!

Much of the firms cash was borrowed on a two-year, 12% note payable (as opposed to generating cash flows from operations). Thus, interest and principal

payments will be substantial in the firms second year of operationsand this adds risk to the firms already shaky earnings prospects.

Some of the excess cash may be only temporarily available. For example, much of the excess cash is likely to be needed for the acquisition of sales facilities, so

that the firm can reduce its rent expense in future years.

In the meantime, any excess cash that is not needed in the day-to-day operations of the firm should be invested in short-term securities (to earn a return on

investment of some kind).

Salary expense of $380,000 seems high for a firm with less than $1 million in sales.

E9.6.

a. Sales (in millions) ..... ........... ........... ........... ........... ........... ........... $141.6 100.0%

Cost of goods sold...... ........... ........... ........... ........... ........... ........... ? ? .

Gross profit .... ........... ........... ........... ........... ........... ........... ........... $ ? 31.6%

Gross profit = ($141.6 million sales * 31.6% gross profit ratio) = $44.7 million

Cost of goods sold = ($141.6 million sales - $44.7 million gross profit) = $96.9 million

Alternative computation for cost of goods sold:

$141.6 million sales * (100% - 31.6%) cost of goods sold ratio = $96.9 million

b. Selling price ... ........... ........... ........... ........... ........... ........... ........... $ ? 100.0%

Cost to manufacture ... ........... ........... ........... ........... ........... ........... 1,860

Gross profit .... ........... ........... ........... ........... ........... ........... ........... $ ? 31.6%

Selling price = $1,860 cost / (100% - 31.6%) cost of goods sold ratio = $2,719.30

E9.11.

a. ($760,000 sales on account + $24,000 decrease in accounts receivable) = $784,000

source of cash. Since accounts receivable decreased during the year, more accounts were

collected in cash than were created by credit sales.

Accounts Receivable

Sales on account 760,000 Cash collections

from customers 784,000

Excess of collections

over sales on account 24,000

b. ($148,000 income tax expense + $34,000 decrease in income taxes payable) = $182,000

use of cash. Tax payments exceeded the current years income tax expense because the payable account decreased.

Income Taxes Payable Cash payments for taxes 182,000 Income tax expense 148,000

Excess of payments

over expense 34,000

c. ($408,000 cost of goods sold + $14,000 increase in inventory - $19,000 increase in

accounts payable) = $403,000 use of cash. Cost of goods sold reflects inventory uses.

Inventory purchases were greater than inventory uses because inventory increased during

the year, but part of the inventory purchases were not paid for in cash because accounts

payable also increased during the year.

Inventory Inventory purchases 422,000 Cost of goods sold 408,000

Excess of purchases

over cost of goods sold 14,000

Accounts Payable Cash paid to suppliers 403,000 Inventory purchases 422,000

Excess of purchases over

payments 19,000

c. Management could use the $2,719.30 estimated selling price as a target in conducting marketing research studies to estimate the sales volume for the new product (within this

general price range), thus, helping to assess its ultimate prospects for success at this price.

d. ($240,000 increase in net book value + $190,000 depreciation expense) = $430,000 use

of cash. Since depreciation is an expense that does not affect cash, the amount of cash

paid to purchase new buildings exceeded the increase in net book value. (Note: In some

years, a firm may spend an enormous amount of cash to acquire new buildings and

equipment, yet still report a decrease in net book value.)

Buildings, net of Accumulated Depreciation

Purchase of buildings 430,000 Depreciation expense 190,000

Excess of purchases over

depreciation expense 240,000

P9.18.

a. Net sales ......... ........... ........... ........... ........... ........... ........... ........... ........... $579,000

Cost of goods sold...... ........... ........... ........... ........... ........... ........... ........... (272,000)

Gross profit .... ........... ........... ........... ........... ........... ........... ........... ........... $307,000

Research and development expenses . ........... ........... ........... ........... ........... (37,000)

Selling, general and administrative expenses ........... ........... ........... ........... (51,000)

Operating income (or Income from operations) ........ ........... ........... ........... $219,000

b. Operating income (or Income from operations) ........ ........... ........... ........... $219,000

Interest expense.......... ........... ........... ........... ........... ........... ........... ........... (64,000)

Income from continuing operations before taxes ...... ........... ........... ........... $155,000

Provision for income taxes .... ........... ........... ........... ........... ........... ........... (74,000)

Income from continuing operations ... ........... ........... ........... ........... ........... $ 81,000

Loss from discontinued operations, net of tax savings of $5,000 ..... ........... (16,000)

Earnings before extraordinary item ... ........... ........... ........... ........... ........... $ 65,000

Extraordinary gain from fire insurance proceeds, net of tax

expense of $28,000 . ........... ........... ........... ........... ........... ........... 104,000 Net income ..... ........... ........... ........... ........... ........... ........... ........... ........... $169,000

P9.23.

a. Solution approach: Prepare a statement of cash flows-direct method (see Exhibit 9-9).

