Chapter 8 - Application- the__ costs of taxation

Essentials of Management Information Systems, 9e (Laudon/Laudon)Chapter 2 Global E-Business and Collaboration1) Senior management is responsible for directing the day-to-day activities of the business. Answer: FALSEDiff: 1 Page Ref: 44-45AACSB: Reflective ThinkingCASE: Comprehension2) Operational-level manufacturing systems deal with the firm's long-term manufacturing goals, such as where to locate a new plant.Answer: FALSEDiff: 2 Page Ref: 45AACSB: Analytic SkillsCASE: Analysis in terms of categorize, differentiate3) Transaction processing systems are most commonly encountered at the senior management level of an organization.Answer: FALSEDiff: 2 Page Ref: 47AACSB: Reflective ThinkingCASE: Comprehension4) TPS help managers monitor the firm's relations with the external environment.Answer: TRUEDiff: 3 Page Ref: 48AACSB: Reflective ThinkingCASE: Comprehension5) A hotel reservation system is a typical example of a management information system. Answer: FALSEDiff: 2 Page Ref: 48-49AACSB: Analytic SkillsCASE: Analysis in terms of categorize6) The decision to grant credit to a customer is normally made by a senior manager. Answer: FALSEDiff: 2 Page Ref: 47AACSB: Reflective ThinkingCASE: Comprehension7) Transaction processing systems are the basic business systems that serve the operational level of the organization.Answer: TRUEDiff: 2 Page Ref: 47AACSB: Reflective ThinkingCASE: Comprehension8) Management information systems primarily support nonroutine decision making. Answer: FALSEDiff: 2 Page Ref: 49AACSB: Reflective ThinkingCASE: Comprehension9) Most MISs use sophisticated mathematical models or statistical techniques.Answer: FALSEDiff: 2 Page Ref: 49AACSB: Reflective ThinkingCASE: Comprehension10) Deciding whether to introduce a new product line is the responsibility of an operational manager.Answer: FALSEDiff: 2 Page Ref: 45AACSB: Analytic SkillsCASE: Analysis in terms of categorize11) Decision-support systems help managers make decisions that are unique, rapidly changing, and not easily specified in advance.Answer: TRUEDiff: 1 Page Ref: 49AACSB: Reflective ThinkingCASE: Comprehension12) Decision-support systems often use information from external sources.Answer: TRUEDiff: 2 Page Ref: 50AACSB: Reflective ThinkingCASE: Comprehension13) ESSs are designed to serve the middle management of the organization.Answer: FALSEDiff: 2 Page Ref: 51AACSB: Reflective ThinkingCASE: Comprehension14) ESSs are designed to incorporate data about external events, but they also draw summarized information from internal MIS and DSS.Answer: TRUEDiff: 2 Page Ref: 51AACSB: Reflective ThinkingCASE: Comprehension15) ESSs are designed primarily to solve specific problems.Answer: FALSEDiff: 2 Page Ref: 51AACSB: Reflective ThinkingCASE: Comprehension16) Information supplied by an enterprise system is structured around cross-functional business processes.Answer: TRUEDiff: 2 Page Ref: 54AACSB: Reflective ThinkingCASE: Comprehension17) Supply chain management systems are more externally oriented than enterprise systems. Answer: TRUEDiff: 2 Page Ref: 55AACSB: Analytic SkillsCASE: Analysis in terms of compare18) Knowledge management systems are used to gather and distribute the firm's essential operational data, such as sales reports.Answer: FALSEDiff: 1 Page Ref: 55AACSB: Reflective ThinkingCASE: Comprehension19) Cell phones are one of the tools firms use to support teamwork and collaboration. Answer: TRUEDiff: 1 Page Ref: 60AACSB: Reflective ThinkingCASE: Comprehension20) The five basic entities that make up any business are suppliers, customers, employees, products and services, and:A) its environment.B) manufacturing and production.C) sales and marketing.D) invoices and payments.Answer: DDiff: 2 Page Ref: 42AACSB: Reflective ThinkingCASE: Comprehension21) Promoting the organization's products or services is a responsibility of the ________ function.A) finance and accountingB) human resourcesC) manufacturing and productionD) sales and marketingAnswer: DDiff: 1 Page Ref: 43AACSB: Reflective ThinkingCASE: Comprehension22) Checking for product quality is an activity associated with the ________ function.A) finance and accountingB) human resourcesC) manufacturing and productionD) sales and marketingAnswer: CDiff: 1 Page Ref: 43AACSB: Reflective ThinkingCASE: Comprehension23) Which of the following is a cross-functional business process?A) Hiring an employeeB) Identifying a customerC) Fulfilling a customer orderD) Creating an invoiceAnswer: CDiff: 2 Page Ref: 44AACSB: Reflective ThinkingCASE: Comprehension24) Employees that assist with paperwork at all levels of the firm are called:A) data workers.B) knowledge workers.C) operational management.D) service workers.Answer: ADiff: 1 Page Ref: 45AACSB: Reflective ThinkingCASE: Comprehension25) The three principal levels of hierarchies within a business organization are:A) management, knowledge workers, and service workers.B) senior management, middle management, and operational management.C) management, data workers, and operational management.D) senior management, operational management, and workers.Answer: BDiff: 2 Page Ref: 45AACSB: Reflective ThinkingCASE: Comprehension26) Key forces in a business's immediate environment include:A) regulations.B) technology.C) economy.D) politics.Answer: ADiff: 3 Page Ref: 45-46AACSB: Reflective ThinkingCASE: Comprehension27) Engineers and architects are examples of:A) senior management.B) production workers.C) knowledge workers.D) middle management.Answer: CDiff: 1 Page Ref: 45AACSB: Reflective ThinkingCASE: Comprehension28) Which of the following is an example of a key force in a firm's broader, less immediate environment?A) stockholdersB) regulationsC) shipping firmsD) economic trendsAnswer: DDiff: 3 Page Ref: 46AACSB: Reflective ThinkingCASE: Comprehension29) A computerized system that performs and records the daily dealings necessary to conduct business is classified as a(n):A) executive support system.B) management-level system.C) decision support system.D) transaction-processing system.Answer: DDiff: 1 Page Ref: 47AACSB: Reflective ThinkingCASE: Comprehension30) Which type of system would you use to change a production schedule if a key supplier was late in delivering goods?A) ESSB) TPSC) MISD) DSSAnswer: BDiff: 2 Page Ref: 47-48AACSB: Analytic SkillsCASE: Analysis in terms of differentiate and appraise31) A relocation control system that reports summaries on the total moving, house-hunting, and home financing costs for employees in all company divisions would fall into the category of:A) knowledge management systems.B) transaction support systems.C) executive-support systems.D) management information systems.Answer: DDiff: 3 Page Ref: 48AACSB: Analytic SkillsCASE: Analysis in terms of categorize32) The term "management information systems" designates a specific category of information systems serving:A) integrated data processing throughout the firm.B) transaction process reporting.C) senior managementD) middle management functions.Answer: DDiff: 1 Page Ref: 48AACSB: Reflective ThinkingCASE: Comprehension33) These systems are designed to summarize and report on the company's basic operations.A) Management information systemsB) Decision-support systemsC) Executive information systemsD) Transaction processing systemsAnswer: ADiff: 2 Page Ref: 48AACSB: Reflective ThinkingCASE: Comprehension34) ________ support making decisions that are unique, rapidly changing, and not easily specified in advance.A) Management information systemsB) Transaction processing systemsC) Executive support systemsD) Decision-support systemsAnswer: DDiff: 1 Page Ref: 49AACSB: Reflective ThinkingCASE: Comprehension35) Which type of system would you use to determine the five suppliers with the worst record in delivering goods on time?A) ESSB) TPSC) MISD) DSSAnswer: CDiff: 2 Page Ref: 48-49AACSB: Analytic SkillsCASE: Analysis in terms of differentiate and appraise36) These systems are especially suited to situations in which the procedure for arriving at a solution may not be fully predefined in advance.A) Management information systemsB) Transaction processing systemsC) Decision-support systemsD) Knowledge management systemsAnswer: CDiff: 2 Page Ref: 49AACSB: Reflective ThinkingCASE: Comprehension37) Which type of system would you use to forecast the return on investment if you used new suppliers with better delivery track records?A) ESSB) TPSC) MISD) DSSAnswer: DDiff: 2 Page Ref: 49-50AACSB: Analytic SkillsCASE: Analysis in terms of categorize38) Decision-support systems are also referred to as:A) business information systems.B) business intelligence systems.C) executive support systems.D) business model systems.Answer: BDiff: 2 Page Ref: 50AACSB: Reflective ThinkingCASE: Comprehension39) Executive support systems are information systems that support the:A) long-range planning activities of senior management.B) knowledge and data workers in an organization.C) decision-making and administrative activities of middle managers.D) day-to-day processes of production.Answer: ADiff: 1 Page Ref: 51AACSB: Reflective ThinkingCASE: Comprehension40) ESS are specifically designed to serve the ________ level of the organization.A) operationalB) end-userC) middle managementD) senior managementAnswer: DDiff: 1 Page Ref: 51AACSB: Reflective ThinkingCASE: Comprehension41) Which type of system would you use to determine what trends in your supplier's industry will affect your firm the most in five years?A) ESSB) TPSC) MISD) DSSAnswer: ADiff: 2 Page Ref: 51AACSB: Analytic SkillsCASE: Analysis in terms of categorize42) ________ systems often deliver information to senior executives through a portal.A) Transaction processingB) Executive supportC) Management informationD) Decision-supportAnswer: BDiff: 2 Page Ref: 51AACSB: Reflective ThinkingCASE: Comprehension43) A POS system, such as the one selected by Johnny's Lunch in the chapter case study, falls into which category of information system?A) TPSB) KWSC) MISD) DSSAnswer: ADiff: 3 Page Ref: 52AACSB: Analytic SkillsCASE: Analysis in terms of categorize44) These systems are designed to support organization-wide process coordination and integration.A) Decision-support systemsB) Management information systemsC) CRMD) Enterprise applicationsAnswer: DDiff: 1 Page Ref: 53AACSB: Reflective ThinkingCASE: Comprehension45) A(n) ________ collects data from various key business processes and stores the data in a single comprehensive data repository, usable by other parts of the business.A) transaction processing systemB) enterprise systemC) automatic reporting systemD) management information systemAnswer: BDiff: 2 Page Ref: 54AACSB: Reflective ThinkingCASE: Comprehension46) What is the most important benefit of an enterprise application?A) Enabling speed of communicating.B) Enabling business functions and departments to share information.C) Enabling a company to work collaboratively with customers and suppliers.D) Enabling cost-effective, e-business processes.Answer: BDiff: 3 Page Ref: 53-54AACSB: Analytic SkillsCASE: Evaluation in terms of appraise, evaluate47) ________ systems integrate and share information from suppliers, manufacturers, distributors, and logistics companies.A) Collaborative distributionB) Supply-chain managementC) Reverse logisticsD) Enterprise planningAnswer: BDiff: 1 Page Ref: 54AACSB: Reflective ThinkingCASE: Comprehension48) ________ systems provide information to coordinate all of the business processes that deal with customers in sales, marketing, and service to optimize revenue, customer satisfaction, and customer retention.A) CRMB) MISC) ESSD) CPSAnswer: ADiff: 1 Page Ref: 55AACSB: Reflective ThinkingCASE: Comprehension49) Which type of information system would an intranet be most easily adapted to?A) CRMB) MISC) TPSD) KMSAnswer: DDiff: 3 Page Ref: 55AACSB: Analytic SkillsCASE: Synthesis in terms of bringing information together50) Which of the following types of system could be used to enable different firms to work collaboratively on a product?A) intranetB) extranetC) KMSD) CRMAnswer: BDiff: 2 Page Ref: 55AACSB: Analytic SkillsCASE: Analysis in terms of appraise51) You manage the Information Systems department at a small startup Internet advertiser. You need to set up an inexpensive system that allows customers to see real-time statistics such as views and click-throughs about their current banner ads. Which type of system will most efficiently provide a solution?A) CRMB) Enterprise systemC) ExtranetD) IntranetAnswer: CDiff: 2 Page Ref: 55AACSB: Reflective ThinkingCASE: Evaluation in terms of assess, choose52) Buying or selling goods over the Internet is called:A) e-commerce.B) e-business.C) an intranet.D) an extranet.Answer: ADiff: 1 Page Ref: 56AACSB: Reflective ThinkingCASE: Comprehension53) The use of digital technology and the Internet to execute the major business processes in the enterprise is called:A) e-commerce.B) e-business.C) enterprise applications.D) MIS.Answer: BDiff: 1 Page Ref: 56AACSB: Reflective ThinkingCASE: Comprehension54) You work for a highly successful advertiser that is just about to expand nationally. Of utmost importance will be finding a way to store and disseminate their client's frequently updated branding and style guides to all of their branches. The guides include multiple image files and text documents. What system will best serve these needs?A) A wikiB) An extranet with KMS capabilitiesC) A TPS with KMS capabilitiesD) An ESS with collaboration capabilitiesAnswer: BDiff: 3 Page Ref: 54-65AACSB: Analytic SkillsCASE: Synthesis in terms of bringing information together55) Interaction jobs are those jobs which:A) are in the service sector and require close coordination, and collaboration.B) involve knowledge that can't be put into an information system.C) are performed typically by operational-level employees.D) require intense levels of interaction with clients.Answer: ADiff: 2 Page Ref: 57AACSB: Reflective ThinkingCASE: Comprehension56) You have been hired by Inspiration Inc, to help improve their profit margin. Inspiration Inc. is a business communications consultancy that services many clients in different industries throughout the U.S. The end products of the company are customized recommendations for the best use of a client's existing resources for improving internal communications, typically delivered via documentation in different media. The company has approximately 100 consultants all of whom are located in their central headquarters in Chicago. What system do you recommend to improve the company's business processes and increase their profit margin?A) Extranet, to enable quick collaboration over the Internet, minimize the time spent communicating with the client, and minimize the amount of paperwork neededB) CRM, to maintain easily accessible customer records to minimize the time spent looking for client dataC) KMS, for minimizing redundant work on similar clientsD) Video conferencing system, for improving collaborationAnswer: ADiff: 3 Page Ref: 55-61AACSB: Reflective ThinkingCASE: Synthesis in terms of bringing information together57) In a business environment, the focus of collaboration is to:A) accomplish the task at hand.B) provide a sense of community.C) foster better communication.D) prevent miscommunication.Answer: ADiff: 2 Page Ref: 56AACSB: Reflective ThinkingCASE: Comprehension58) Which of the following statements is NOT true about collaboration in a business setting?A) Collaboration may be a short-lived activity, lasting just a few minutes.B) Collaboration is a many-to-many activity as opposed to a one-to-one or one-to-many activity.C) Meaningful collaboration requires a supportive business firm culture and the right, decentralized structure.D) The evidence of the business benefits of collaboration are largely anecdotal.Answer: BDiff: 2 Page Ref: 56-59AACSB: Reflective ThinkingCASE: Comprehension59) Which of the following tools is NOT one of the most important 15 types of collaboration software tools?A) screen sharingB) video streamingC) video conferencingD) e-mail and instant messagingAnswer: BDiff: 2 Page Ref: 60AACSB: Reflective ThinkingCASE: Comprehension60) A wiki is a type of:A) social networking site.B) blogging.C) video conferencing.D) Web site designed for collaborative writing and editing.Answer: DDiff: 1 Page Ref: 61AACSB: Reflective ThinkingCASE: Comprehension61) Second Life is an example of a:A) virtual world.B) wiki.C) social networking site.D) mind mapping tool.Answer: ADiff: 1 Page Ref: 61AACSB: Reflective ThinkingCASE: Comprehension62) The most widely used collaboration software tool used by very large firms is:A) Lotus Notes.B) Microsoft SharePoint.C) Google Apps.D) Onehub.Answer: ADiff: 2 Page Ref: 65AACSB: Reflective ThinkingCASE: Comprehension63) What analytical framework discussed in the chapter helps understand and evaluate the benefits and uses of collaboration tools?A) cost/use matrixB) task/time matrixC) space/cost matrixD) time/space matrixAnswer: DDiff: 2 Page Ref: 67AACSB: Reflective ThinkingCASE: Comprehension64) Which of the following collaboration tools would be appropriate for participants in separate locations who need to collaborate synchronously?A) blogB) team roomC) electronic meeting softwareD) group calendarAnswer: CDiff: 2 Page Ref: 67AACSB: Analytic SkillsCASE: Analysis in terms of compare65) The ________ is responsible for ensuring that the company complies with existing data privacy laws.A) CPOB) CKOC) CIOD) CIPAnswer: ADiff: 2 Page Ref: 68AACSB: Reflective ThinkingCASE: Comprehension66) The principal liaison between the information systems groups and the rest of the organization is a(n):A) programmer.B) information systems manager.C) systems analyst.D) CIO.Answer: CDiff: 2 Page Ref: 68AACSB: Reflective ThinkingCASE: Comprehension67) A ________ is a senior manager who oversees the use of IT