Cash flows from operating activities: (in millions) Cash collected from customers .......... ........... ........... ........... ........... ........... $1,350

Interest and taxes paid ........... ........... ........... ........... ........... ........... ........... (90)

Cash paid to suppliers and employees ........... ........... ........... ........... ........... (810)

Net cash provided by operating activities ...... ........... ........... ........... ........... $ 450

b. Cash flows from investing activities: Purchase of land and buildings .......... ........... ........... ........... ........... ........... $(170)

Proceeds from the sale of equipment . ........... ........... ........... ........... ........... 40

Net cash used for investing activities ........... ........... ........... ........... ........... $( 130)

c. Cash flows from financing activities: Payment of long-term debt .... ........... ........... ........... ........... ........... ........... $ (220)

Issuance of preferred stock .... ........... ........... ........... ........... ........... ........... 300

Cash dividends declared and paid ...... ........... ........... ........... ........... ........... (340)

Net cash used for financing activities ........... ........... ........... ........... ........... $( 260)

d. Net increase in cash for the year ........ ........... ........... ........... ........... ........... $ 60

Week 3

Thomas & Maurice Chapter 1

1. a. Total explicit cost = $793,000 (= 555,000 + 45,000 + 28,000 + 165,000) Total implicit cost = $190,000 (= 175,000 + 0.15 100,000) Total economic cost = $983,000 (= 793,000 + 190,000)

b. Accounting profit = $177,000 (= 970,000 793,000)

c. Economic profit = $13,000 (= 970,000 983,000)

d. The owners accounting profit is $13,000 less than what he could have earned in salary and return on investment of his $100,000, i.e., his economic profit is $13,000. Thus, he would have made $13,000 more if he had kept his job and invested his $100,000 in stocks of other businesses.

3. a. Burton's explicit cost's are $18,000 per month. His implicit costs are $20,000 per

month ($15,000 + $5,000).

b. Opportunity cost = explicit + implicit costs = $18,000 + 20,000 = $38,000 per

month

c. Burton Cummings costs of production (= $38,000/month) exceed his revenues

by $13,000 (=25,000 38,000). Rather than lose $13,000 per month, Burton could rent his rig (and receive $15,000 per month) and drive trucks for another

firm (and earn $5,000 per month). With this use of his resources he would earn

$20,000 per month. Or, Burton could try his luck as a singer in a rock band.


1. a. Demand will decrease, so price will decrease. b. Supply will increase, so price will decrease. c. Demand will increase, so price will increase. d. Demand will decrease, so price will decrease. e. Supply will decrease, so price will increase. f. Supply will increase, so price will decrease. g. Supply will increase (when the price of a complement in production increases),

so price will decrease. h. Demand will decrease, so price will decrease.

4. a. No effect on demand (no shift)just a movement up the demand. b. Decrease demand for hotels. c. Demand for rental cars decreases. d. Supply of overnight mail decreases.

5. Construct a demand and supply diagram like Panel A of Figure 2.12.

a. Imposing rent controls creates a shortage of low-income housing, which decreases the quantity supplied at the lower rent imposed by the controls compared to the amount of housing supplied at the market-clearing (higher) rent level.

b. No, the shortage created by rent controls means that more low-income families are willing and able to pay for rent-controlled housing than the amount of rent controlled housing that is available. Compare this to the situation before rent-controls in which markets clear at higher rent levels.

c. In the short run, families who are able to get housing at the lower rent levels may be better off. In many cases, however, families must pay large bribes under the table to get into the rent-controlled homes. And, as time passes, landlords have little or no incentive to make repairs to the rent-controlled units. Politicians may also gain from rent controls because it appears to be a compassionate policy to help the poor. The losers are the families who cannot get the rent-controlled housing even though they are willing and able to pay the higher market-clearing rent.

d. History has shown that rent-controlled districts over time fall into a state of decay and ruin. Rent-controlled properties undermine the incentive for landlords to maintain the housing. With a shortage of low-income housing, low rent housing will be fully rented no matter what condition the roof or plumbing might be in. Furthermore, if landlords let the property decay sufficiently, renters will leave, and the property can be converted to some other use (commercial or industrial use) not subject to rent controls.

e. Taxpayers, genuinely compassionate about providing more housing for low-income families, could offer builders subsidies to build low-income housing. In the absence of rent controls, this would shift supply rightward and equilibrium rents would fall. Also, there would be no shortage of low income housing. Owners would have incentives to properly maintain roofs and plumbing. Of course building subsidies would cost real money; but everyone knows that theres no such thing as a free lunch (well, maybe not everyone knows this).

8. To the extent that consumers really do care about whether or not a firm behaves in a "socially responsible" manner, disseminating information about "progressive business practices" causes demand to increase for products produced by the socially responsible firms. An increase in demand, ceteris paribus, results in a higher price for products of socially responsible firms.

6. In the graph, let D0 be the initial demand for

tickets to Disneyland and S0 be the supply of

tickets to Disneyland. Slowing tourism causes

demand to decrease, as represented by the

demand curve D1. The new rides at Six Flags

further reduce demand to D2. These events all

result in lower ticket prices at Disneyland as well

as reduced attendance. This is not a violation of

the law of demand since price is falling due to a

decrease (shift) in demand, not a movement

along a given demand curve.

10. In the figure, the environmental curbs on burning wood causes supply to shift leftward from S0 to S1. The substitution from burning wood to gas hearths is represented by the leftward shift in demand from D0 to D1. Comparing initial equilibrium point A to B, the price of firewood has remained unchanged while the quantity of firewood burned decreases.

Frank & Bernanke Chapter 18

4a. U.S. assets become less attractive, so the demand for dollars falls. The dollar

depreciates.

b. The demand for U.S. goods (software) falls, so the demand for dollars falls. The

dollar depreciates.

c. Financial investors switch funds from U.S. assets to East Asian assets, demand fewer

dollars (or supplying more). The dollar depreciates.

d. As Americans are dissuaded from buying imported automobiles, they supply fewer

dollars to the foreign exchange market. The dollar appreciates.

e. Financial investors would anticipate that the Fed will lower interest rates, making

U.S. financial assets less attractive. The demand for dollars falls and the dollar

depreciates. This effect may be offset to some degree by the impending recession itself,

which would be expected to lower the U.S. demand for imports and hence reduce the

supply of dollars, putting upward pressure on the dollar.

f. As Americans increase their spending on imported goods they supply more dollars to

the foreign exchange market. The dollar depreciates.

8. In dollars, the British automobile costs 20,000 x $1.50/ or $30,000. The price of the

U.S. car relative to the British car is thus $26,000/$30,000 = 0.867, that is, the U.S. car is

cheaper. From the British perspective, the value of the U.S. car in pounds is 26,000/1.50

= 17,333. The price of the British car relative to the U.S. car is 20,000/17,333 =

1.154 (which, by the way, equals 1/0.867). So, either way we calculate it, we find that

the British car is more expensive and the U.S. car is more competitively priced.

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N u m b er o f t ic k e ts

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Week 4


1. a. One way of reducing traffic deaths is to reduce speed. While it may be possible

to eliminate all traffic deaths by allowing motorists to drive no faster than 15

MPH in cars equipped with driver and passenger air bags, most American drivers

would not view a 15 MPH speed limit as optimal. Most drivers seem willing to

accept some additional probability of death in return for faster speeds. The 70

MPH speed limit would be optimal if the marginal benefit of reducing speed

limits equals the marginal cost of reducing speed limits. Just because reducing

speed limits to 65 MPH would save even more lives does not, by itself, mean that

further reduction in speed limits should be undertaken. The marginal benefit of

speed reduction must be compared to the marginal cost.

b. If it costs nothing to eliminate pollution (i.e. MC = 0), then the optimal level of

pollution would indeed be zero. When the marginal cost of pollution abatement

is greater than zero, as it is for virtually every type of pollution, the optimal level

of pollution occurs at that level of pollution for which the marginal benefit to

society of eliminating more pollution just equals the marginal cost of eliminating

more pollution. In fact, it is possible to have too little pollution if pollution

abatement activities have been undertaken such that the marginal cost of

abatement exceeds the marginal benefit.

c. To maximize net benefit, troops should be left in Afhanistan if the marginal

benefit exceeds the marginal cost. Since marginal benefit and marginal cost are

measures of additional (or extra) benefits and costs, benefits and costs already

incurred do not matter (i.e. do not affect MB and MC). Sunk costs or benefits do

not enter the decision making process, only incremental benefits and costs

matter.

d. see answer to part c

e. Insurance premiums are fixed costs. The optimal level has nothing to do with

how high or how low fixed costs go.

2. Appalachian Coal Mining should minimize net cost by choosing that level of pollution

(P) where the marginal benefit of pollution reduction equals the marginal cost of

pollution reduction:

1,000 10P = 40P P

* = 20 units of pollution.

3. The second partner is basing his objection to the move on costs that are sunk. The money

spent on office stationary, business cards, and a sign that cannot be moved to the new

office are not marginal costs in the decision to move and should thus be ignored. In other

words, the cost of the old cards, old stationary, and old sign are sunk costs to be ignored

in making the decision to move the office, while any costs of purchasing new business

cards, new stationary, or a new sign are part of the marginal cost of making the move. If,

as the first partner seems to believe, MB exceeds MC for making the move, then net

benefit rises even though new cards, stationary, and a sign must be purchased.

4. a. 2

b. $500 (= $25 20 radios not stolen due to hiring 1 guard) c. 4


1. Slowing population growth and an increased share of retired people both imply slower growth in the number of people employed. If average labor productivity

(output per employed worker) continues to grow at earlier rates, total output will still

grow more slowly than before, because of slower growth in the number of workers.

If average labor productivity stagnates, then total output will grow very slowly or

even decline.

Living standards depend not on total output but on output divided by the total

population. Slowing population growth reduces total output but also the number of

people who share that output. So slower population growth in itself should not

affect living standards. However, a reduced share of the population that is working,

all else equal, will reduce output per person, lowering living standards. Slower

productivity growth will only worsen this problem.

4. a. Positive (a statement about what is likely to happen).

b. Normative (a statement about what the Fed should do).

c. Positive.

d. Positive.

e. Normative (depends on views about the fairness of the tax code).

5. a. Microeconomist (operations of an individual firm).

b. Microeconomist (behavior of an individual market).

c. Macroeconomist (behavior of economy as a whole; uses aggregation to study a

broad trend)

d. Macroeconomist (behavior of the economy as a whole)

e. Macroeconomist (behavior of a broad macroeconomic aggregate, consumer

spending)


7a. If the real interest rate in Eastland is higher than the real interest rate in Westland,

financial investors in Westland will want to buy Eastland assets, and hence will demand

eastmarks. The demand equation shows that, the greater the difference between the real

returns in Eastland and Westland, the higher the demand for eastmarks. Similarly, if the

return in Eastland is greater than the return in Westland, financial investors in Eastland

will not be eager to buy Westlands financial assets, and thus will not supply so many eastmarks to the foreign exchange market. The supply equation implies that, the greater

the difference between the real returns in Eastland and Westland, the fewer eastmarks

will be supplied to the foreign exchange market.

b. If the real interest rates are equal, the last term drops out of both the supply and

demand equations. Setting demand equal to supply we can find the fundamental value of

the eastmark:

25,000 5,000e = 18,500 + 8,000e 6,500 = 13,000e

e = 0.5 westmarks/eastmark

c. Now rE rW = 0.10 0.12 = -0.02. Setting demand equal to supply we have

25,000 5,000e + 50,000(-0.02) = 18,500 + 8,000e 50,000(-0.02)

24,000 5,000e = 19,500 + 8,000e 4,500 = 13,000e

e = 0.346 westmarks/eastmark

So the increase in Westlands real interest rate has caused the fundamental value of the

eastmark to decline, relative to the westmark.

d. The depreciation of the eastmark makes Eastlands goods cheaper abroad, and makes imports from Westland more expensive. So the depreciation should raise Eastlands net exports and hence its aggregate demand.

e. To restore the fundamental value of the eastmark to 0.5 westmarks/eastmark,

Eastland will have to match the real interest rate increase in Westmark, setting rE = 0.12.