in the firm.A) CEOB) CFOC) CIOD) CITAnswer: CDiff: 1 Page Ref: 68AACSB: Reflective ThinkingCASE: Comprehension68) Development and support services for a firm's business systems are provided by:A) IT educational services.B) IT management services.C) Application software services.D) IT standards services.Answer: CDiff: 3 Page Ref: 69AACSB: Reflective ThinkingCASE: Comprehension69) Policies that determine which information technology will be used, when, and how are provided by:A) IT educational services.B) IT management services.C) Application software services.D) IT standards services.Answer: DDiff: 3 Page Ref: 69AACSB: Reflective ThinkingCASE: Comprehension70) A(n) ________ is a set of logically related activities for accomplishing a specific business result.Answer: business processDiff: 1 Page Ref: 42AACSB: Reflective ThinkingCASE: Comprehension71) A firm depends heavily on its ________ to supply capital, labor, customers, new technology, services and products, stable markets and legal systems, and general educational resources. Answer: environmentDiff: 2 Page Ref: 45AACSB: Reflective ThinkingCASE: Comprehension72) The ________ function is responsible for attracting, developing, and maintaining the firm's workforce.Answer: human resourcesDiff: 1 Page Ref: 43AACSB: Reflective ThinkingCASE: Comprehension73) Managers need ________ systems to monitor the status of internal operations and the firm's relations with the external environment.Answer: transaction processingDiff: 2 Page Ref: 48AACSB: Reflective ThinkingCASE: Comprehension74) A(n) ________ is used by middle management to support nonroutine decision making. Answer: decision-support system/DSSDiff: 1 Page Ref: 49AACSB: Reflective ThinkingCASE: Comprehension75) ________ applications span the entire firm, integrating information from multiple functions and business processes to enhance the performance of the organization as a whole.Answer: EnterpriseDiff: 1 Page Ref: 53AACSB: Reflective ThinkingCASE: Comprehension76) Supply chain management systems are one type of ________ system because they automate the flow of information across organizational boundaries.Answer: interorganizationalDiff: 3 Page Ref: 55AACSB: Reflective ThinkingCASE: Comprehension77) ________ are highly trained technical specialists who write the software instructions for computers.Answer: ProgrammersDiff: 1 Page Ref: 68AACSB: Reflective ThinkingCASE: Comprehension78) ________ are representatives of departments outside of the information systems group for whom applications are developed.Answer: End usersDiff: 2 Page Ref: 69AACSB: Reflective ThinkingCASE: Comprehension79) ________ technology allows a videoconference participant to give the appearance of being present at a location other than his or her true physical location.Answer: TelepresenceDiff: 3 Page Ref: 61AACSB: Reflective ThinkingCASE: Comprehension80) Identify the different types of systems used for the different levels of management in a business.Answer: The types of information systems used for different levels of management are transaction processing systems (TPS), management information systems (MIS), decision-support systems (DSS), and executive support systems (ESS). TPS, such as payroll or order processing, track the flow of the daily routine transactions that are necessary to conduct business. They are used by operational managers to manage day-to-day operations. MIS summarize and report on the c ompany’s basic operations using data supplied by TPS. They provide middle managers with reports on the organization’s current performance and are not highly analytical. DSS also support middle management decisions when these decisions are unique, rapidly changing, and not specified easily in advance. They use advanced analytical models and data analysis capabilities and often draw on information from external as well as internal sources. ESS support senior management by providing data of greatest importance to senior management decision makers. ESS provide a generalized computing and communications capacity that can be applied to a changing array of problems. ESS present graphs and data from many sources through an interface that is easy for senior managers to use, often a portal.Diff: 1 Page Ref: 47-51AACSB: Reflective ThinkingCASE: Synthesis in terms of generalize81) In your opinion, what are at least three factors that contribute to the difficulty of integrating systems for different organizational levels and functions within an organization? Support your answer.Answer: An example answer is: Three factors that can contribute include different computing environments; different data kept; and employee resistance. Different computing environments can make it difficult in terms of programming to connect the systems together. If the systems have kept different types of data and different records, this may also be a hindrance. For example, if some elements in a database are recorded differently, such as a customer ID not being the same in one area as another, this would make consistency a problem and may contribute to redundant information. There may also be resistance to adopting new, integrative systems that are more efficient because these may change business processes and the functions of employees. People working in an organization may not want to lose the responsibilities they have and the functions they understand.Diff: 3 Page Ref: 53AACSB: Analytic SkillsCASE: Evaluation in terms of assess, compare82) Discuss at least three reasons why collaboration and teamwork are more important today than ever.Answer: Collaboration and teamwork are more important today than ever for a variety of reasons. For one, the nature of work has changed from factory manufacturing andpre-computer office work. Today, the kinds of jobs we have require much closer coordination and interaction among the parties involved in producing the service or product. Another reason is that the organization of work has changed. For most of the industrial age, work was organized in a hierarchical fashion. Orders came down the hierarchy, and responses moved back up the hierarchy. Today, work is organized into groups and teams, who are expected to develop their own methods for accomplishing the task. Senior managers observe and measure results, but are much less likely to issue detailed orders or operating procedures. Another reason is the need to manage work from global locations: The work of the firm has changed from a single location to multiple locations - offices throughout a region, a nation, or even around the globe. Global competition also places a premium on innovation. Innovation is a group and social process, and most innovations derive from collaboration among individuals in a lab, a business, or government agencies. Strong collaborative practices and technologies are believed to increase the rate and quality of innovation. Overall, most research on collaboration supports the notion that diverse teams produce better outputs, faster, than individuals working on their own.Diff: 2 Page Ref: 57-58AACSB: Analytic SkillsCASE: Synthesis in terms of propose83) Identify and describe at least four business benefits of collaboration? Which do you feel is the most important and why?Answer: Business benefits from collaboration are (1) productivity; (2) quality; (3) innovation;(4) customer service; and (5) financial performance. Collaboration helps productivity because people working together on a task can complete the task more quickly. It helps quality because people working together will be more able to correct each other's mistakes. It helps innovation because people working in groups come up with more ideas than those working in isolation. It helps customer service because teams can solve customer complaints more quickly together rather than working in isolation. And as a result of all of these benefits, collaboration helps finance, because collaborative firms have superior sales, sales growth, and financial performance. Student evaluations will vary: for example, the most important of the benefits might be: innovation, because new products, services, and means of production are at the heart of being able to outperform your competitors.Diff: 2 Page Ref: 58-59AACSB: Analytic SkillsCASE: Evaluation in terms of compare, assess。

曼昆经济学原理英文版答案As the creator of the Baidu Wenku document "Principles of Economics by Mankiw (English Version) Answers", I would like to provide a comprehensive guide to the solutions of the questions in the book. This document aims to help students better understand the principles of economics and improve their problem-solving abilities.Chapter 1: Ten Principles of Economics。

1. People face trade-offs.2. The cost of something is what you give up to get it.3. Rational people think at the margin.4. People respond to incentives.5. Trade can make everyone better off.6. Markets are usually a good way to organize economic activity.7. Governments can sometimes improve economic outcomes.8. The standard of living depends on a country's production.9. Prices rise when the government prints too much money.10. Society faces a short-run trade-off between inflation and unemployment.Chapter 2: Thinking Like an Economist。

Chapter 8Aggregate Planning in the Supply ChainTrue/False1. The goal of aggregate planning is to satisfy demand in a way that minimizesprofit.Answer: FalseDifficulty: Easy2. Aggregate planning is a process by which a company determines levels ofcapacity, production, subcontracting, inventory, stockouts, and even pricing overa specified time horizon.Answer: TrueDifficulty: Moderate3. Aggregate planning solves problems involving aggregate decisions rather thanstock keeping unit (SKU) level decisions.Answer: TrueDifficulty: Easy4. Traditionally, much of aggregate planning is focused within an enterprise andmay not always be seen as a part of supply chain management.Answer: TrueDifficulty: Moderate5. Aggregate planning is an important supply chain issue because, to be effective, itrequires inputs from throughout the supply chain, but its results have little impact on the supply chain.Answer: FalseDifficulty: Moderate6. Short-term production serves as a broad blueprint for operations and establishesthe parameters within which aggregate planning decisions are made.Answer: FalseDifficulty: Easy7. The aggregate planning problem is concerned with determining the productionlevel, inventory level, and capacity level (internal and outsourced) for each period that maximizes the firm’s profit over the planning horizon.Answer: TrueDifficulty: Moderate8. To create an aggregate plan, a company must specify the planning horizon forthe plan and the duration of each period within the planning horizon.Answer: TrueDifficulty: Easy9. A planning horizon is usually between three and five years.Answer: FalseDifficulty: Moderate10. A poor aggregate plan can result in improved sales and profits if the availableinventory and capacity are unable to meet demand.Answer: FalseDifficulty: Easy11. A poor aggregate plan may result in a large amount of excess inventory andcapacity, thereby raising costs.Answer: TrueDifficulty: Moderate12. The aggregate planner must make a trade-off between capacity, inventory, andbacklog costs.Answer: TrueDifficulty: Moderate13. An aggregate plan that increases one cost typically results in the increase of theother two.Answer: FalseDifficulty: Moderate14. The time flexible strategy is where the production rate is synchronized with thedemand rate by varying machine capacity or hiring and laying off employees asthe demand rate varies.Answer: FalseDifficulty: Hard15. The time flexible strategy is where workforce (capacity) is kept stable but thenumber of hours worked is varied over time in an effort to synchronize production with demand.Answer: TrueDifficulty: Moderate16. The mixed strategy is where a stable machine capacity and workforce aremaintained with a constant output rate with inventory levels fluctuating over time.Answer: FalseDifficulty: Hard17. Most strategies that an aggregate planner actually uses are in combination, andare referred to as mixed strategies.Answer: TrueDifficulty: Easy18. A highly effective tool for a company to use when it tries to maximize profits whilebeing subjected to a series of constraints is aggregate programming.Answer: FalseDifficulty: Moderate19. To improve the quality of these aggregate plans, forecast errors must be takeninto account when formulating aggregate plans.Answer: TrueDifficulty: Moderate20. Forecasting errors are dealt with in aggregate plans using either safety backlogor safety capacity.Answer: FalseDifficulty: Moderate21. Safety inventory is defined as inventory held to satisfy demand that is higher thanforecasted.Answer: TrueDifficulty: Easy22. Safety capacity is defined as capacity used to satisfy demand that is lower thanforecasted.Answer: FalseDifficulty: Easy23. Companies should work with downstream partners to produce forecasts and withupstream partners to determine constraints when doing aggregate planning.Answer: TrueDifficulty: Easy24. The aggregate plan should be viewed primarily as an in-house tool that does notneed to be communicated to supply chain partners.Answer: FalseDifficulty: Easy25. Given that forecasts are always wrong to some degree, the aggregate planneeds to have some flexibility built into it if it is to be useful.Answer: TrueDifficulty: Moderate26. A manager should perform sensitivity analysis on the inputs into an aggregateplan to choose the best solution for the range of possibilities that could occur.Answer: TrueDifficulty: Moderate27. As inputs into the aggregate plan change, managers do not need to makechanges to the aggregate plan.Answer: FalseDifficulty: Easy28. As capacity utilization increases, it becomes less important to perform aggregateplanning.Answer: FalseDifficulty: ModerateMultiple Choice1. The process by which a company determines levels of capacity, production,subcontracting, inventory, stockouts, and even pricing over a specified timehorizon isa. aggregate planning.b. detail planning.c. inventory planning.d. sales planning.e. all of the aboveAnswer: aDifficulty: Moderate2. The goal of aggregate planning is toa. dissatisfy customers in a way that maximizes profit.b. dissatisfy customers in a way that minimizes profit.c. satisfy demand in a way that maximizes profit.d. satisfy demand in a way that minimizes profit.e. none of the aboveAnswer: cDifficulty: Easy3. Aggregate planning solves problems involvinga. aggregate decisions and stock keeping unit (SKU) level decisions.b. aggregate decisions or stock keeping unit (SKU) level decisions.c. aggregate decisions rather than stock keeping unit (SKU) level decisions.d. stock keeping unit (SKU) level decisions rather than aggregate decisions.e. b and c onlyAnswer: cDifficulty: Easy4. Aggregate planning, to be effective, requires inputs froma. all customers.b. all departments.c. all suppliers.d. throughout the supply chain.e. throughout the company.Answer: dDifficulty: Moderate5. Much of aggregate planning has traditionally been focuseda. on short-term production scheduling.b. on customer relationship management.c. within an enterprise.d. beyond enterprise boundaries.e. all of the aboveAnswer: cDifficulty: Moderate6. Which of the following are not operational parameters the aggregate planner isconcerned with?a. production rateb. workforcec. overtimed. backorderse. inventory on handAnswer: dDifficulty: Moderate7. The operational parameter concerned with the number of units completed perunit time (such as per week or per month) isa. production rate.b. workforce.c. overtime.d. backlog.e. inventory on hand.Answer: aDifficulty: Easy8. The operational parameter concerned with the number of workers/units ofcapacity needed for production isa. production rate.b. workforce.c. overtime.d. backlog.e. inventory on hand.Answer: bDifficulty: Easy9. The operational parameter concerned with the amount of overtime productionplanned isa. production rate.b. workforce.c. overtime.d. backlog.e. inventory on hand.Answer: cDifficulty: Easy10. The operational parameter concerned with demand not satisfied in the period inwhich it arises, but carried over to future periods isa. production rate.b. workforce.c. overtime.d. backlog.e. inventory on hand.Answer: dDifficulty: Easy11. The operational parameter concerned with the planned inventory carried over thevarious periods in the planning horizon isa. production rate.b. workforce.c. overtime.d. backlog.e. inventory on hand.Answer: eDifficulty: Easy12. The operational parameter concerned with the number of units of machinecapacity needed for production isa. machine capacity level.b. subcontracting.c. overtime.d. backlog.e. inventory on hand.Answer: aDifficulty: Easy13. The operational parameter concerned with the subcontracted capacity requiredover the planning horizon isa. machine capacity level.b. subcontracting.c. overtime.d. backlog.e. inventory on hand.Answer: cDifficulty: Easy14. The aggregate plana. serves as a broad blueprint for operations.b. establishes the parameters within which short-term production anddistribution decisions are made.c. allows the supply chain to alter capacity allocations and change supplycontracts.d. all of the abovee. b and c onlyAnswer: dDifficulty: Moderate15. Aggregate planning is concerned with determininga. the production level, sales level, and capacity for each period.b. the demand level, inventory level, and capacity for each period.c. the production level, inventory level, and capacity for each period.d. the production level, staffing level, and capacity for each period.e. none of the aboveAnswer: cDifficulty: Moderate16. To create an aggregate plan, a company must specifya. the planning horizon for the plan.b. the duration of each period within the planning horizon.c. key information required.d. all of the abovee. a and b onlyAnswer: dDifficulty: Moderate17. The planning horizon isa. the time period over which the aggregate plan is to produce a solution.b. the duration of each time period in the aggregate plan.c. the length of time required to produce the aggregate plan.d. the solution to the aggregate plan.e. none of the aboveAnswer: aDifficulty: Easy18. The length of the planning horizon is usually betweena. one and three months.b. three and eighteen months.c. one and three years.d. three and five years.e. none of the aboveAnswer: bDifficulty: Moderate19. Which of the following is not information needed by the aggregate planner?a. demand forecast for each period in the planning horizonb. production costsc. labor costsd. cost of subcontracting productione. cost of changing the demand forecastAnswer: eDifficulty: Moderate20. The cost of changing capacity includes thea. cost of adding machine capacity.b. cost of reducing machine capacity.c. cost of hiring workforce.d. cost of laying off workforce.e. all of the aboveAnswer: eDifficulty: Easy21. Which of the following is not a cost of changing capacity?a. cost of adding machine capacityb. cost of hiring workforcec. cost of laying off workforced. cost of overtimee. cost of reducing machine capacityAnswer: dDifficulty: Moderate22. Which of the following is not a constraint the aggregate planner needs toconsider?a. limits on stockouts and backlogsb. limits on overtimec. limits on sales commissionsd. limits on layoffse. limits on capital availableAnswer: cDifficulty: Moderate23. A poor aggregate plan can result ina. appropriate inventory levels.b. efficient use of capacity.c. better sales and lost profits.d. lost sales and lost profits.e. lost sales and better profits.Answer: dDifficulty: Hard24. The fundamental trade-offs available to an aggregate planner are betweena. capability, inventory, and backlog costs.b. capability, inventory, and sales costs.c. capacity, inventory, and backlog costs.d. capacity, inventory, and sales costs.e. none of the aboveAnswer: cDifficulty: Easy25. Which of the following is not a distinct aggregate planning strategy for achievingbalance between capacity, inventory, and backlog costs?a. adjustable strategyb. Chase strategyc. level strategyd. mixed strategye. time flexible strategyAnswer: aDifficulty: Easy26. The strategy where the production rate is synchronized with the demand rate byvarying machine capacity or hiring and laying off employees as the demand rate varies is thea. adjustable strategy.b. Chase strategy.c. level strategy.d. mixed strategy.e. time flexible strategy.Answer: bDifficulty: Moderate27. The strategy where workforce (capacity) is kept stable but the number of hoursworked is varied over time in an effort to synchronize production with demand is thea. adjustable strategy.b. Chase strategy.c. level strategy.d. mixed strategy.e. time flexible strategy.Answer: eDifficulty: Moderate28. The strategy where a stable machine capacity and workforce are maintained witha constant output rate, with inventory levels fluctuating over time, is thea. adjustable strategy.b. Chase strategy.c. level strategy.d. mixed strategy.e. time flexible strategy.Answer: cDifficulty: Hard29. Most strategies that an aggregate planner actually uses are in combination andare referred to as thea. adjustable strategy.b. Chase strategy.c. level strategy.d. mixed strategy.e. time flexible strategy.Answer: dDifficulty: Easy30. A highly effective tool for a company to use when it tries to maximize profits whilebeing subjected to a series of constraints isa. aggregate programming.b. distribution programming.c. production programming.d. linear programming.e. manufacturing programming.Answer: dDifficulty: Moderate31. When formulating aggregate plans,a. forecast errors have no impact.b. forecast errors must be taken into account.c. forecast accuracy is assumed.d. forecast accuracy is not a factor.e. none of the aboveAnswer: bDifficulty: Moderate32. Forecasting errors are dealt with usinga. safety backlog.b. safety capacity.c. safety inventory.d. all of the abovee. b and c onlyAnswer: eDifficulty: Moderate33. Inventory held to satisfy demand that is higher than forecasted isa. safety backlog.b. safety capacity.c. safety inventory.d. safety sales.e. safety workforce.Answer: cDifficulty: Easy34. Capacity used to satisfy demand that is higher than forecasted isa. safety backlog.b. safety capacity.c. safety inventory.d. safety sales.e. safety workforce.Answer: bDifficulty: Easy35. Which of the following is an approach a company can use to create a buffer forforecast error using safety inventory?a. overtimeb. carry extra workforce permanentlyc. build and carry extra inventoriesd. subcontractinge. purchase capacity or product from an open or spot marketAnswer: aDifficulty: Easy36. Which of the following is not an approach a company can use to create a bufferfor forecast error using safety capacity?a. overtimeb. carry extra workforce permanentlyc. build and carry extra inventoriesd. subcontractinge. purchase capacity or product from an open or spot marketAnswer: cDifficulty: Easy37. Aggregate planning should consider information froma. only the enterprise as its breadth of scope.b. downstream partners to produce forecasts.c. upstream partners to determine constraints.d. all of the abovee. b and c onlyAnswer: dDifficulty: Easy38. The quality of the aggregate plan can be improved by using information froma. only the local firm.b. only downstream partners.c. only upstream partners.d. all parts of the supply chain.e. none of the aboveAnswer: bDifficulty: Moderate39. The aggregate plan should be communicated toa. only the local firm.b. only downstream partners.c. only upstream partners.d. all supply chain partners who will be affected by it.e. none of the aboveAnswer: cDifficulty: Moderate40. The aggregate plan needs toa. be a final product because changes are disruptive to the supply chain.b. be considered fixed because forecasts are usually accurate.c. have some flexibility built into it because forecasts are always wrong.d. have some flexibility built into it because forecasts are usually right.e. none of the aboveAnswer: cDifficulty: Moderate41. How frequently should the aggregate plan be rerun?a. weeklyb. monthlyc. every 3 to 8 monthsd. as inputs to the aggregate plan changee. neverAnswer: dDifficulty: Hard42. As capacity utilization increases,a. it becomes less important to perform aggregate planning.b. it becomes more important to perform aggregate planning.c. it does not affect the importance of performing aggregate planning.d. it lessens the importance of aggregate planning.e. none of the aboveAnswer: bDifficulty: ModerateEssay/Problems1. Discuss the primary objective and operational parameters of aggregate planning.Answer: The goal of aggregate planning is to satisfy demand in a way thatmaximizes profit. Aggregate planning is a process by which a companydetermines levels of capacity, production, subcontracting, inventory, stockouts,and even pricing over a specified time horizon. The aggregate planner’s mainobjective is to identify the following operational parameters over the specifiedtime horizon:• Production rate: the number of units completed per unit time (such as per week or per month).• Workforce: the number of workers/units of capacity needed for production.• Overtime: the amount of overtime production planned.• Machine capacity level: the number of units of machine capacity needed forproduction.• Subcontracting: the subcontracted capacity required over the planning horizon.• Backlog: demand not satisfied in the period in which it arises but carried over to future periods.• Inventory on hand: the planned inventory carried over the various periods in the planning horizon.The aggregate plan serves as a broad blueprint for operations and establishesthe parameters within which short-term production and distribution decisions are made. The aggregate plan allows the supply chain to alter capacity allocationsand change supply contracts.Difficulty: Moderate2. Discuss the information required for aggregate planning.Answer: An aggregate planner requires the following information:• Demand forecast F t for each Period t in the planning horizon that extends over T periods• Production cos ts• Labor costs, regular time ($/hour), and overtime costs ($/hour)• Cost of subcontracting production ($/unit or $/hour)• Cost of changing capacity; specifically, cost of hiring/laying off workforce($/worker) and cost of adding or reducing machine capacity ($/machine)• Labor/machine hours required per unit• Inventory holding cost ($/unit/period)• Stockout or backlog cost ($/unit/period)• Constraints:• Limits on overtime• Limits on layoffs• Limits on capital available• Limits on stockouts and ba cklogs• Constraints from suppliers to the enterpriseThis information is used to create an aggregate plan that in turn helps a company make the following determinations:• Production quantity from regular time, overtime, and subcontracted time:used to determine number of workers and supplier purchase levels.• Inventory held: used to determine how much warehouse space andworking capital is needed.• Backlog/stockout quantity: used to determine what the customer servicelevels will be.• Workforce hired/laid off: used to determine any labor issues that will beencountered.• Machine capacity increase/decrease: used to determine if newproduction equipment needs to be purchased or idled.The quality of an aggregate plan has a significant impact on the profitability of a firm. A poor aggregate plan can result in lost sales and lost profits if the available inventory and capacity are unable to meet demand. A poor aggregate plan mayalso result in a large amount of excess inventory and capacity, thereby raisingcosts. Therefore, aggregate planning is a very important tool in helping a supply chain maximize profitability.Difficulty: Hard3. Explain the basic strategies that an aggregate planner has available to balancethe various costs and meet demand.Answer: There are essentially three distinct aggregate planning strategies forachieving balance between these costs. These strategies involve trade-offsbetween capital investment, workforce size, work hours, inventory, andbacklogs/lost sales. Most strategies that a planner actually uses are acombination of these three and are referred to as mixed strategies. The threestrategies are as follows:1. Chase strategy—using capacity as the lever: With this strategy, the productionrate is synchronized with the demand rate by varying machine capacity or hiring and laying off employees as the demand rate varies. In practice, achieving thissynchronization can be very problematic because of the difficulty in varyingcapacity and workforce on short notice. This strategy can be expensive toimplement if the cost of varying machine or labor capacity over time is high. Itcan also have a significant negative impact on the morale of the workforce. TheChase strategy results in low levels of inventory in the supply chain and highlevels of change in capacity and workforce. It should be used when the cost ofcarrying inventory is very expensive and costs to change levels of machine andlabor capacity are low.2. Time flexibility strategy—using utilization as the lever: This strategy may beused if there is excess machine capacity (i.e., if machines are not used twentyfour hours a day, seven days a week). In this case, the workforce (capacity) iskept stable but the number of hours worked is varied over time in an effort tosynchronize production with demand. A planner can use variable amounts ofovertime or a flexible schedule to achieve this synchronization. Although thisstrategy does require that the workforce be flexible, it avoids some of theproblems associated with the Chase strategy, most notably changing the size of the workforce. This strategy results in low levels of inventory but with loweraverage utilization. It should be used when inventory carrying costs are relatively high and machine capacity is relatively inexpensive.3. Level strategy—using inventory as the lever: With this strategy, a stablemachine capacity and workforce are maintained with a constant output rate.Shortages and surpluses result in inventory levels fluctuating over time. Hereproduction is not synchronized with demand. Either inventories are built up inanticipation of future demand or backlogs are carried over from high- to low-demand periods. Employees benefit from stable working conditions. A drawback associated with this strategy is that large inventories may accumulate andcustomer orders may be delayed. This strategy keeps capacity and costs ofchanging capacity relatively low. It should be used when inventory carrying andbacklog costs are relatively low.Difficulty: Moderate4. Discuss key issues to be considered when implementing aggregate planning.Answer: 1. Think beyond the enterprise to the entire supply chain. Mostaggregate planning done today takes only the enterprise as its breadth of scope.However, there are many factors outside the enterprise throughout the supplychain that can dramatically impact the optimal aggregate plan. Therefore, avoidthe trap of only thinking about your enterprise when aggregate planning. Workwith partners downstream to produce forecasts, with upstream partners todetermine constraints, and with any other supply chain entities that can improve the quality of the inputs into the aggregate plan. As the plan is only as good asthe quality of the inputs, using the supply chain to increase the quality of theinputs will greatly improve the quality of the aggregate plan. Also make sure tocommunicate the aggregate plan to all supply chain partners who will be affected by it.2. Make plans flexible because forecasts are always wrong. Aggregate plans arebased on forecasts of future demand. Given that these forecasts are alwayswrong to some degree, the aggregate plan needs to have some flexibility builtinto it if it is to be useful. By building flexibility into the plan, when future demand changes, or other changes occur, such as increases in costs, the plan canappropriately adjust to handle the new situation. A manager should performsensitivity analysis on the inputs into an aggregate plan. Using sensitivityanalysis on the inputs into the aggregate plan will enable the planner to choosethe best solution for the range of possibilities that could occur.3. Rerun the aggregate plan as new data emerges. Aggregate plans provide amap for the next three to eighteen months. This does not mean that a firm should only run aggregate plans once every three to eighteen months. As inputs into the aggregate plan change, managers should use the latest values of these inputsand rerun the aggregate plan. By using the latest inputs, the plan will avoidsuboptimization based on old data and will produce a better solution. Forinstance, as new demand forecasts become available, aggregate plans shouldbe reevaluated.4. Use aggregate planning as capacity utilization increases. Surprisingly, manycompanies do not create aggregate plans and instead rely solely on orders from their distributors or warehouses to determine their production schedules. Theseorders are driven either by actual demand or through inventory managementalgorithms. If a company has no trouble efficiently meeting demand this way,then one could claim the lack of aggregate planning may not significantly harmthe company. However, when utilization becomes high and capacity is an issue, relying on orders to set the production schedule can lead to capacity problems.When utilization is high, the likelihood of producing for all the orders as theyarrive is very low. Planning needs to be done to best utilize the capacity to meet the forecasted demand. Therefore, as capacity utilization increases, it becomesmore important to perform aggregate planning.Difficulty: Moderate。

Chapter 8Application: the Costs of TaxationTRUE/FALSE1. Total surplus is always equal to the sum of consumer surplus and producer surplus.ANS: F DIF: 2 REF: 8-1 NAT: AnalyticLOC: Supply and demand TOP: Total surplusMSC: Interpretive2. Total surplus in a market does not change when the government imposes a tax on that market because the lossof consumer surplus and producer surplus is equal to the gain of government revenue.ANS: F DIF: 2 REF: 8-1 NAT: AnalyticLOC: Supply and demand TOP: Total surplusMSC: Interpretive3. When a tax is imposed on buyers, consumer surplus and producer surplus both decrease.ANS: T DIF: 2 REF: 8-1 NAT: AnalyticLOC: Supply and demand TOP: Consumer surplus | Producer surplusMSC: Interpretive4. When a tax is imposed on buyers, consumer surplus decreases but producer surplus increases.ANS: F DIF: 2 REF: 8-1 NAT: AnalyticLOC: Supply and demand TOP: Consumer surplus | Producer surplusMSC: Interpretive5. When a tax is imposed on sellers, producer surplus decreases but consumer surplus increases.ANS: F DIF: 2 REF: 8-1 NAT: AnalyticLOC: Supply and demand TOP: Consumer surplus | Producer surplusMSC: Interpretive6. When a tax is imposed on sellers, consumer surplus and producer surplus both decrease.ANS: T DIF: 2 REF: 8-1 NAT: AnalyticLOC: Supply and demand TOP: Consumer surplus | Producer surplusMSC: Interpretive7. Taxes affect market participants by increasing the price paid by the buyer and received by the seller.ANS: F DIF: 1 REF: 8-1 NAT: AnalyticLOC: Supply and demand TOP: Taxes MSC: Applicative8. Taxes affect market participants by increasing the price paid by the buyer and decreasing the price received bythe seller.ANS: T DIF: 1 REF: 8-1 NAT: AnalyticLOC: Supply and demand TOP: Taxes MSC: Applicative9. A tax raises the price received by sellers and lowers the price paid by buyers.ANS: F DIF: 1 REF: 8-1 NAT: AnalyticLOC: Supply and demand TOP: Efficiency MSC: Interpretive10. Normally, both buyers and sellers of a good become worse off when the good is taxed.ANS: T DIF: 2 REF: 8-1 NAT: AnalyticLOC: Supply and demand TOP: Welfare MSC: Interpretive11. When a good is taxed, the tax revenue collected by the government equals the decrease in the welfare ofbuyers and sellers caused by the tax.ANS: F DIF: 2 REF: 8-1 NAT: AnalyticLOC: Supply and demand TOP: Welfare | Tax revenueMSC: Interpretive529530 Chapter 8 /Application: the Costs of Taxation12. A tax places a wedge between the price buyers pay and the price sellers receive.ANS: T DIF: 1 REF: 8-1 NAT: AnalyticLOC: Supply and demand TOP: Efficiency MSC: Interpretive13. A tax on a good causes the size of the market to increase.ANS: F DIF: 1 REF: 8-1 NAT: AnalyticLOC: Supply and demand TOP: Efficiency MSC: Interpretive14. A tax on a good causes the size of the market to shrink.ANS: T DIF: 1 REF: 8-1 NAT: AnalyticLOC: Supply and demand TOP: Efficiency MSC: Interpretive15. When a tax is imposed, the loss of consumer surplus and producer surplus as a result of the tax exceeds the taxrevenue collected by the government.ANS: T DIF: 2 REF: 8-1 NAT: AnalyticLOC: Supply and demand TOP: Welfare MSC: Interpretive16. Economists use the government’s tax revenue to measure the public benefit from a tax.ANS: T DIF: 2 REF: 8-1 NAT: AnalyticLOC: Supply and demand TOP: Welfare MSC: Interpretive17. Because taxes distort incentives, they cause markets to allocate resources inefficiently.ANS: T DIF: 2 REF: 8-1 NAT: AnalyticLOC: Supply and demand TOP: Efficiency MSC: Interpretive18. Taxes cause deadweight losses because they prevent buyers and sellers from realizing some of the gains fromtrade.ANS: T DIF: 2 REF: 8-1 NAT: AnalyticLOC: Supply and demand TOP: Deadweight lossMSC: Interpretive19. As the price elasticities of supply and demand increase, the deadweight loss from a tax increases.ANS: T DIF: 2 REF: 8-2 NAT: AnalyticLOC: Elasticity TOP: Elasticity | Deadweight loss MSC: Applicative20. The greater the elasticity of demand, the smaller the deadweight loss of a tax.ANS: F DIF: 2 REF: 8-2 NAT: AnalyticLOC: Elasticity TOP: Elasticity | Deadweight loss MSC: Interpretive21. The more inelastic are demand and supply, the greater is the deadweight loss of a tax.ANS: F DIF: 2 REF: 8-2 NAT: AnalyticLOC: Elasticity TOP: Elasticity | Deadweight loss MSC: Applicative22. The elasticities of the supply and demand curves in the market for cigarettes affect how much a tax distortsthat market.ANS: T DIF: 2 REF: 8-2 NAT: AnalyticLOC: Elasticity TOP: Elasticity | Deadweight loss MSC: Interpretive23. If a tax did not induce buyers or sellers to change their behavior, it would not cause a deadweight loss. ANS: T DIF: 2 REF: 8-2 NAT: AnalyticLOC: Supply and demand TOP: Deadweight lossMSC: Interpretive24. The most important tax in the U.S. economy is the tax on corporations’ profits.ANS: F DIF: 1 REF: 8-2 NAT: AnalyticLOC: Supply and demand TOP: Labor MSC: Definitional25. The Social Security tax, and to a large extent, the federal income tax, are labor taxes.ANS: T DIF: 1 REF: 8-2 NAT: AnalyticLOC: Supply and demand TOP: Labor MSC: InterpretiveChapter 8 /Application: the Costs of Taxation 531 26. Taxes on labor tend to increase the number of hours that people choose to work.ANS: F DIF: 1 REF: 8-2 NAT: AnalyticLOC: Supply and demand TOP: Labor MSC: Interpretive27. Taxes on labor tend to encourage the elderly to retire early.ANS: T DIF: 1 REF: 8-2 NAT: AnalyticLOC: Supply and demand TOP: Labor MSC: Interpretive28. Taxes on labor tend to encourage second earners to stay at home rather than work in the labor force.ANS: T DIF: 1 REF: 8-2 NAT: AnalyticLOC: Supply and demand TOP: Labor MSC: Interpretive29. Economists disagree on whether labor taxes have a small or large deadweight loss.ANS: T DIF: 1 REF: 8-2 NAT: AnalyticLOC: Supply and demand TOP: Labor | Deadweight lossMSC: Definitional30. The demand for bread is less elastic than the demand for donuts; hence, a tax on bread will create a largerdeadweight loss than will the same tax on donuts, other things equal.ANS: F DIF: 2 REF: 8-2 NAT: AnalyticLOC: Elasticity TOP: Elasticity | Deadweight loss MSC: Applicative31. The larger the deadweight loss from taxation, the larger the cost of government programs.ANS: T DIF: 2 REF: 8-2 NAT: AnalyticLOC: Supply and demand TOP: Deadweight lossMSC: Interpretive32. A tax on insulin is likely to cause a very large deadweight loss to society.ANS: F DIF: 2 REF: 8-2 NAT: AnalyticLOC: Elasticity TOP: Deadweight loss | Elasticity MSC: Applicative33. The deadweight loss of a tax rises even more rapidly than the size of the tax.ANS: T DIF: 2 REF: 8-3 NAT: AnalyticLOC: Supply and demand TOP: Deadweight lossMSC: Interpretive34. As the size of a tax increases, the government's tax revenue rises, then falls.ANS: T DIF: 2 REF: 8-3 NAT: AnalyticLOC: Supply and demand TOP: Laffer curve MSC: Interpretive35. Tax revenues increase in direct proportion to increases in the size of the tax.ANS: F DIF: 2 REF: 8-3 NAT: AnalyticLOC: Supply and demand TOP: Tax revenue MSC: Interpretive36. If the size of a tax doubles, the deadweight loss doubles.ANS: F DIF: 3 REF: 8-3 NAT: AnalyticLOC: Supply and demand TOP: Deadweight lossMSC: Applicative37. If the size of a tax triples, the deadweight loss increases by a factor of six.ANS: F DIF: 3 REF: 8-3 NAT: AnalyticLOC: Supply and demand TOP: Deadweight lossMSC: Applicative38. A tax on unimproved land falls entirely on landowners because the supply of land is perfectly inelastic. ANS: T DIF: 2 REF: 8-3 NAT: AnalyticLOC: Supply and demand TOP: Land tax MSC: Interpretive39. Because the supply of land is perfectly elastic, the deadweight loss of a tax on land is very large.ANS: F DIF: 2 REF: 8-3 NAT: AnalyticLOC: Elasticity TOP: Land tax | Deadweight loss MSC: Interpretive532 Chapter 8 /Application: the Costs of Taxation40. Economist Arthur Laffer made the argument that tax rates in the United States were so high that reducing therates would increase tax revenue.ANS: T DIF: 2 REF: 8-3 NAT: AnalyticLOC: Supply and demand TOP: Laffer curve MSC: Definitional41. The Laffer curve is the curve showing how tax revenue varies as the size of the tax varies.ANS: T DIF: 2 REF: 8-3 NAT: AnalyticLOC: Supply and demand TOP: Laffer curve MSC: Definitional42. The result of the large tax cuts in the first Reagan Administration demonstrated very convincingly that ArthurLaffer was correct when he asserted that cuts in tax rates would increase tax revenue.ANS: F DIF: 2 REF: 8-3 NAT: AnalyticLOC: Supply and demand TOP: Laffer curve MSC: Interpretive43. The idea that tax cuts would increase the quantity of labor supplied, thus increasing tax revenue, became knowas supply-side economics.ANS: T DIF: 2 REF: 8-3 NAT: AnalyticLOC: Supply and demand TOP: Supply-side economicsMSC: Definitional44. The Laffer curve illustrates how taxes in markets with greater elasticities of demand compare to taxes inmarkets with smaller elasticities of supply.ANS: F DIF: 2 REF: 8-3 NAT: AnalyticLOC: Supply and demand TOP: Laffer curve MSC: Definitional45. The more elastic are supply and demand in a market, the greater are the distortions caused by a tax on thatmarket, and the more likely it is that a tax cut in that market will raise tax revenue.ANS: T DIF: 3 REF: 8-3 NAT: AnalyticLOC: Elasticity TOP: Elasticity | Deadweight loss MSC: Applicative46. When the government imposes taxes on buyers and sellers of a good, society loses some of the benefits ofmarket efficiency.ANS: T DIF: 1 REF: 8-4 NAT: AnalyticLOC: Supply and demand TOP: Efficiency MSC: InterpretiveChapter 8 /Application: the Costs of Taxation 533SHORT ANSWER 1.Suppose the government levies a tax of the vertical distance from point A to point B. Using the graph shown,determine the value of each of the following: a. equilibrium price before the tax b. consumer surplus before the tax c. producer surplus before the tax d. total surplus before the tax e. consumer surplus after the tax f. producer surplus after the taxg. total tax revenue to the governmenth. total surplus (consumer surplus+producer surplus+tax revenue) after the tax i. deadweight loss1002003004005006007008009001000246810121416182022ANS:a. $10b. $3,600c. $2,400d. $6,000e. $900f. $600g. $3,000h. $4,500i.$1,500DIF: 3REF: 8-1NAT: AnalyticLOC: Supply and demandTOP: Welfare MSC: Applicative2.John has been in the habit of mowing Willa's lawn each week for $20. John's opportunity cost is $15, and Willa would be willing to pay $25 to have her lawn mowed. What is the maximum tax the government can impose on lawn mowing without discouraging John and Willa from continuing their mutually beneficial arrangement?ANS:If the tax is less than $10, there will exist a price at which both John and Willa will still benefit from thelawn-mowing arrangement. If the tax is $10, a price can be set which will leave John and Willa neither better off nor worse off from the lawn-mowing arrangement. If the tax is greater than $10, all possible prices will leave at least one of the parties worse off from the lawn-mowing arrangement.DIF: 2REF: 8-1NAT: AnalyticLOC: Supply and demandTOP: Efficiency MSC: Applicative534 Chapter 8 /Application: the Costs of Taxation 3.Use the following graph shown to fill in the table that follows.DemandSupplyQ1Q2P1P2P3ABDFC GP4QuantityPriceDIF: 2REF: 8-1NAT: AnalyticLOC: Supply and demandTOP: Welfare MSC: Applicative4.Suppose that instead of a supply-demand diagram, you are given the following information:Q s = 100 + 3P Q d = 400 - 2PFrom this information compute equilibrium price and quantity. Now suppose that a tax is placed on buyers so that Q d = 400 - (2P + T ).If T = 15, solve for the new equilibrium price and quantity. (Note: P is the price received by sellers and P + T is the price paid by buyers.) Compare these answers for equilibrium price and quantity with your first answers. What does this show you?ANS:Prior to the tax, the equilibrium price would be $60 and the equilibrium quantity would be 280. After the tax is imposed, P , the price received by sellers would be $57. The price paid by buyers would be $72. The quantity sold would be 271. The new answer shows three obvious facts. First, buyers pay more with a tax. Second, sellers receive less with a tax. Third, the size of the market shrinks when a tax is imposed on a product.DIF: 3 REF: 8-1NAT: AnalyticLOC: Supply and demandTOP: Taxes MSC: AnalyticalChapter 8 /Application: the Costs of Taxation 535 5. Using demand and supply diagrams, show the difference in deadweight loss between (a) a market withinelastic demand and supply and (b) a market with elastic demand and supply.ANS:DIF: 2 REF: 8-2 NAT: Analytic LOC: ElasticityTOP: Deadweight loss | Elasticity MSC: Applicative536 Chapter 8 /Application: the Costs of Taxation6. Illustrate on three demand-and-supply graphs how the size of a tax (small, medium and large) can alter totalrevenue and deadweight loss.ANS:DIF: 2 REF: 8-3 NAT: Analytic LOC: Supply and demandTOP: Deadweight loss MSC: ApplicativeSec00 - Application: The Costs of TaxationMULTIPLE CHOICE1. In 1776, the American Revolution was sparked by anger overa.the extravagant lifestyle of British royalty.b.the crimes of British soldiers stationed in the American colonies.c.British taxes imposed on the American colonies.d.the failure of the British to protect American colonists from attack by hostile Native Americans. ANS: C DIF: 1 REF: 8-0NAT: Analytic LOC: Supply and demand TOP: TaxesMSC: DefinitionalChapter 8 /Application: the Costs of Taxation 5372. Anger over British taxes played a significant role in bringing about thea.election of John Adams as the second American president.b.American Revolution.c.War of 1812.d.“no new taxes” clause in the U.S. Constitution.ANS: B DIF: 1 REF: 8-0NAT: Analytic LOC: Supply and demand TOP: TaxesMSC: Definitional3. Who once said that taxes are the price we pay for a civilized society?a.Aristotleb.George Washingtonc.Oliver Wendell Holmes, Jr.d.Ronald ReaganANS: C DIF: 1 REF: 8-0NAT: Analytic LOC: Supply and demand TOP: TaxesMSC: Definitional4. Who once said that taxes are the price we pay for a civilized society?ton Friedmanb.Theodore Rooseveltc.Arthur Lafferd.Oliver Wendell Holmes, Jr.ANS: D DIF: 1 REF: 8-0NAT: Analytic LOC: Supply and demand TOP: TaxesMSC: Definitional5. To fully understand how taxes affect economic well-being, we musta.assume that economic well-being is not affected if all tax revenue is spent on goods and services forthe people who are being taxed.pare the taxes raised in the United States with those raised in other countries, especially France.pare the reduced welfare of buyers and sellers to the amount of revenue the government raises.d.take into account the fact that almost all taxes reduce the welfare of buyers, increase the welfare ofsellers, and raise revenue for the government.ANS: C DIF: 2 REF: 8-0NAT: Analytic LOC: Supply and demand TOP: Taxes | Economic welfare MSC: Interpretive6. To fully understand how taxes affect economic well-being, we must compare thea.benefit to buyers with the loss to sellers.b.price paid by buyers to the price received by sellers.c.profits earned by firms to the losses incurred by consumers.d.decrease in total surplus to the increase in revenue raised by the government.ANS: D DIF: 2 REF: 8-0NAT: Analytic LOC: Supply and demand TOP: Taxes | Economic welfare MSC: Interpretive7. To fully understand how taxes affect economic well-being, we must compare thea.consumer surplus to the producer surplus.b.price paid by buyers to the price received by sellers.c.reduced welfare of buyers and sellers to the revenue raised by the government.d.consumer surplus to the deadweight loss.ANS: C DIF: 2 REF: 8-0NAT: Analytic LOC: Supply and demand TOP: Taxes | Economic welfare MSC: Interpretive538 Chapter 8 /Application: the Costs of TaxationSec01 - Application: The Costs of Taxation - The Deadweight Loss of Taxation MULTIPLE CHOICE1. When a tax is levied on a good, the buyers and sellers of the good share the burden,a.provided the tax is levied on the sellers.b.provided the tax is levied on the buyers.c.provided a portion of the tax is levied on the buyers, with the remaining portion levied on thesellers.d.regardless of how the tax is levied.ANS: D DIF: 2 REF: 8-1NAT: Analytic LOC: Supply and demand TOP: Tax burdenMSC: Interpretive2. A tax on a gooda.raises the price that buyers effectively pay and raises the price that sellers effectively receive.b.raises the price that buyers effectively pay and lowers the price that sellers effectively receive.c.lowers the price that buyers effectively pay and raises the price that sellers effectively receive.d.lowers the price that buyers effectively pay and lowers the price that sellers effectively receive. ANS: B DIF: 2 REF: 8-1NAT: Analytic LOC: Supply and demand TOP: TaxesMSC: Interpretive3. When a tax is placed on a product, the price paid by buyersa.rises, and the price received by sellers rises.b.rises, and the price received by sellers falls.c.falls, and the price received by sellers rises.d.falls, and the price received by sellers falls.ANS: B DIF: 2 REF: 8-1NAT: Analytic LOC: Supply and demand TOP: TaxesMSC: Interpretive4. A tax affectsa.buyers only.b.sellers only.c.buyers and sellers only.d.buyers, sellers, and the government.ANS: D DIF: 2 REF: 8-1NAT: Analytic LOC: Supply and demand TOP: Tax incidenceMSC: Interpretive5. The government’s benefit from a tax can be measured bya.consumer surplus.b.producer surplus.c.tax revenue.d.All of the above are correct.ANS: C DIF: 2 REF: 8-1NAT: Analytic LOC: Supply and demand TOP: Tax revenueMSC: Interpretive6. What happens to the total surplus in a market when the government imposes a tax?a.Total surplus increases by the amount of the tax.b.Total surplus increases but by less than the amount of the tax.c.Total surplus decreases.d.Total surplus is unaffected by the tax.ANS: C DIF: 2 REF: 8-1NAT: Analytic LOC: Supply and demand TOP: Total surplusMSC: Applicative7. When a good is taxed,a.both buyers and sellers of the good are made worse off.b.only buyers are made worse off, because they ultimately bear the burden of the tax.c.only sellers are made worse off, because they ultimately bear the burden of the tax.d.neither buyers nor sellers are made worse off, since tax revenue is used to provide goods andservices that would otherwise not be provided in a market economy.ANS: A DIF: 2 REF: 8-1NAT: Analytic LOC: Supply and demand TOP: Tax burdenMSC: Interpretive8. To measure the gains and losses from a tax on a good, economists use the tools ofa.macroeconomics.b.welfare economics.c.international-trade theory.d.circular-flow analysis.ANS: B DIF: 1 REF: 8-1NAT: Analytic LOC: Supply and demand TOP: WelfareMSC: Interpretive9. When a tax is imposed on a good, thea.supply curve for the good always shifts.b.demand curve for the good always shifts.c.amount of the good that buyers are willing to buy at each price always remains unchanged.d.equilibrium quantity of the good always decreases.ANS: D DIF: 2 REF: 8-1NAT: Analytic LOC: Supply and demand TOP: TaxesMSC: Interpretive10. A tax levied on the sellers of a good shifts thea.supply curve upward (or to the left).b.supply curve downward (or to the right).c.demand curve upward (or to the right).d.demand curve downward (or to the left).ANS: A DIF: 2 REF: 8-1NAT: Analytic LOC: Supply and demand TOP: TaxesMSC: Interpretive11. A tax levied on the buyers of a good shifts thea.supply curve upward (or to the left).b.supply curve downward (or to the right).c.demand curve downward (or to the left).d.demand curve upward (or to the right).ANS: C DIF: 2 REF: 8-1NAT: Analytic LOC: Supply and demand TOP: TaxesMSC: Interpretive12. If a tax shifts the supply curve upward (or to the left), we can infer that the tax was levied ona.buyers of the good.b.sellers of the good.c.both buyers and sellers of the good.d.We cannot infer anything because the shift described is not consistent with a tax.ANS: B DIF: 2 REF: 8-1NAT: Analytic LOC: Supply and demand TOP: TaxesMSC: Interpretive13. If a tax shifts the supply