If the difference in real interest rates is zero, then the same calculation as in part b shows

that e = 0.5. However, the higher real interest rate in Eastland will depress aggregate

demand and output.

f. Because of the fixed exchange rate, Eastland was forced to match Westlands monetary tightening, whether or not it was an appropriate move for Eastlands domestic economy. This illustrates the point that maintaining a fixed exchange rate eliminates a

countrys ability to use monetary policy independently to stabilize its domestic economy.

Week 6

Chapter 1

7. There is no doubt that growth of the Internet will open up new marketing

opportunities--it already has, and so far we're just seeing the tip of the iceberg.

Will growth of these services ultimately eliminate the need for retailers and

wholesalers? Perhaps over the longer run we will see services such as these

taking over for some types of retailers and wholesalers. Clearly, at present the

focus of the Internet (and other similar network systems) is on fast, interactive

communication. In the past, most marketing communication has been limited--

it's one way communication from seller to buyer--except in the case of personal

selling. The Internet, direct response cable TV, and even toll-free telephone

systems are quickly changing that.

The Internet can help to overcome separation in time and information. It might

also be possible to create very diverse "virtual" assortments of products that are

practical because they are available to a very large number of people. Thus, the

Internet is well suited for the buying and selling function (in some situations)

and the market information functions. As such, it might also reduce some of

the risk that otherwise might be inherent in transactions. On the other hand,

someone is likely to need to deal with the transporting and storing functions

and perhaps standardization and grading.

While the person or company that sells over the Internet may not take the form

of a retail store, it's useful to remind students that firms that sell out of a catalog

are already using the basic approach characteristic of electronic shopping over a

computer network. What is different here is the sophistication of the

technology and speed of the communication more than the basic way the

operation works.

12. The marketing concept is defined on page 15. A firm must have some

objective to guide its efforts--and a profit orientation provides such an

objective. But the marketing concept says that an organization should have

more than just profit as an objective. It should attempt to satisfy some

customers and make a profit. Profit can be seen not only as an objective but as

a constraint if one really gets carried away with the marketing concept. If a

marketing manager really wanted to satisfy some customers very well, he could

design a very pleasing marketing mix for them that might include free products

or services! Adding profit in the definition, however, would preclude such a

move. In other words, the marketing concept insists on some balance between

fully satisfying some target customers and meeting a firm's own objectives.

16. Students will come up with a variety of benefits and costs associated with the

products for this question. At this point in their thinking about customer value,

it is probably less important that they be detailed or exhaustive in coming up

with examples than it is that they grasp the concept that each product (actually,

each marketing mix) may have a variety of different benefits and costs. A class

discussion is likely to highlight some cases when one student sees something as

a benefit, but a different student argues that it is not so much a benefit as it is a

cost if it is missing (e.g., good gas mileage may be a benefit of a car, or it may

represent a cost if it is missing). The fact that different customers may frame benefits and costs in different ways is not treated as an important distinction in

the literature on customer value. On the other hand, it can be useful to know

when this sort of difference occurs because it is at least indirectly related to

customer expectations.

(a) Wrist watch: Benefits: accuracy, attractiveness, durability, warranty, and

status; Costs: the opposite of any of the above as well as factors such as hard to

service, lack of warranty, price paid, or missing a needed battery.

(b) Weight-loss diet supplement: Benefits: more self-esteem, more energy,

greater sex appeal, convenient to prepare or consume; Costs: any unfavorable

side effects (nervousness, high blood pressure, etc), difficult or inconvenient to

obtain, high price.

(c) Cruise on a luxury liner: Benefits: excitement, variety, relaxation, pleasure,

social interactions; Costs: boredom, fear (say, of a fire or of the boat sinking),

sea-sickness, expense.

(d) Checking account from a bank: Benefits: convenience, record of spending

(and in some cases cancelled checks), ability to obtain cash; Costs: monthly

fees, check fees, fees for bounced checks, record keeping hassles,

inconvenience of going to bank, some businesses do not accept checks, time to

show identification.

Chapter 2

4. It is important for a firm to have a clearly defined target market even if a

company sells its products only from a website. This question is designed to

prompt students to think about the idea of the website in the context of the

marketing mix. The fact that the firm is distributing to customers direct via its website (rather than through wholesalers or retailers) is certainly an

important decision in the marketing mix context, but the fact that the website it

available to customers from all over the world doesnt mean that the firms offering will be attractive to customers regardless of geographic location. The

marketer still needs to think about the benefits of its product offering relative to

the needs of some set of customers, what competitors are offering those

customers, when and how the product is going to get to the customers place, what communications (promotion, customer service, etc.) the customers will

need, what price is appropriate, and the like. There is intense competition for

attention and business on the Internet, and just building a better mousetrap (if the firm has in fact done thatwhether it is the product offering OR the website itself!) is not any sort of assurance that it will attract, satisfy, and retain

customers. A firm that has a specific target market will be able to fine tune its

message and the rest of the marketing mix to the needs of the target customers,

and that increases the odds that it can offer them superior customer value.

10. This question is designed to get the students thinking about the various target

markets which might be aimed at for a particular product--and the many factors

which ought to be considered. If the instructor is familiar with the development

of a new marketing strategy, it probably will be preferable to substitute this

product for one of those suggested--in order to give the students a better "feel"

for reality.

This exercise can easily lead into an interesting discussion of marketing

strategy planning and all of the problems that can arise (but the instructor must

guard against it degenerating into just a "bull" session). The general approach

will be illustrated below for the new toothbrush.

The students must be led to see that there are many different potential target

markets before going on to the development of one whole strategy. It might

help to begin by trying to determine the degree of interest of some target

consumers in toothbrushes in general--and the extent of interest they might

have in the particular kind of product being considered. Using the marketing

strategy diagram (p. 49) as a framework--to begin to segment the "toothbrush

market"--you could lead them to ask questions such as: What do consumers

look for in toothbrushes? Why do they buy them? Where do they buy them?

How much do they pay for them? Who buys them? All of these questions

should be raised by the students. Obviously, no one answer can be developed

in the classroom for all these questions (there are many target markets), but

some tentative conclusions might be advanced--some consumers are worried

about their gums, not just their teeth, some people don't seem to think about

brushes at all, some what a brush that's easy to pack for travel, etc.

The next step would be to analyze the product in the light of the consumers'

image of toothbrushes and the ritual of toothbrushing. If this product seems to

have any possibilities for satisfying the needs of some consumers, then the

other three Ps--Place, Promotion, and Price--will have to be considered. Where

consumers traditionally buy toothbrushes may have a bearing on where they

will have to be distributed. If the same types of places are chosen, a great deal

of promotion may not be necessary. However, if an entirely new set of places

is chosen, promotion may become more expensive. If the consumer is not

particularly enthused about new products of this type, even if they are superior,

then the latitude on pricing may be rather narrow. The marketing executive's

job would be to weigh all of these four Ps in the light of consumer analysis in

order to come up with a satisfactory marketing strategy.

At this time, a well-organized discussion of all these points probably should not

be expected of the students, but it is surprising what they can do. In the

following pages some examples of students' work are presented to give you

some idea of the caliber of work which can be expected this early in the course.

A. The marketing problems I believe I would face if I were to develop a new

design for a toothbrush:

Concerning the consumer:

1. Characteristics of buyer and users.

2. Size of purchase.

3. Unfavorable attitudes of buyers of brand.

4. Class of buyers.

5. Number of competitors and brands.

6. Differentiation of own brand from leaders.

Concerning the product:

1. Quality.

2. Models and sizes.

3. Attractiveness.

4. Shape, material, design, color, and copy.

Concerning the place:

1. Number of wholesalers and retailers.

2. Degree of aggressive retailer cooperation.

Concerning the price:

1. Factory price.

2. Wholesalers' and retailers' price.

3. Discounts, allowances, and deals.

4. Price support.

Concerning the promotion:

1. Selling. 2. Advertising. 3. Sales promotion.

**********

B. The first thing we have to do in setting up the marketing strategy is to

determine the target market. The target for a new spinning reel would, most

naturally, be the sport fisherman. Since the consumer is of such great

importance in the selection of a strategy, he should be considered first and quite

well. To begin with, sport fishermen can be from any social or financial class.

This fact in itself presents somewhat of a problem. The reel has to be such that

it will appeal to the majority of the people from these different groups.

Next we have to determine just how we are going to design this item to

accomplish this. We have to make it so it has all the qualities we want to have

and still be priced right so it can be sold in the volume necessary to make a

profit. We have to decide whether we are going to make all the component

parts ourselves or if we are going to do any subcontracting. These and many

more considerations must be made in this connection.

Determining places of distribution to the customer is also very important. With

an article such as a fishing reel the best markets would no doubt be in or near

river towns, fishing resorts, lakes, or oceans. In this same department you must

determine how you are going to work your distribution end of the business,

whether you are going to use wholesale outlets, brokers, franchised dealers, etc.

The price of the reel now has to be set so that it will move fairly fast on the

market. Competition will naturally have something to do in determining this

price. You must also take into account the distributors and sales force and

whether you are going to pay them a high commission.

Since this is a new product, promotion is going to be of major importance in

establishing good markets. You will have to concern yourself with advertising,

sales promotions, and training salespeople among other things. I think these

would be the greatest problem areas you would encounter.

**********

C. Consumers: The market target for the new wonder drug is all consumers, since

at one time or another everybody gets sick. The drug will be also aimed at

children since children are always getting sick. The drug should be promoted

more to residents of cold or damp sections of the country since susceptibility to

sickness is greater in these areas.

The number of other brands are few since this is a new wonder drug. Brand

loyalty will be low since this is a new product.

Product: The product will be in pill form. In must be decided how many sizes

of bottles and how many pills to each size there should be. The color of the

coating of the pill is important in order to make it attractive to children. The

color and graphical design of the box should stand out on the shelf.

The brand name should be easy to pronounce and should be connected to the

concept of curing sickness so that when someone thinks, "I am really sick, what

can I take to get better?", immediately the name will pop into his mind after

hearing it only once before.