curve downward (or to the right), we can infer that the tax was levied ona.buyers of the good.b.sellers of the good.c.both buyers and sellers of the good.d.We cannot infer anything because the shift described is not consistent with a tax.ANS: D DIF: 2 REF: 8-1NAT: Analytic LOC: Supply and demand TOP: TaxesMSC: Interpretive14. If a tax shifts the demand curve downward (or to the left), we can infer that the tax was levied ona.buyers of the good.b.sellers of the good.c.both buyers and sellers of the good.d.We cannot infer anything because the shift described is not consistent with a tax.ANS: A DIF: 2 REF: 8-1NAT: Analytic LOC: Supply and demand TOP: TaxesMSC: Interpretive15. If a tax shifts the demand curve upward (or to the right), we can infer that the tax was levied ona.buyers of the good.b.sellers of the good.c.both buyers and sellers of the good.d.We cannot infer anything because the shift described is not consistent with a tax.ANS: D DIF: 2 REF: 8-1NAT: Analytic LOC: Supply and demand TOP: TaxesMSC: Interpretive16. When a tax is imposed on the buyers of a good, the demand curve shiftsa.downward by the amount of the tax.b.upward by the amount of the tax.c.downward by less than the amount of the tax.d.upward by more than the amount of the tax.ANS: A DIF: 2 REF: 8-1NAT: Analytic LOC: Supply and demand TOP: TaxesMSC: Interpretive17. When a tax is imposed on the sellers of a good, thea.demand curve shifts downward by less than the amount of the tax.b.demand curve shifts downward by the amount of the tax.c.supply curve shifts upward by less than the amount of the tax.d.supply curve shifts upward by the amount of the tax.ANS: D DIF: 2 REF: 8-1NAT: Analytic LOC: Supply and demand TOP: TaxesMSC: Interpretive18. A tax placed on buyers of tires shifts thea.demand curve for tires downward, decreasing the price received by sellers of tires and causing thequantity of tires to increase.b.demand curve for tires downward, decreasing the price received by sellers of tires and causing thequantity of tires to decrease.c.supply curve for tires upward, decreasing the effective price paid by buyers of tires and causing thequantity of tires to increase.d.supply curve for tires upward, increasing the effective price paid by buyers of tires and causing thequantity of tires to decrease.ANS: B DIF: 3 REF: 8-1NAT: Analytic LOC: Supply and demand TOP: TaxesMSC: Applicative19. Suppose a tax is imposed on the buyers of fast-food French fries. The burden of the tax willa.fall entirely on the buyers of fast-food French fries.b.fall entirely on the sellers of fast-food French fries.c.be shared equally by the buyers and sellers of fast-food French fries.d.be shared by the buyers and sellers of fast-food French fries but not necessarily equally. ANS: D DIF: 2 REF: 8-1NAT: Analytic LOC: Supply and demand TOP: Tax incidenceMSC: Interpretive20. It does not matter whether a tax is levied on the buyers or the sellers of a good becausea.sellers always bear the full burden of the tax.b.buyers always bear the full burden of the tax.c.buyers and sellers will share the burden of the tax.d.None of the above is correct; the incidence of the tax does depend on whether the buyers or thesellers are required to pay the tax.ANS: C DIF: 2 REF: 8-1NAT: Analytic LOC: Supply and demand TOP: Tax incidenceMSC: Interpretive21. When alcohol is taxed and sellers of alcohol are required to pay the tax to the government,a.the quantity of alcohol bought and sold in the market is reduced.b.the price paid by buyers of alcohol decreases.c.the demand for alcohol decreases.d.there is a movement downward and to the right along the demand curve for alcohol.ANS: A DIF: 2 REF: 8-1NAT: Analytic LOC: Supply and demand TOP: Tax incidenceMSC: Interpretive22. One result of a tax, regardless of whether the tax is placed on the buyers or the sellers, is that thea.size of the market is unchanged.b.price the seller effectively receives is higher.c.supply curve for the good shifts upward by the amount of the tax.d.tax reduces the welfare of both buyers and sellers.ANS: D DIF: 2 REF: 8-1NAT: Analytic LOC: Supply and demand TOP: Taxes | Welfare MSC: Interpretive23. When a tax is placed on the buyers of a product, a result is that buyers effectively paya.less than before the tax, and sellers effectively receive less than before the tax.b.less than before the tax, and sellers effectively receive more than before the tax.c.more than before the tax, and sellers effectively receive less than before the tax.d.more than before the tax, and sellers effectively receive more than before the tax.ANS: C DIF: 2 REF: 8-1NAT: Analytic LOC: Supply and demand TOP: TaxesMSC: Interpretive24. When a tax is levied on a good,a.neither buyers nor sellers are made worse off.b.only sellers are made worse off.c.only buyers are made worse off.d.both buyers and sellers are made worse off.ANS: D DIF: 2 REF: 8-1NAT: Analytic LOC: Supply and demand TOP: Taxes | Welfare MSC: Interpretive25. When a tax is levied on the buyers of a good, thea.supply curve shifts upward by the amount of the tax.b.quantity supplied increases for all conceivable prices of the good.c.buyers of the good will send tax payments to the government.d.demand curve shifts to the right by the horizontal distance of the tax.ANS: C DIF: 2 REF: 8-1NAT: Analytic LOC: Supply and demand TOP: TaxesMSC: Definitional26. When a tax is levied on the sellers of a good, thea.supply curve shifts upward by the amount of the tax.b.quantity demanded decreases for all conceivable prices of the good.c.quantity supplied increases for all conceivable prices of the good.d.None of the above is correct.ANS: A DIF: 2 REF: 8-1NAT: Analytic LOC: Supply and demand TOP: TaxesMSC: Interpretive27. A $2.00 tax per gallon of paint placed on the sellers of paint will shift the supply curvea.downward by exactly $2.00.b.downward by less than $2.00.c.upward by exactly $2.00.d.upward by less than $2.00.ANS: C DIF: 2 REF: 8-1NAT: Analytic LOC: Supply and demand TOP: Tax incidenceMSC: Interpretive28. When a tax on a good is enacted,a.buyers and sellers share the burden of the tax regardless of whether the tax is levied on buyers or onsellers.b.buyers always bear the full burden of the tax.c.sellers always bear the full burden of the tax.d.sellers bear the full burden of the tax if the tax is levied on them; buyers bear the full burden of thetax if the tax is levied on them.ANS: A DIF: 2 REF: 8-1NAT: Analytic LOC: Supply and demand TOP: Tax incidenceMSC: Interpretive29. A tax placed on a gooda.causes the effective price to sellers to increase.b.affects the welfare of buyers of the good but not the welfare of sellers.c.causes the equilibrium quantity of the good to decrease.d.creates a burden that is usually borne entirely by the sellers of the good.ANS: C DIF: 2 REF: 8-1NAT: Analytic LOC: Supply and demand TOP: Tax incidenceMSC: Interpretive30. When a tax is levied on buyers of a good,ernment collects too little revenue to justify the tax if the equilibrium quantity of the gooddecreases as a result of the tax.b.there is an increase in the quantity of the good supplied.c. a wedge is placed between the price buyers pay and the price sellers effectively receive.d.the effective price to buyers decreases because the demand curve shifts leftward.ANS: C DIF: 2 REF: 8-1NAT: Analytic LOC: Supply and demand TOP: TaxesMSC: Applicative。

Chapter 8Aggregate Planning in the Supply ChainTrue/False1.The goal of aggregate planning is to satisfy demand in a way thatminimizes profit.Answer: FalseDifficulty: Easy2.Aggregate planning is a process by which a company determines levels ofcapacity, production, subcontracting, inventory, stockouts, and evenpricing over a specified time horizon.Answer: TrueDifficulty: Moderate3.Aggregate planning solves problems involving aggregate decisions ratherthan stock keeping unit (SKU) level decisions.Answer: TrueDifficulty: Easy4.Traditionally, much of aggregate planning is focused within anenterprise and may not always be seen as a part of supply chainmanagement.Answer: TrueDifficulty: Moderate5.Aggregate planning is an important supply chain issue because, to beeffective, it requires inputs from throughout the supply chain, but its results have little impact on the supply chain.Answer: FalseDifficulty: Moderate6.Short-term production serves as a broad blueprint for operations andestablishes the parameters within which aggregate planning decisions are made.Answer: FalseDifficulty: Easy7.The aggregate planning problem is concerned with determining theproduction level, inventory level, and capacity level (internal andoutsourced) for each p eriod that maximizes the firm’s profit over theplanning horizon.Answer: TrueDifficulty: Moderate8.To create an aggregate plan, a company must specify the planning horizonfor the plan and the duration of each period within the planning horizon.Answer: TrueDifficulty: Easy9. A planning horizon is usually between three and five years.Answer: FalseDifficulty: Moderate10. A poor aggregate plan can result in improved sales and profits if theavailable inventory and capacity are unable to meet demand.Answer: FalseDifficulty: Easy11. A poor aggregate plan may result in a large amount of excess inventoryand capacity, thereby raising costs.Answer: TrueDifficulty: Moderate12.The aggregate planner must make a trade-off between capacity, inventory,and backlog costs.Answer: TrueDifficulty: Moderate13.An aggregate plan that increases one cost typically results in theincrease of the other two.Answer: FalseDifficulty: Moderate14.The time flexible strategy is where the production rate is synchronizedwith the demand rate by varying machine capacity or hiring and layingoff employees as the demand rate varies.Answer: FalseDifficulty: Hard15.The time flexible strategy is where workforce (capacity) is kept stablebut the number of hours worked is varied over time in an effort tosynchronize production with demand.Answer: TrueDifficulty: Moderate16.The mixed strategy is where a stable machine capacity and workforce aremaintained with a constant output rate with inventory levels fluctuating over time.Answer: FalseDifficulty: Hard17.Most strategies that an aggregate planner actually uses are incombination, and are referred to as mixed strategies.Answer: TrueDifficulty: Easy18. A highly effective tool for a company to use when it tries to maximizeprofits while being subjected to a series of constraints is aggregateprogramming.Answer: FalseDifficulty: Moderate19.To improve the quality of these aggregate plans, forecast errors must betaken into account when formulating aggregate plans.Answer: TrueDifficulty: Moderate20.Forecasting errors are dealt with in aggregate plans using either safetybacklog or safety capacity.Answer: FalseDifficulty: Moderate21.Safety inventory is defined as inventory held to satisfy demand that ishigher than forecasted.Answer: TrueDifficulty: Easy22.Safety capacity is defined as capacity used to satisfy demand that islower than forecasted.Answer: FalseDifficulty: Easypanies should work with downstream partners to produce forecasts andwith upstream partners to determine constraints when doing aggregateplanning.Answer: TrueDifficulty: Easy24.The aggregate plan should be viewed primarily as an in-house tool thatdoes not need to be communicated to supply chain partners.Answer: FalseDifficulty: Easy25.Given that forecasts are always wrong to some degree, the aggregate planneeds to have some flexibility built into it if it is to be useful.Answer: TrueDifficulty: Moderate26. A manager should perform sensitivity analysis on the inputs into anaggregate plan to choose the best solution for the range ofpossibilities that could occur.Answer: TrueDifficulty: Moderate27.As inputs into the aggregate plan change, managers do not need to makechanges to the aggregate plan.Answer: FalseDifficulty: Easy28.As capacity utilization increases, it becomes less important to performaggregate planning.Answer: FalseDifficulty: ModerateMultiple Choice1.The process by which a company determines levels of capacity, production,subcontracting, inventory, stockouts, and even pricing over a specifiedtime horizon isa.aggregate planning.b.detail planning.c.inventory planning.d.sales planning.e.all of the aboveAnswer: aDifficulty: Moderate2.The goal of aggregate planning is toa.dissatisfy customers in a way that maximizes profit.b.dissatisfy customers in a way that minimizes profit.c.satisfy demand in a way that maximizes profit.d.satisfy demand in a way that minimizes profit.e.none of the aboveAnswer: cDifficulty: Easy3.Aggregate planning solves problems involvinga.aggregate decisions and stock keeping unit (SKU) level decisions.b.aggregate decisions or stock keeping unit (SKU) level decisions.c.aggregate decisions rather than stock keeping unit (SKU) leveldecisions.d.stock keeping unit (SKU) level decisions rather than aggregatedecisions.e. b and c onlyAnswer: cDifficulty: Easy4.Aggregate planning, to be effective, requires inputs froma.all customers.b.all departments.c.all suppliers.d.throughout the supply chain.e.throughout the company.Answer: dDifficulty: Moderate5.Much of aggregate planning has traditionally been focuseda.on short-term production scheduling.b.on customer relationship management.c.within an enterprise.d.beyond enterprise boundaries.e.all of the aboveAnswer: cDifficulty: Moderate6.Which of the following are not operational parameters the aggregateplanner is concerned witha.production rateb.workforcec.overtimed.backorderse.inventory on handAnswer: dDifficulty: Moderate7.The operational parameter concerned with the number of units completedper unit time (such as per week or per month) isa.production rate.b.workforce.c.overtime.d.backlog.e.inventory on hand.Answer: aDifficulty: Easy8.The operational parameter concerned with the number of workers/units ofcapacity needed for production isa.production rate.b.workforce.c.overtime.d.backlog.e.inventory on hand.Answer: bDifficulty: Easy9.The operational parameter concerned with the amount of overtimeproduction planned isa.production rate.b.workforce.c.overtime.d.backlog.e.inventory on hand.Answer: cDifficulty: Easy10.The operational parameter concerned with demand not satisfied in theperiod in which it arises, but carried over to future periods isa.production rate.b.workforce.c.overtime.d.backlog.e.inventory on hand.Answer: dDifficulty: Easy11.The operational parameter concerned with the planned inventory carriedover the various periods in the planning horizon isa.production rate.b.workforce.c.overtime.d.backlog.e.inventory on hand.Answer: eDifficulty: Easy12.The operational parameter concerned with the number of units of machinecapacity needed for production isa.machine capacity level.b.subcontracting.c.overtime.d.backlog.e.inventory on hand.Answer: aDifficulty: Easy13.The operational parameter concerned with the subcontracted capacityrequired over the planning horizon isa.machine capacity level.b.subcontracting.c.overtime.d.backlog.e.inventory on hand.Answer: cDifficulty: Easy14.The aggregate plana.serves as a broad blueprint for operations.b.establishes the parameters within which short-term production anddistribution decisions are made.c.allows the supply chain to alter capacity allocations and changesupply contracts.d.all of the abovee. b and c onlyAnswer: dDifficulty: Moderate15.Aggregate planning is concerned with determininga.the production level, sales level, and capacity for each period.b.the demand level, inventory level, and capacity for each period.c.the production level, inventory level, and capacity for eachperiod.d.the production level, staffing level, and capacity for eachperiod.e.none of the aboveAnswer: cDifficulty: Moderate16.To create an aggregate plan, a company must specifya.the planning horizon for the plan.b.the duration of each period within the planning horizon.c.key information required.d.all of the abovee. a and b onlyAnswer: dDifficulty: Moderate17.The planning horizon isa.the time period over which the aggregate plan is to produce asolution.b.the duration of each time period in the aggregate plan.c.the length of time required to produce the aggregate plan.d.the solution to the aggregate plan.e.none of the aboveAnswer: aDifficulty: Easy18.The length of the planning horizon is usually betweena.one and three months.b.three and eighteen months.c.one and three years.d.three and five years.e.none of the aboveAnswer: bDifficulty: Moderate19.Which of the following is not information needed by the aggregateplannera.demand forecast for each period in the planning horizonb.production costsbor costsd.cost of subcontracting productione.cost of changing the demand forecastAnswer: eDifficulty: Moderate20.The cost of changing capacity includes thea.cost of adding machine capacity.b.cost of reducing machine capacity.c.cost of hiring workforce.d.cost of laying off workforce.e.all of the aboveAnswer: eDifficulty: Easy21.Which of the following is not a cost of changing capacitya.cost of adding machine capacityb.cost of hiring workforcec.cost of laying off workforced.cost of overtimee.cost of reducing machine capacityAnswer: dDifficulty: Moderate22.Which of the following is not a constraint the aggregate planner needsto considera.limits on stockouts and backlogsb.limits on overtimec.limits on sales commissionsd.limits on layoffse.limits on capital availableAnswer: cDifficulty: Moderate23. A poor aggregate plan can result ina.appropriate inventory levels.b.efficient use of capacity.c.better sales and lost profits.d.lost sales and lost profits.e.lost sales and better profits.Answer: dDifficulty: Hard24.The fundamental trade-offs available to an aggregate planner are betweena.capability, inventory, and backlog costs.b.capability, inventory, and sales costs.c.capacity, inventory, and backlog costs.d.capacity, inventory, and sales costs.e.none of the aboveAnswer: cDifficulty: Easy25.Which of the following is not a distinct