Place: Samples should be distributed to doctors. The main distribution will be

through drugstores and drug counters in department stores.

Price: The price should be within the reach of everybody first of all. It should

be priced in the range of other drugs. Many people object to the high price of

drugs but most will pay the price if they think the product is good. If the price

is high, people feel that they are getting something good. So the price should

appear a little high but not so high as to take a big chunk out of the average

person's pocket.

Promotion: Since it is a medical discovery and a significant one, an attempt

should be made to have articles printed in the various medical journals to show

doctors how good the product really is. Television is the best medium for

advertising the product. 'A famous doctor says' approach should be avoided

since I think it is boring to people. But the doctor should not be left completely

out the advertisement. It should be brought out that the drug is safe for all ages.

All other modes of advertisement should also be used.

**********

D. The new type of industrial stapling machine causes students considerable

trouble as few of them have had much industrial experience. This provides

another opportunity to emphasize the need for careful customer analysis.

For class discussion, it is useful to segment the stapling machine market into at

least two parts--thus requiring two sets of answers. The two basic markets are

for office use and for plant use for fastening boxes or for assembling wood or

metal pieces.

You might show that reaching office managers, production managers,

purchasing agents, and even top executives in businesses where fastening is

especially important affects the Place and Promotion variables. The problems

of marketing industrial products should only be raised here, as they are treated

extensively in the rest of the text. By the end of the book, the students will be

able to handle such a problem very nicely. It might be fruitful at this time,

however, to get the students to notice that industrial marketing would probably

be more economically-oriented than final consumer marketing.

Chapter 3

2. Market segmentation is a two-step process of (1) naming broad product-

markets and (2) segmenting these broad product-markets in order to select

target markets and develop suitable marketing mixes. Naming a broad-product

market involves "breaking apart"--disaggregating--all possible needs into some

generic markets and broad product-markets in which the firm may be able to

operate profitably. This step tries to "narrow down" to product-market areas

where the firm is more likely to have competitive advantage. After this first

narrowing down step, the second step is segmenting--aggregating individual

customers with similar needs into a relatively homogeneous group of customers

who will respond to a marketing mix in a similar way. See text pages 65-67.

9. Positioning approaches show where proposed and/or present brands are

located in a market--as seen by customers. This information can help marketing

managers in a number of ways. First, it can help a marketing manager to decide

whether he wants to leave his product where it is--or try to make changes (for

example, in the product or in customer perceptions by changes in promotion). It

can show what brands are viewed as most similar to the firm's offering--and thus

it can help to identify which brand is competing most directly with which other

brands. It can also point to market segments whose needs are not being met by

current offerings. Sometimes it can also help in making decisions about whether

or not to try to combine several segments into a single target market.

Week 6 Chapter 4

3. Various company objectives might have an impact on the appropriate

marketing strategy or strategies and then the marketing mix or mixes. This

particular example provides an opportunity to introduce a discussion of the

objectives that a giant company like Microsoft had when the Internet

opportunity became an issue versus the objectives of a smaller company that

was simply trying to become established. Thus, in the context of the specific

question, some objectives that the former programmer might pursue could

include:

(1) Maximize profits in the next two years.

(2) Find strategies that would not prompt aggressive competition

(retaliation) by large, established firms in this market. (3) Rapid growth of the firm.

(4) Build a reputation for reliable software and good technical support.

(5) Offer a product that had clear advantages for at least some segment

of the market

(6) Build a large enterprise.

Some of these objectives might be compatible with each other and lead to the

use of the same marketing strategy or strategies. However, some objectives

would clearly be incompatible. For example, trying to maximize profit in the

next two years (ignoring what happens afterward) would probably rule out the

development of a large-scale software application that would attempt to

compete with Microsofts Internet Explorer or AOLs browser. That kind of effort would require much more time (to secure capital, hire a large number of

qualified programmers, and develop a very complex software product). Rather,

maximizing profit on a shorter term horizon might suggest some smaller scale,

more focused application. For example, the programmer might focus on an

Internet browser that was particularly well suited to the needs of real estate

agents because it did a really good job of handling multiple listing information

available on Internet websites. The real estate agent target market might be

willing to pay higher prices for the higher quality browser (i.e., more specific to

their needs) because it helped them earn more money.

6. Students will have different opinions about the difficulty for the hardware store

of planning for the new competitive threat: a competing store to be opened by a

big home improvement chain. This scenario is in fact unfolding in smaller

towns all over the country as big chains like Home Depot, Lowes, and Home Quarters have aggressively expanded the number of stores that they open.

Even though the question doesn't reveal much about the small store that is

currently in the town, the question is quite clear in suggesting that the current

store has a monopoly of sorts. It is also reasonable to expect that the new home

improvement store will be very much like other stores in the chain. Thus, it

might also be possible for the owner of the store to determine what happened in

the past when the chain went into similar markets. This might even reveal

markets in which a competitor had developed a very effective strategy for

fending off the attack. For example, in one such case the local store added

more service (including delivery) and more specialized services for building

contractorssuch as rental tools or small engine repairs. The chain could offer lower prices on general home building items, but the smaller store had success

maintaining good margins and profits by having a very good assortment of

convenience items like nuts and screws and bolts that customers wanted to pick

up quickly. The local store also put more emphasis of items of special interest

in the local market (like water pipe heaters to prevent broken water pipes

during the cold winter) that were not well represented in the product line of the

chain store.

9. Basically, it is attempting to protect consumers--but sometimes efforts have

been made to protect individual competitors in the hope that this

would preserve competition and help consumers.

15. Answers here will vary significantly. However, examples of firms that are

appealing to senior citizens include: financial services firms (mutual fund

companies, banks, brokerage houses) who are offering a variety of retirement

planning products; companies in the health care business (including insurance

companies, hospitals, HMO, life-time care facilities); entertainment and leisure-

time companies (travel agencies, recreational vehicles, adult education, crafts

such as woodworking or gardening); and producers of fashion products

(dresses, slacks, coats) designed to appeal to people whose bodies are not quite

as buff as they once were. Example of firms that are appealing to teens include: transportation companies (automobiles); entertainment companies

(movies, music CDs, TV programming); food companies (snack foods, candy,

fast-food); educational services (colleges, music lessons, etc.); and companies

in many sports-related businesses.

Chapter 5

1. The "economic buyer" model of consumer behavior suggests that people know

all the facts (relevant to a purchase) and logically compare choices in terms of

cost and value received to get the greatest satisfaction from spending their time

and money. Thus, its focus is often on economic needs such as economy of

purchase or use, convenience, efficiency in operation or use, dependability in

use, or improvement in earnings.

Students are likely to give a wide variety of examples of purchases--both those

that seem to be consistent with the economic buyer model and those that are

not. The amount of information that the consumer had (or decided to get) is a

factor that typically differentiates the different types of purchases. As these

differences are brought out, it may be useful to discuss the idea that consumers

are more willing to search for information and compare products (i.e.,

consistent with the economic buyer model) in some situations than in others--

for example, when the purchase is important, the financial risk is significant,

etc. On the other hand, many purchases are made more or less habitually--

especially once a satisfactory alternative has been found. For such purchases,

most consumers see the cost of searching for more information as too high

relative to its potential value.

Some students may realize that "economic buyer" comparisons are usually

easier to make when the alternative ways of meeting a need are comparable.

For example, it may be easier to compare different brands of 13" color

television sets than to decide whether to buy a new TV set or alternatively to

spend the money on a ski weekend. Both may involve entertainment needs, but

really represent very different alternatives. (Sometimes it is not easy to do

economic comparisons even when alternatives are, on the surface, more similar.

For example, a student who is interested in buying a large screen TV would

need to decide if the extra money for a HDTV model, or perhaps a thin LCD

model, was worth the difference in price. Evaluating the difference in price and

features might be made even more difficult by uncertainty about how prices

will change in the future (and/or how quickly more HD broadcasts become

available).

Student examples will often highlight purchases where economic buyer type

comparisons don't seem sensible--or perhaps even feasible. For example, a

purchase of a particular CD may be based on the emotional reaction to a

particular song--or a specific artist. A purchase of a specific fashion item might

be based on needs (such as status appeal or aesthetic reactions) that can't be

easily calibrated on some sort on "economic need" basis. On the other hand,

when the same basic products (brands) are available at different stores,

consumers may search for the "best deal" on the desired product.

8. Students will have varied responses to this question, perhaps in part because of

differences in awareness of Hispanic people. There is not necessarily a right

answer to this question, but rather it is intended to prompt students to think

about how culture is pervasive in everyday activities such as grocery shopping.

There are in fact a number of chains that have been successful in targeting the

growing Hispanic subculture in California (and other areas). Some of the

changes in "product" include more "familiar" brands imported from Mexico

and different varieties of food, especially more choice of products that are basic

to Hispanic cooking. For example, rice is popular in the Hispanic diet and there

are likely to be many more varieties of rice; by contrast, potatoes are less

popular and there would not be as much interest in having a variety of different

types of potatoes. Place would be important. Stores should be located in places

that are convenient to Hispanics. There might be some problems in

maintaining inventories or getting timely deliveries of some products--

especially if they are not ones that are readily available from local wholesalers

(including food brokers) or if they must be imported from Mexico. The most

obvious change in promotion is probably the change from English to Spanish.

However, there might also be a need for more personal selling in the store--as

Hispanic shoppers tend to be less accepting of self-service grocery shopping

than is typical for some segments of the U.S. population. In addition, "local"

media--such as Hispanic radio stations and newspapers--oriented toward

Hispanic shoppers might be the best bet for reaching the target market.

Experience has shown that Hispanic shoppers are willing to pay higher prices at

supermarkets that really cater to their needs and interests. Some students will

argue that prices will need to be oriented to value and "low everyday prices"--

as many Hispanics are not in the top income groups. While that is true, it is

nevertheless the case that lower income Hispanics are willing to pay a bit extra

to be able to shop at a store where the products and service offered match their

taste.

Week 7 Marchall, McManus, Viele Chapter 10

P10.11.

a. Net revenues in 2003 = $30,141 million (table, p. 25)

b. Cost of goods sold in 2002 = $26,764 - $13,318 = $13,446 million (table, p. 25)

c. Difference between operating income and net income in 2004 = $10,130 - $7,516

= $2,614 million (table, p. 25)

d. Year(s) in which net income decreased as compared to the previous year = 2006 only

(table, p. 25)

e. Amount of interest income earned = $636 million (table, p.70)

f. Number of shares of stock options outstanding at December 30, 2006

= 839.5 million (table, p.64)

g. Total revenues from unaffiliated customers outside of the United States

= $29,896 million (table, p.87, Total revenues $35,382 less U.S. $5,486)

h. Amount committed for the construction or purchase of property, plant, and equipment