aggregate planning strategy forachieving balance between capacity, inventory, and backlog costsa.adjustable strategyb.Chase strategyc.level strategyd.mixed strategye.time flexible strategyAnswer: aDifficulty: Easy26.The strategy where the production rate is synchronized with the demandrate by varying machine capacity or hiring and laying off employees asthe demand rate varies is thea.adjustable strategy.b.Chase strategy.c.level strategy.d.mixed strategy.e.time flexible strategy.Answer: bDifficulty: Moderate27.The strategy where workforce (capacity) is kept stable but the number ofhours worked is varied over time in an effort to synchronize production with demand is thea.adjustable strategy.b.Chase strategy.c.level strategy.d.mixed strategy.e.time flexible strategy.Answer: eDifficulty: Moderate28.The strategy where a stable machine capacity and workforce aremaintained with a constant output rate, with inventory levelsfluctuating over time, is thea.adjustable strategy.b.Chase strategy.c.level strategy.d.mixed strategy.e.time flexible strategy.Answer: cDifficulty: Hard29.Most strategies that an aggregate planner actually uses are incombination and are referred to as thea.adjustable strategy.b.Chase strategy.c.level strategy.d.mixed strategy.e.time flexible strategy.Answer: dDifficulty: Easy30. A highly effective tool for a company to use when it tries to maximizeprofits while being subjected to a series of constraints isa.aggregate programming.b.distribution programming.c.production programming.d.linear programming.e.manufacturing programming.Answer: dDifficulty: Moderate31.When formulating aggregate plans,a.forecast errors have no impact.b.forecast errors must be taken into account.c.forecast accuracy is assumed.d.forecast accuracy is not a factor.e.none of the aboveAnswer: bDifficulty: Moderate32.Forecasting errors are dealt with usinga.safety backlog.b.safety capacity.c.safety inventory.d.all of the abovee. b and c onlyAnswer: eDifficulty: Moderate33.Inventory held to satisfy demand that is higher than forecasted isa.safety backlog.b.safety capacity.c.safety inventory.d.safety sales.e.safety workforce.Answer: cDifficulty: Easy34.Capacity used to satisfy demand that is higher than forecasted isa.safety backlog.b.safety capacity.c.safety inventory.d.safety sales.e.safety workforce.Answer: bDifficulty: Easy35.Which of the following is an approach a company can use to create abuffer for forecast error using safety inventorya.overtimeb.carry extra workforce permanentlyc.build and carry extra inventoriesd.subcontractinge.purchase capacity or product from an open or spot marketAnswer: aDifficulty: Easy36.Which of the following is not an approach a company can use to create abuffer for forecast error using safety capacitya.overtimeb.carry extra workforce permanentlyc.build and carry extra inventoriesd.subcontractinge.purchase capacity or product from an open or spot marketAnswer: cDifficulty: Easy37.Aggregate planning should consider information froma.only the enterprise as its breadth of scope.b.downstream partners to produce forecasts.c.upstream partners to determine constraints.d.all of the abovee. b and c onlyAnswer: dDifficulty: Easy38.The quality of the aggregate plan can be improved by using informationfroma.only the local firm.b.only downstream partners.c.only upstream partners.d.all parts of the supply chain.e.none of the aboveAnswer: bDifficulty: Moderate39.The aggregate plan should be communicated toa.only the local firm.b.only downstream partners.c.only upstream partners.d.all supply chain partners who will be affected by it.e.none of the aboveAnswer: cDifficulty: Moderate40.The aggregate plan needs toa.be a final product because changes are disruptive to the supplychain.b.be considered fixed because forecasts are usually accurate.c.have some flexibility built into it because forecasts are alwayswrong.d.have some flexibility built into it because forecasts are usuallyright.e.none of the aboveAnswer: cDifficulty: Moderate41.How frequently should the aggregate plan be reruna.weeklyb.monthlyc.every 3 to 8 monthsd.as inputs to the aggregate plan changee.neverAnswer: dDifficulty: Hard42.As capacity utilization increases,a.it becomes less important to perform aggregate planning.b.it becomes more important to perform aggregate planning.c.it does not affect the importance of performing aggregateplanning.d.it lessens the importance of aggregate planning.e.none of the aboveAnswer: bDifficulty: ModerateEssay/Problems1.Discuss the primary objective and operational parameters of aggregateplanning.Answer: The goal of aggregate planning is to satisfy demand in a waythat maximizes profit. Aggregate planning is a process by which acompany determines levels of capacity, production, subcontracting,inventory, stockouts, and even pricing over a specified time horizon.The aggregate planner’s main objective is to identify the followingoperational parameters over the specified time horizon:•Production rate: the number of units completed per unit time (such as per week or per month).•Workforce: the number of workers/units of capacity needed forproduction.•Overtime: the amount of overtime production planned.•Machine capacity level: the number of units of machine capacityneeded for production.•Subcontracting: the subcontracted capacity required over the planning horizon.•Backlog: demand not satisfied in the period in which it arises butcarried over to future periods.•Inventory on hand: the planned inventory carried over the variousperiods in the planning horizon.The aggregate plan serves as a broad blueprint for operations andestablishes the parameters within which short-term production anddistribution decisions are made. The aggregate plan allows the supplychain to alter capacity allocations and change supply contracts.Difficulty: Moderate2.Discuss the information required for aggregate planning.Answer: An aggregate planner requires the following information:• Demand forecast F t for each Period t in the planning horizon thatextends over T periods• Production costs• Labor costs, regular time ($/hour), and overtime costs ($/hour)• Cost of subcontracting production ($/unit or $/hour)• Cost of changing capacity; specifically, cost of hiring/laying offworkforce ($/worker) and cost of adding or reducing machine capacity($/machine)• Labor/machine hours required per unit• Inventory holding cost ($/unit/period)• Stockout or backlog cost ($/unit/period)• Constraints:• Limits on overtime• Limits on layoffs• Limits on capital available• Limits on stockouts and backlogs• Constraints from suppliers to the enterpriseThis information is used to create an aggregate plan that in turn helpsa company make the following determinations:•Production quantity from regular time, overtime, andsubcontracted time: used to determine number of workers andsupplier purchase levels.•Inventory held: used to determine how much warehouse space andworking capital is needed.•Backlog/stockout quantity: used to determine what the customerservice levels will be.•Workforce hired/laid off: used to determine any labor issuesthat will be encountered.•Machine capacity increase/decrease: used to determine if newproduction equipment needs to be purchased or idled.The quality of an aggregate plan has a significant impact on theprofitability of a firm. A poor aggregate plan can result in lost sales and lost profits if the available inventory and capacity are unable tomeet demand. A poor aggregate plan may also result in a large amount of excess inventory and capacity, thereby raising costs. Therefore,aggregate planning is a very important tool in helping a supply chainmaximize profitability.Difficulty: Hard3.Explain the basic strategies that an aggregate planner has available tobalance the various costs and meet demand.Answer: There are essentially three distinct aggregate planningstrategies for achieving balance between these costs. These strategies involve trade-offs between capital investment, workforce size, work hours, inventory, and backlogs/lost sales. Most strategies that aplanner actually uses are a combination of these three and are referred to as mixed strategies. The three strategies are as follows:1. Chase strategy—using capacity as the lever: With this strategy, the production rate is synchronized with the demand rate by varying machine capacity or hiring and laying off employees as the demand rate varies.In practice, achieving this synchronization can be very problematic because of the difficulty in varying capacity and workforce on short notice. This strategy can be expensive to implement if the cost of varying machine or labor capacity over time is high. It can also have a significant negative impact on the morale of the workforce. The Chase strategy results in low levels of inventory in the supply chain and high levels of change in capacity and workforce. It should be used when the cost of carrying inventory is very expensive and costs to change levels of machine and labor capacity are low.2. Time flexibility strategy—using utilization as the lever: This strategy may be used if there is excess machine capacity ., if machines are not used twenty four hours a day, seven days a week). In this case, the workforce (capacity) is kept stable but the number of hours workedis varied over time in an effort to synchronize production with demand.A planner can use variable amounts of overtime or a flexible schedule to achieve this synchronization. Although this strategy does require that the workforce be flexible, it avoids some of the problems associatedwith the Chase strategy, most notably changing the size of the workforce.This strategy results in low levels of inventory but with lower average utilization. It should be used when inventory carrying costs arerelatively high and machine capacity is relatively inexpensive.3. Level strategy—using inventory as the lever: With this strategy, astable machine capacity and workforce are maintained with a constantoutput rate. Shortages and surpluses result in inventory levelsfluctuating over time. Here production is not synchronized with demand.Either inventories are built up in anticipation of future demand orbacklogs are carried over from high- to low-demand periods. Employeesbenefit from stable working conditions. A drawback associated with this strategy is that large inventories may accumulate and customer ordersmay be delayed. This strategy keeps capacity and costs of changingcapacity relatively low. It should be used when inventory carrying andbacklog costs are relatively low.Difficulty: Moderate4.Discuss key issues to be considered when implementing aggregate planning.Answer: 1. Think beyond the enterprise to the entire supply chain. Most aggregate planning done today takes only the enterprise as its breadthof scope. However, there are many factors outside the enterprisethroughout the supply chain that can dramatically impact the optimalaggregate plan. Therefore, avoid the trap of only thinking about yourenterprise when aggregate planning. Work with partners downstream toproduce forecasts, with upstream partners to determine constraints, and with any other supply chain entities that can improve the quality of the inputs into the aggregate plan. As the plan is only as good as thequality of the inputs, using the supply chain to increase the quality ofthe inputs will greatly improve the quality of the aggregate plan. Also make sure to communicate the aggregate plan to all supply chain partners who will be affected by it.2. Make plans flexible because forecasts are always wrong. Aggregate plans are based on forecasts of future demand. Given that theseforecasts are always wrong to some degree, the aggregate plan needs to have some flexibility built into it if it is to be useful. By building flexibility into the plan, when future demand changes, or other changes occur, such as increases in costs, the plan can appropriately adjust to handle the new situation. A manager should perform sensitivity analysis on the inputs into an aggregate plan. Using sensitivity analysis on the inputs into the aggregate plan will enable the planner to choose thebest solution for the range of possibilities that could occur.3. Rerun the aggregate plan as new data emerges. Aggregate plans providea map for the next three to eighteen months. This does not mean that a firm should only run aggregate plans once every three to eighteen months. As inputs into the aggregate plan change, managers should use the latest values of these inputs and rerun the aggregate plan. By using the latest inputs, the plan will avoid suboptimization based on old data and will produce a better solution. For instance, as new demand forecasts become available, aggregate plans should be reevaluated.4. Use aggregate planning as capacity utilization increases. Surprisingly, many companies do not create aggregate plans and instead rely solely on orders from their distributors or warehouses to determine their production schedules. These orders are driven either by actual demand or through inventory management algorithms. If a company has no trouble efficiently meeting demand this way, then one could claim thelack of aggregate planning may not significantly harm the company. However, when utilization becomes high and capacity is an issue, relying on orders to set the production schedule can lead to capacity problems. When utilization is high, the likelihood of producing for all the orders as they arrive is very low. Planning needs to be done to best utilize the capacity to meet the forecasted demand. Therefore, as capacity utilization increases, it becomes more important to perform aggregate planning.Difficulty: Moderate。

国际财务管理课后习题答案chapter-8CHAPTER 8 MANAGEMENT OF TRANSACTION EXPOSURE SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS ANDPROBLEMSQUESTIONS1. How would you define transaction exposure? How is it different from economic exposure?Answer: T ransaction exposure is the sensitivity of realized domestic currency values of the firm’s contractual cash flows denominated in foreign currencies to unexpected changes in exchange rates. Unlike economic exposure, transaction exposure is well-defined and short-term.2. Discuss and compare hedging transaction exposure using the forward contract vs. money market instruments. When do the alternative hedging approaches produce the same result?Answer: Hedging transaction exposure by a forward contract is achieved by selling or buying foreign currency receivables or payables forward. On the other hand, money market hedge is achieved by borrowing or lending the present value of foreign currency receivables or payables, thereby creating offsetting foreign currency positions. If the interest rate parity is holding, the two hedging methods are equivalent.3. Discuss and compare the costs of hedging via the forward contract and the options contract.Answer: There is no up-front cost of hedging by forward contracts. In the case of options hedging, however, hedgers should pay the premiums for the contracts up-front. The cost of forward hedging, however, may be realized ex post when the hedger regrets his/her hedging decision.4. What are the advantages of a currency options contract as a hedging tool compared with the forward contract?Answer: The main advantage of using options contracts for hedging is that the hedger can decide whether to exercise options upon observing the realized future exchange rate. Options thus provide a hedge against ex post regret that forward hedger might have to suffer. Hedgers can only eliminate the downside risk while retaining the upside potential.5. Suppose your company has purchased a put option on the German mark to manage exchange exposure associated with an account receivable denominated in that currency. In this case, your company can be said to have an ‘insurance’ policy on its receivable. Explain in what sense this is so.Answer: Your company in this case knows in advance that it will receive a certain minimum dollar amount no matter what might happen to the $/€ exchange rate. Furthermore, if the German mark appreciates, your company will benefit from the rising euro.6. Recent surveys of corporate exchange risk management practices indicate that many U.S. firms simply do not hedge. How would you explain this result?Answer: There can be many possible reasons for this. First, many firms may feel that they are not really exposed to exchange risk due to product diversification, diversified markets for their products, etc. Second, firms may be using self-insurance against exchange risk. Third, firms may feel that shareholders can diversify exchange risk themselves, rendering corporate risk management unnecessary.7. Should a firm hedge? Why or why not?Answer: In a perfect capital market, firms may not need to hedge exchange risk. But firms can add to their value by hedging if markets are imperfect. First, if management knows about the firm’s exposure better than shareho lders, the firm, not its shareholders, should hedge. Second, firms may be able to hedge at a lower cost. Third, if default costs are significant, corporate hedging can be justifiable because it reduces the probability of default. Fourth, if the firm faces progressive taxes, it can reduce tax obligations by hedging which stabilizes corporate earnings.8. Using an example, discuss the possible effect of hedging on a firm’s tax obligations.Answer: One can use an example similar to the one presented in the chapter.9. Explain contingent exposure and discuss the advantages of using currency options to manage this type of currency exposure.Answer: Companies may encounter a situation where they may or may not face currency exposure. In this situation, companies need options, not obligations, to buy or sell a given amount of foreign exchange they may or may not receive or have to pay. If companies either hedge using forward contracts or do not hedge at all, they may face definite currency exposure.10. Explain cross-hedging and discuss the factors determining its effectiveness.Answer: Cross-hedging involves hedging a position in one asset by taking a position in another asset. The effectiveness of cross-hedging would depend on the strength and stability of the relationship between the two assets.PROBLEMS1. Cray Research sold a super computer to the Max Planck Institute in Germany on credit and invoiced €10 million payable in six months. Currently, the six-month forward exchange rate is $1.10/€ and the fo reign exchange advisor for Cray Research predicts that the spot rate is likely to be $1.05/€ in six months.(a) What is the expected gain/loss from the forward hedging?(b) If you were the financial manager of Cray Research, would you recommend hedging this euro receivable? Why or why not?(c) Suppose the foreign exchange advisor predicts that the future spot rate will be the same as the forward exchange rate quoted today. Would you recommend hedging in this case? Why or why not?Solution: (a) Expected gain($) = 10,000,000(1.10 – 1.05)= 10,000,000(.05)= $500,000.(b) I would recommend hedging because Cray Research can increase the expected dollar receipt by $500,000 and also eliminate the exchange risk.(c) Since I eliminate risk without sacrificing dollar receipt, I still would recommend hedging.2. IBM purchased computer chips from NEC, a Japanese electronics concern, and was billed ¥250 million payable in three months. Currently, the spot exchange rate is ¥105/$ and the three-month forward rate is ¥100/$. The three-month money market interest rate is 8 percent per annum in the U.S. and 7 percent per annum in Japan. The management of IBM decided to use the money market hedge to deal with this yen account payable.(a) Explain the process of a money market hedge and compute the dollar cost of meeting the yen obligation.(b) Conduct the cash flow analysis of the money market hedge.Solution: (a). Let’s first compute the PV of ¥250 million, i.e.,250m/1.0175 = ¥245,700,245.7So if the above yen amount is invested today at the Japanese interest rate for three months, the maturity value will be exactly equal to ¥25 million which is the amount of payable.To buy the above yen amount today, it will cost:$2,340,002.34 = ¥250,000,000/105.The dollar cost of meeting this yen obligation is $2,340,002.34 as of today.(b)___________________________________________________________________Transaction CF0 CF1____________________________________________________________________1. Buy yens spot -$2,340,002.34with dollars ¥245,700,245.702. Invest in Japan - ¥245,700,245.70 ¥250,000,0003. Pay yens - ¥250,000,000Net cash flow - $2,340,002.34____________________________________________________________________3. You plan to visit Geneva, Switzerland in three months to attend an international business conference. You expect to incur the total cost of SF 5,000 for lodging, meals and transportation during your stay. As of today, the spot exchange rate is $0.60/SF and the three-month forward rate is $0.63/SF. You can buy the three-month call option on SF with the exercise rate of $0.64/SF for the premium of $0.05 per SF. Assume that your expected future spot exchange rate is the same as the forward rate. The three-month interest rate is 6 percent per annum in the United States and 4 percent per annum in Switzerland.(a) Calculate your expected dollar cost of buying SF5,000 if you choose to hedge via call option on SF.(b) Calculate the future dollar cost of meeting this SF obligation if you decide to hedge using a forward contract.(c) At what future spot exchange rate will you be indifferent between the forward and option market hedges?(d) Illustrate the future dollar costs of meeting the SF payable against the future spot exchange rate under both the options and forward market hedges.Solution: (a) Total option premium = (.05)(5000) = $250. In three months, $250 is worth $253.75 = $250(1.015). At the expected future spot rate of $0.63/SF, which is less than the exercise price, you don’t expect to exercise options. Rather, you expect to buy Swiss franc at $0.63/SF. Since you are going to buy SF5,000, you expect to spend $3,150 (=.63x5,000). Thus, the total expected cost of buying SF5,000 will be the sum of $3,150 and $253.75, i.e., $3,403.75.(b) $3,150 = (.63)(5,000).obtain x = $0.57925/SF. Note that at the break-even future spot rate, options will not be exercised.(d) If the Swiss franc appreciates beyond $0.64/SF, which is the exercise price of call option, you will exercise the option and buy SF5,000 for $3,200. The total cost of buying SF5,000 will be $3,453.75 = $3,200 + $253.75.This is the maximum you will pay.4. Boeing just signed a contract to sell a Boeing 737 aircraft to Air France. Air France will be billed €20 million which is payable in one year. The current spot exchange rate is $1.05/€ and the one -year forward rate is $1.10/€. The annual interest rate is 6.0% in the U.S. and5.0% in France. Boeing is concerned with the volatile exchange rate between the dollar and the euro and would like to hedge exchange exposure.(a) It is considering two hedging alternatives: sell the euro proceeds from the sale forward or borrow euros from the Credit Lyonnaise against the euro receivable. Which alternative would you recommend? Why?(b) Other things being equal, at what forward exchange rate would Boeing be indifferent between the two hedging methods?Solution: (a) In the case of forward hedge, the future dollar proceeds will be (20,000,000)(1.10) = $22,000,000. In the case of money market hedge (MMH), the firm has to first borrow the PV of its euro receivable, i.e., 20,000,000/1.05 =€19,047,619. Then the firm should exchange this euro amount into dollars at the current spot rate to receive: (€19,047,619)($1.05/€) = $20,000,000, which can be invested at the dollar interest rate for one year to yield:$20,000,000(1.06) = $21,200,000.Clearly, the firm can receive $800,000 more by using forward hedging.(b) According to IRP, F = S(1+i $)/(1+i F ). Thus the “indifferent” forward rate will be:$ Co Options Forward $3,453.75 $3,150 0 0.0.64 (strike$/S $253.75F = 1.05(1.06)/1.05 = $1.06/€.5. Suppose that Baltimore Machinery sold a drilling machine to a Swiss firm and gave the Swiss client a choice of paying either $10,000 or SF 15,000 in three months.(a) In the above example, Baltimore Machinery effectively gave the Swiss client a free option to buy up to $10,000 dollars using Swiss franc. What is the ‘implied’ exercise exchange rate?(b) If the spot exchange rate turns out to be $0.62/SF, which currency do you think the Swiss client will choose to use for payment? What is the value of this free option for the Swiss client?(c) What is the best way for Baltimore Machinery to deal with the exchange exposure?Solution: (a) The implied exercise (price) rate is: 10,000/15,000 = $0.6667/SF.(b) If the Swiss client chooses to pay $10,000, it will cost SF16,129 (=10,000/.62). Since the Swiss client has an option to pay SF15,000, it will choose to do so. The value of this option is obviously SF1,129 (=SF16,129-SF15,000).(c) Baltimore Machinery faces a contingent exposure in the sense that it may or may not receive SF15,000 in the future. The firm thus can hedge this exposure by buying a put option on SF15,000.6. Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy Industry. PCC owes Mitsubishi Heavy Industry 500 million yen in one year. The current spot rate is 124 yen per dollar and the one-year forward rate is 110 yen per dollar. The annual interest rate is 5% in Japan and 8% in the U.S. PCC can also buy a one-year call option on yen at the strike price of $.0081 per yen for a premium of .014 cents per yen.(a) Compute the future dollar costs of meeting this obligation using the money market hedge and the forward hedges.(b) Assuming that the forward exchange rate is the best predictor of the future spot rate, compute the expected future dollar cost of meeting this obligation when the option hedge is used.(c) At what future spot rate do you think PCC may be indifferent between the option and forward hedge?Solution: (a) In the case of forward hedge, the dollar cost will be 500,000,000/110 = $4,545,455. In the case of money market hedge, the future dollar cost will be: 500,000,000(1.08)/(1.05)(124)= $4,147,465.(b) The option premium is: (.014/100)(500,000,000) = $70,000. Its future value will be $70,000(1.08) = $75,600.At the expected future spot rate of $.0091(=1/110), which is higher than the exercise of $.0081, PCC will exercise its call option and buy ¥500,000,000 for $4,050,000 (=500,000,000x.0081).The total expected cost will thus be $4,125,600, which is the sum of $75,600 and $4,050,000.(c) When the option hedge is use d, PCC will spend “at most” $4,125,000. On the other hand, when the forward hedging is used, PCC will have to spend $4,545,455 regardless of the future spot rate. This means that the options hedge dominates the forward hedge. At no future spot rate, PCC will be indifferent between forward and options hedges.7. Airbus sold an aircraft, A400, to Delta Airlines, a U.S. company, and billed $30 million payable in six months. Airbus is concerned with the euro proceeds from international sales and would like to control exchange risk. The current spot exchange rate is $1.05/€ and six-month forward exchange rate is $1.10/€ at the moment. Airbus can buy a six-month put option on U.S. dollars witha strike price of €0.95/$ for a premium of €0.02 per U.S. dollar. Curr ently, six-month interest rate is2.5% in the euro zone and3.0% in the U.S.pute the guaranteed euro proceeds from the American sale if Airbus decides to hedge usinga forward contract.b.If Airbus decides to hedge using money market instruments, what action does Airbus need totake? What would be the guaranteed euro proceeds from the American sale in this case?c.If Airbus decides to hedge using put options on U.S. dollars, what would be the ‘expected’ europroceeds from the American sale? Assume that Airbus regards the current forward exchange rate as an unbiased predictor of the future spot exchange rate.d.At what future spot exchange rate do you think Airbus will be indifferent between the optionand money market hedge?Solution:a. Airbus will se ll $30 million forward for €27,272,727 = ($30,000,000) / ($1.10/€).b. Airbus will borrow the present value of the dollar receivable, i.e., $29,126,214 = $30,000,000/1.03, and then sell the dollar proceeds spot for euros: €27,739,251. This is the euro amo unt that Airbus is going to keep.c. Since the expected future spot rate is less than the strike price of the put option, i.e., €0.9091< €0.95, Airbus expects to exercise the option and receive €28,500,000 = ($30,000,000)(€0.95/$). This is gross proceeds. Airbus spent €600,000 (=0.02x30,000,000) upfront for the option and its future cost is equal to €615,000 = €600,000 x 1.025. Thus the net euro proceeds from the American sale is €27,885,000, which is the difference between the gross proceeds and the opt ion costs.d. At the indifferent future spot rate, the following will hold:€28,432,732 = S T (30,000,000) - €615,000.Solving for S T, we obtain the “indifference” future spot exchange rate, i.e., €0.9683/$, or $1.0327/€. Note that €28,432,732 is the futu re value of the proceeds under money market hedging:€28,432,732 = (€27,739,251) (1.025).Suggested solution for Mini Case: Chase Options, Inc.[See Chapter 13 for the case text]Chase Options, Inc.Hedging Foreign Currency Exposure Through Currency OptionsHarvey A. PoniachekI. Case SummaryThis case reviews the foreign exchange options market and hedging. It presents various international transactions that require currency options hedging strategies by the corporations involved. Seven transactions under a variety of circumstances are introduced that require hedging by currency options. The transactions involve hedging of dividend remittances, portfolio investment exposure, and strategic economic competitiveness. Market quotations are provided for options (and options hedging ratios), forwards, and interest rates for various maturities.II. Case Objective.The case introduces the student to the principles of currency options market and hedging strategies. The transactions are of various types that often confront companies that are involved in extensive international business or multinational corporations. The case induces students to acquire hands-on experience in addressing specific exposure and hedging concerns, including how to apply various market quotations, which hedging strategy is most suitable, and how to address exposure in foreign currency through cross hedging policies.III. Proposed Assignment Solution1. The company expects DM100 million in repatriated profits, and does not want the DM/$ exchange rate at which they convert those profits to rise above 1.70. They can hedge this exposure using DM put options with a strike price of 1.70. If the spot rate rises above 1.70, they can exercise the option, while if that rate falls they can enjoy additional profits from favorable exchange rate movements.To purchase the options would require an up-front premium of:DM 100,000,000 x 0.0164 = DM 1,640,000.With a strike price of 1.70 DM/$, this would assure the U.S. company of receiving at least:DM 100,000,000 – DM 1,640,000 x (1 + 0.085106 x 272/360)= DM 98,254,544/1.70 DM/$ = $57,796,791by exercising the option if the DM depreciated. Note that the proceeds from the repatriated profits are reduced by the premium paid, which is further adjusted by the interest foregone on this amount.However, if the DM were to appreciate relative to the dollar, the company would allow the option to expire, and enjoy greater dollar proceeds from this increase.Should forward contracts be used to hedge this exposure, the proceeds received would be:DM100,000,000/1.6725 DM/$ = $59,790,732,regardless of the movement of the DM/$ exchange rate. While this amount is almost $2 million more than that realized using option hedges above, there is no flexibility regarding the exercise date; if this date differs from that at which the repatriate profits are available, the company may be exposed to additional further current exposure. Further, there is no opportunity to enjoy any appreciation in the DM.If the company were to buy DM puts as above, and sell an equivalent amount in calls with strike price 1.647, the premium paid would be exactly offset by the premium received. This would assure that the exchange rate realized would fall between 1.647 and 1.700. If the rate rises above 1.700, the company will exercise its put option, and if it fell below 1.647, the other party would use its call; forany rate in between, both options would expire worthless. The proceeds realized would then fall between:DM 100,00,000/1.647 DM/$ = $60,716,454andDM 100,000,000/1.700 DM/$ = $58,823,529.This would allow the company some upside potential, while guaranteeing proceeds at least $1 million greater than the minimum for simply buying a put as above.Buy/Sell OptionsDM/$Spot Put Payoff “Put”Profits Call Payoff“Call”Profits Net Profit1.60 (1,742,846) 0 1,742,846 60,716,454 60,716,454 1.61 (1,742,846) 0 1,742,846 60,716,454 60,716,454 1.62 (1,742,846) 0 1,742,846 60,716,454 60,716,454 1.63 (1,742,846) 0 1,742,846 60,716,454 60,716,454 1.64 (1,742,846) 0 1,742,846 60,716,454 60,716,454 1.65 (1,742,846) 60,606,061 1,742,846 0 60,606,061 1.66 (1,742,846) 60,240,964 1,742,846 0 60,240,964 1.67 (1,742,846) 59,880,240 1,742,846 0 59,880,240 1.68 (1,742,846) 59,523,810 1,742,846 0 59,523,810 1.69 (1,742,846) 59,171,598 1,742,846 0 59,171,598 1.70 (1,742,846) 58,823,529 1,742,846 0 58,823,529 1.71 (1,742,846) 58,823,529 1,742,846 0 58,823,529 1.72 (1,742,846) 58,823,529 1,742,846 0 58,823,529 1.73 (1,742,846) 58,823,529 1,742,846 0 58,823,529 1.74 (1,742,846) 58,823,529 1,742,846 0 58,823,529 1.75 (1,742,846) 58,823,529 1,742,846 0 58,823,529 1.76 (1,742,846) 58,823,529 1,742,846 0 58,823,529 1.77 (1,742,846) 58,823,529 1,742,846 0 58,823,529 1.78 (1,742,846) 58,823,529 1,742,846 0 58,823,529 1.79 (1,742,846) 58,823,529 1,742,846 0 58,823,5291.80 (1,742,846) 58,823,529 1,742,846 0 58,823,529 1.81 (1,742,846) 58,823,529 1,742,846 0 58,823,529 1.82 (1,742,846) 58,823,529 1,742,846 0 58,823,529 1.83 (1,742,846) 58,823,529 1,742,846 0 58,823,529 1.84 (1,742,846) 58,823,529 1,742,846 0 58,823,529 1.85 (1,742,846) 58,823,529 1,742,846 0 58,823,529Since the firm believes that there is a good chance that the pound sterling will weaken, locking them into a forward contract would not be appropriate, because they would lose the opportunity to profit from this weakening. Their hedge strategy should follow for an upside potential to match their viewpoint. Therefore, they should purchase sterling call options, paying a premium of:5,000,000 STG x 0.0176 = 88,000 STG.If the dollar strengthens against the pound, the firm allows the option to expire, and buys sterling in the spot market at a cheaper price than they would have paid for a forward contract; otherwise, the sterling calls protect against unfavorable depreciation of the dollar.Because the fund manager is uncertain when he will sell the bonds, he requires a hedge which will allow flexibility as to the exercise date. Thus, options are the best instrument for him to use. He can buy A$ puts to lock in a floor of 0.72 A$/$. Since he is willing to forego any further currency appreciation, he can sell A$ calls with a strike price of 0.8025 A$/$ to defray the cost of his hedge (in fact he earns a net premium of A$ 100,000,000 x (0.007234 –0.007211) = A$ 2,300), while knowing that he can’t receive less than 0.72 A$/$ when redeeming his investment, and can benefit from a small appreciation of the A$.Example #3:Problem: Hedge principal denominated in A$ into US$. Forgo upside potential to buy floor protection.I. Hedge by writing calls and buying puts1) Write