= Approximately $3.3 billion (p.84)

i. Fair value of available-for-sale securities classified as floating rate notes

= $3,512 million (p.68)

j. Cost of goods sold for the third quarter of 2006 = $8,739 - $4,294

= $4,445 million (table, p.91use September 30 column)

P10.12.

a. Percentage of R&D relative to net revenues in 2006 = $5,873 / $35,382 = 16.6%

b. Amount by which property, plant and equipment decreased during 2006

(i.e., for depreciation, asset sales, and similar transactions) =

Net investment in property, plant & equipment, 2005 ...... ........... $17,111

Additions to property, plant & equipment, 2006 .. ........... ........... 5,779

Less: Decreases in property, plant & equipment, 2006 .... .......... ( ? )

Net investment in property, plant & equipment, 2006 ...... ........... $17,602 million

Solving for the missing amount, 2006 decreases = $5,288 million *

* Note that Depreciation Expense for 2006 was $4,654 million and the Restructuring, asset impairment, and net loss on retirement of assets category was $635 million. These two amounts add to $5,289 million and thus are off by $1 million due to rounding (see

the Statements of Cash Flows on page 51).

c. Year in which stockholders equity grew by the greatest amount over the previous year

= 2003, increased by $2,378 ($37,846 - $35,468). (table, p. 25).

d. Change in total liabilities from 2002 to 2006 = $2,860 increase, as computed below (see

table, p. 25):

2006 2002 Change Total assets .... ........... ........... ........... ........... $48,368 $44,224 +$4,144

Stockholders equity.. ........... ........... ........... 36,752 35,468 + 1,284 Total liabilities .......... ........... ........... ........... $11,616 $ 8,756 +$2,860

e. Amount of work-in-process inventory = $2,044 million (table, p.58)

f. Total amount of revenues from unaffiliated customers earned in Europe

= $6,587 million (table, p.87)

g. The companys effective tax rate = 28.6% (table, p.73)

h. Adjusted cost and estimated fair value of investments held in asset-backed securities

= Adjusted cost = $1,633 million, Estimated fair value = $1,636 million (table, p.68)

i. Market price range of common stock for the fourth quarter of 2006

= High = $27.43, Low = $22.65 (table, p.91)

j. Amount of land and buildings, exclusive of construction in progress

= $14,544 million (table, p.58)

Ross, Westerfield Jordan Chapter 3

6. We need to calculate the net income before we calculate the earnings per share.

The sum of dividends and addition to retained earnings must equal net income, so

net income must have been:

Net income = Addition to retained earnings + Dividends

Net income = $530,000 + 190,000

Net income = $720,000

So, the earnings per share were:

EPS = Net income / Shares outstanding

EPS = $720,000 / 570,000

EPS = $1.26 per share

The dividends per share were:

Dividends per share = Total dividends / Shares outstanding

Dividends per share = $190,000 / 570,000

Dividends per share = $0.33 per share

The book value per share was:

Book value per share = Total equity / Shares outstanding

Book value per share = $6,800,000 / 570,000

Book value per share = $11.93 per share

The market-to-book ratio is:

Market-to-book ratio = Share price / Book value per share

Market-to-book ratio = $39 / $11.93

Market-to-book ratio = 3.27 times

The P/E ratio is:

P/E ratio = Share price / EPS

P/E ratio = $39 / $1.26

P/E ratio = 30.88 times

Sales per share are:

Sales per share = Total sales / Shares outstanding

Sales per share = $16,000,000 / 570,000

Sales per share = $28.07

The P/S ratio is:

P/S ratio = Share price / Sales per share

P/S ratio = $39 / $28.07

P/S ratio = 1.39 times

16. a. The current ratio is calculated as:

Current ratio = Current assets / Current liabilities

Current ratio2007 = $166,869 / $219,186

Current ratio2007 = 0.76 times

Current ratio2008 = $222,608 / $245,856

Current ratio2008 = 0.91 times

b. The quick ratio is calculated as:

Quick ratio = (Current assets Inventory) / Current liabilities

Quick ratio2007 = ($166,689 104,339) / $219,186 Quick ratio2007 = 0.28 times

Quick ratio2008 = ($222,608 144,696) / $245,856 Quick ratio2008 = 0.32 times

c. The cash ratio is calculated as:

Cash ratio = Cash / Current liabilities

Cash ratio2007 = $18,288 / $219,186

Cash ratio2007 = 0.08 times

Cash ratio2008 = $22,455 / $245,856

Cash ratio2008 = 0.09 times

d. The debt-equity ratio is calculated as:

Debt-equity ratio = Total debt / Total equity

Debt-equity ratio = (Current liabilities + Long-term debt) / Total equity

Debt-equity ratio2007 = ($219,186 + 190,000) / $339,693

Debt-equity ratio2007 = 1.20

Debt-equity ratio2008 = ($245,856 + 131,250) / $407,490

Debt-equity ratio2008 = 0.93

And the equity multiplier is:

Equity multiplier = 1 + Debt-equity ratio

Equity multiplier2007 = 1 + 1.20

Equity multiplier2007 = 2.20

Equity multiplier2008 = 1 + 0.93

Equity multiplier2008 = 1.93

e. The total debt ratio is calculated as:

Total debt ratio = Total debt / Total assets

Total debt ratio = (Current liabilities + Long-term debt) / Total assets

Total debt ratio2007 = ($219,186 + 190,000) / $748,879

Total debt ratio2007 = 0.55

Total debt ratio2007 = ($245,856 + 131,250) / $784,596

Total debt ratio2007 = 0.48

ans_practice-2 summer 1 2012

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