calls for $/A$ @ 0.8025Buy puts for $/A$ @ 0.72# contracts needed = Principal in A$/Contract size100,000,000A$/100,000 A$ = 1002) Revenue from sale of calls = (# contracts)(size of contract)(premium)$75,573 = (100)(100,000 A$)(.007234 $/A$)(1 + .0825 195/360)3) Total cost of puts = (# contracts)(size of contract)(premium)$75,332 = (100)(100,000 A$)(.007211 $/A$)(1 + .0825 195/360)4) Put payoffIf spot falls below 0.72, fund manager will exercise putIf spot rises above 0.72, fund manager will let put expire5) Call payoffIf spot rises above .8025, call will be exercised If spot falls below .8025, call will expire6) Net payoffSee following Table for net payoff Australian Dollar Bond HedgeStrikePrice Put Payoff “Put”Principal Call Payoff“Call”Principal Net Profit0.60 (75,332) 72,000,000 75,573 0 72,000,2410.61 (75,332) 72,000,000 75,573 0 72,000,2410.62 (75,332) 72,000,000 75,573 0 72,000,2410.63 (75,332) 72,000,000 75,573 0 72,000,2410.64 (75,332) 72,000,000 75,573 0 72,000,2410.65 (75,332) 72,000,000 75,573 0 72,000,2410.66 (75,332) 72,000,000 75,573 0 72,000,2410.67 (75,332) 72,000,000 75,573 0 72,000,2410.68 (75,332) 72,000,000 75,573 0 72,000,2410.69 (75,332) 72,000,000 75,573 0 72,000,2410.70 (75,332) 72,000,000 75,573 0 72,000,2410.71 (75,332) 72,000,000 75,573 0 72,000,2410.72 (75,332) 72,000,000 75,573 0 72,000,2410.73 (75,332) 73,000,000 75,573 0 73,000,2410.74 (75,332) 74,000,000 75,573 0 74,000,2410.75 (75,332) 75,000,000 75,573 0 75,000,2410.76 (75,332) 76,000,000 75,573 0 76,000,2410.77 (75,332) 77,000,000 75,573 0 77,000,2410.78 (75,332) 78,000,000 75,573 0 78,000,2410.79 (75,332) 79,000,000 75,573 0 79,000,2410.80 (75,332) 80,000,000 75,573 0 80,000,2410.81 (75,332) 0 75,573 80,250,000 80,250,2410.82 (75,332) 0 75,573 80,250,000 80,250,2410.83 (75,332) 0 75,573 80,250,000 80,250,2410.84 (75,332) 0 75,573 80,250,000 80,250,2410.85 (75,332) 0 75,573 80,250,000 80,250,2414. The German company is bidding on a contract which they cannot be certain of winning. Thus, the need to execute a currency transaction is similarly uncertain, and using a forward or futures as a hedge is inappropriate, because it would force them to perform even if they do not win thecontract.Using a sterling put option as a hedge for this transaction makes the most sense. For a premium of:12 million STG x 0.0161 = 193,200 STG,they can assure themselves that adverse movements in the pound sterling exchange rate will not diminish the profitability of the project (and hence the feasibility of their bid), while at the same time allowing the potential for gains from sterling appreciation.5. Since AMC in concerned about the adverse effects that a strengthening of the dollar would have on its business, we need to create a situation in which it will profit from such an appreciation. Purchasing a yen put or a dollar call will achieve this objective. The data in Exhibit 1, row 7 represent a 10 percent appreciation of the dollar (128.15 strike vs. 116.5 forward rate) and can be used to hedge against a similar appreciation of the dollar.For every million yen of hedging, the cost would be:Yen 100,000,000 x 0.000127 = 127 Yen.To determine the breakeven point, we need to compute the value of this option if the dollar appreciated 10 percent (spot rose to 128.15), and subtract from it the premium we paid. This profit would be compared with the profit earned on five to 10 percent of AMC’s sales (which would be lost as a result of the dollar appreciation). The number of options to be purchased which would equalize these two quantities would represent the breakeven point.Example #5:Hedge the economic cost of the depreciating Yen to AMC.If we assume that AMC sales fall in direct proportion to depreciation in the yen (i.e., a 10 percent decline in yen and 10 percent decline in sales), then we can hedge the full valu e of AMC’s sales. I have assumed $100 million in sales.1) Buy yen puts# contracts needed = Expected Sales *Current ¥/$ Rate / Contract size9600 = ($100,000,000)(120¥/$) / ¥1,250,0002) Total Cost = (# contracts)(contract size)(premium)$1,524,000 = (9600)( ¥1,250,000)($0.0001275/¥)3) Floor rate = Exercise – Premium128.1499¥/$ = 128.15¥/$ - $1,524,000/12,000,000,000¥4) The payoff changes depending on the level of the ¥/$ rate. The following table summarizes thepayoffs. An equilibrium is reached when the spot rate equals the floor rate.AMC ProfitabilityYen/$ Spot Put Payoff Sales Net Profit 120 (1,524,990) 100,000,000 98,475,010 121 (1,524,990) 99,173,664 97,648,564 122 (1,524,990) 98,360,656 96,835,666 123 (1,524,990) 97,560,976 86,035,986 124 (1,524,990) 96,774,194 95,249,204 125 (1,524,990) 96,000,000 94,475,010 126 (1,524,990) 95,238,095 93,713,105 127 (847,829) 94,488,189 93,640,360 128 (109,640) 93,750,000 93,640,360 129 617,104 93,023,256 93,640,360 130 1,332,668 92,307,692 93,640,360 131 2,037,307 91,603,053 93,640,360 132 2,731,269 90,909,091 93,640,360 133 3,414,796 90,225,664 93,640,360 134 4,088,122 89,552,239 93,640,360 135 4,751,431 88,888,889 93,640,360 136 5,405,066 88,235,294 93,640,360 137 6,049,118 87,591,241 93,640,360 138 6,683,839 86,966,522 93,640,360 139 7,308,425 86,330,936 93,640,360 140 7,926,075 85,714,286 93,640,360 141 8,533,977 85,106,383 93,640,360 142 9,133,318 84,507,042 93,640,360 143 9,724,276 83,916,084 93,640,360 144 10,307,027 83,333,333 93,640,360 145 10,881,740 82,758,621 93,640,360 146 11,448,579 82,191,781 93,640,360 147 12,007,707 81,632,653 93,640,360 148 12,569,279 81,081,081 93,640,360 149 13,103,448 80,536,913 93,640,360 150 13,640,360 80,000,000 93,640,360。

Solutions Manualto accompanyPrinciples of Accounting2nd editionbyJerry Weygandt, Keryn Chalmers, Lorena Mitrione Michelle Fyfe, Susana Yuen, Donald Kieso, Paul KimmelChapter 14Companies: share capitalJohn Wiley & Sons Australia, LtdCHAPTER 14Companies: Share Capital ASSIGNMENT CLASSIFICATION TABLELearning Objectives QuestionsBriefExercises Exercises Problems1. Identify the majorcharacteristics of acompany.1, 2, 3, 4, 9 12. Differentiate betweenshare capital andretained earnings. 5, 6, 8, 10,11, 14, 152 3A, 4A3. Record the issue ofordinary shares. 7, 11, 12,133, 4, 5, 6 1, 2, 3, 4,5, 61A, 2A, 3A,4A, 6A, 7A4. Explain the accountingfor share buy-backs.15, 16 7 2, 4, 6, 8 6A5. Differentiate preferenceshares from ordinaryshares. 17 4, 8 3, 5, 8 1A, 4A, 6A,7A6. Prepare a shareholder s’equity section. 20 9 2, 7, 8, 9,10, 111A, 2A, 3A,4A, 5A, 6A,7A7. Compute book valueper share.18, 19 10 12, 13ASSIGNMENT CHARACTERISTICS TABLEProblemNumber Description DifficultyLevelTimeAllotted (min.)1 Journalise shares transactions, post, and prepare sharecapital section.Simple 30-402 Journalise share transactions, and prepareshareholder s’ equity section.Moderate 30-403 Journalise and post transactions, and prepare theshareholder s’ equity section.Moderate 30-404 Journalise and post ordinary and preference sharetransactions, and prepare shareholder s’ equity section.Moderate 30-405 Prepare shareholder s’ equity section.Simple 20-306 Prepare entries for share transactions and prepareshareholder s’ e quity section.Moderate 20-307 Journalise share transactions and prepare share capitalsection.Moderate 40-50BLOOM’S TAXONOMY TABLECorrelation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercisesand ProblemsANSWERS TO QUESTIONS1.(a) Separate legal entity. A company is separate and distinct from its owners and it acts inits own name rather than in the name of its shareholders. In contrast to a partnership, the acts of the owners (shareholders) do not bind the company unless the owners are duly appointed agents of the company.(b) Limited liability of shareholders. Because of its separate legal existence, creditors of acompany ordinarily have recourse only to company assets to satisfy their claims. Thus,the liability of shareholders is normally limited to their investment in the company.(c) Transferable ownership rights. Ownership of a company is held in shares. The sharesare transferable units. Shareholders may dispose of part or all of their interest by simplyselling their shares. The transfer of ownership to another party is entirely at thediscretion of the shareholder.2.(a) The separation of ownership and management is an advantage to a company becauseit can hire professional managers to run the company. It is also a disadvantage to a company because it prevents owners from having an active role in directly managingthe company.(b) Two other disadvantages of a company form of ownership are government regulationsand company taxation. A company is subject to numerous regulations. Companies must pay income taxes. These taxes are substantial. Publicly owned companies are alsorequired to make adequate disclosures of their financial affairs.3.(a) (1) The articles of incorporation is a document that creates a company.(2) The company constitution is the internal rules and procedures for conducting theaffairs of a company. They also indicate the powers of the shareholders, directorsand senior executives.(3) Preliminary expenses are costs incurred in the formation of a company. Thesecosts include legal fees and promotional expenditure involved in the organisationof the business. Preliminary costs are capitalised as it would be expected thatthese costs will provide future economic benefits to the company.4.In the absence of restrictive provisions, the basic ownership rights of ordinary shareholdersare the rights to:(1) vote in the election of a board of directors and in company actions that requireshareholder s’ approval.(2) share in company profits through the receipt of dividends.(3) keep the same percentage ownership when new shares of ordinary shares are issued(the preemptive right).(4) share in assets upon liquidation.5.(a) The two principal components of shareholder s’ equity for a company are share capital(the investment of cash and other assets in the company by shareholders in exchange for shares) and retained earnings. The principal source of retained earnings is profit.(b) Share capital is the term used to describe the total amount paid-up on shares. Sharecapital may result through the issue of ordinary shares and/or preference shares.6.Each of the three basic financial statements for a company differs from those for aproprietorship. The income statement for a company will have income tax expense. For a company, a retained earnings statement is prepared to show the changes in retained earnings during the period. In the statement of financial position, the owner’s equity section is called the shareholder s’ e quity section.7.Shareholders’ EquityShare Capital100 000 ordinary shares, fully paid ............................................................... 500 00050 000 ordinary shares, paid to $4 ................................................................ 200 000Total Share Capital .............................................................................. 700 000 Retained Earnings ........................................................................................ 44 000 Total Shareholders’ Equity......................................................................... $744 000 8.Par value is an arbitrary amount assigned to each share. The share issue price is the pricerequired to be paid in order to purchase the shares. Countries like Australia and New Zealand have removed the use of par value because par value is an immaterial value in relation to the issue price with no relationship with the market value of the share issued.9.Among the factors which influence the market value of shares are the company’s profits andanticipated future earnings, its expected dividend rate per share, its current financial position, the current state of the economy, and the current state of the share markets.10.When a company issue shares, cash is received by the company and the share capitalaccount is credited with the amount of shares issued, therefore increasing share capital.This is very different to stock exchange transactions where one shareholder sells some or all of their shares to another shareholder or investor. These type of transactions, known as stock exchange transactions, are not recorded by the company and therefore share capital remains the same. In these transactions, the company simply records the change in ownership of those shares often via the share registry service.11.When the board of directors of Unforgettable Houseboats Ltd makes the call theshareholders are obliged to pay the amount called. When shares are allotted, a legally binding contract is created, therefore shareholders are required to pay the amount owing as and when required. The amount per share required to be paid is $2 per share.12. If a shareholder fails to pay a call on a share the company can do one of two things:(a) take legal action against the shareholder to ensure the money is paid; or,(b) forfeit the shares. If the shares are forfeited, the shareholder who owned the sharesloses any amount paid to the company and is no longer a shareholder of the company.13.When shares are issued for services or non-cash assets, the cost should be measured at thefair value of the consideration given up (in this case, the shares). The fair value of the shares is objectively determinable than that of the land, since the shares are actively traded on the stock exchange. Therefore, the land should be recorded at $90 000.14. A company may repurchase its own shares for one of the following reasons:1. The company has surplus cash, and it does not have or is not aware of a sufficientprofitable investment opportunity.2. Management may want to avoid a takeover of the company by an outside party.3. The buy back of shares may support the shares’ market price by decreasing thenumber of shares available.4. Management may be making a financing decision, that is, it may wish to replace someof the company’s share capital with borrowed funds.15.When a company buys back its shares, the cost of the share buy-back is debited againstshareholders’ equity, normally to the sha re capital account. Cash is credited at the cost of the buy-back. Thus, this transaction: (a) has no effect on profit, (b) decreases total assets,(c) reduces share capital, and (d) decreases total shareholder s’ equity.16.Under the accounting standards, namely IAS 1 101 and AASB 101Presentation of FinancialStatements,when a company buys back its shares it requires the following disclosures:∙number of shares bought back∙price paid per share bought back∙amount debited to the shareholders’ equity accounts.The disclosure would normally be made in the notes to the financial statements.17.(a) Ordinary shares and preference shares both represent ownership of the company.Ordinary shares signifies the basic residual ownership; preference shares is ownershipwith certain privileges or preferences. Preference shareholders typically have apreference as to dividends and as to assets in the event of liquidation. However,preference shareholders generally do not have voting rights.(b) Some preference shares possess the additional features of being cumulative. Ifpreference shares are cumulative, the preference shareholders must be paid bothcurrent-year dividends and unpaid prior year dividends before ordinary shareholdersreceive any dividends.(c) Dividends in arrears are disclosed in the notes to the financial statements.18.The formula for computing book value per share when a company has only ordinary sharesissued is:TotalShareholder s’Equity ÷Number ofOrdinary SharesIssued=BookValueper ShareBook value per share represents the equity an ordinary shareholder has in the net assets of the company from owning one share.19.Book value per share represents the equity an ordinary shareholder has in the net assets ofthe company from owning one share. Market value is generally only remotely related to book value. A shares market value will reflect many factors, including the company’s profits and anticipated future earnings, its expected dividend rate per share, its current financial position, the current state of the economy, and the current state of the securities or share markets.20.The answers are summarised in the table below:Account Classification(a)(b)(c)(d)(e)(f) Ordinary sharesShare CapitalRetained EarningsPreference SharesOrdinary Share CapitalOrdinary Share CapitalShare capital — ordinary sharesShare capitalRetained earningsShare Capital — Preference SharesShare capital — Ordinary SharesShare capital — Ordinary Shares partly paidSOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 14-1The advantages and disadvantages of a company are as follows:Advantages DisadvantagesSeparate legal existenceLimited liability of shareholders Transferable ownership rights Ability to acquire capital Continuous lifeNo mutual agency for shareholders Professional managers Separation of ownership and management Government regulationsCompany taxationBRIEF EXERCISE 14-230 June Profit and Loss Summary ............................................................ 450 000Retained Earnings ............................................................. 450 000BRIEF EXERCISE 14-310 May Cash (1000 × $10) ...................................................................... 10 000Ordinary share capital (1000 × $10)................................... 10 000BRIEF EXERCISE 14-4Cash (10 000 × $6) ................................................................................... 60 000 Ordinary Share Capital .................................................................... 60 000 Cash (3000 × $12) .................................................................................... 36 000 Preference Share Capital ................................................................ 36 000BRIEF EXERCISE 14-520 June Cash (Trust Account) .................................................................. 12 000Application ......................................................................... 12 000(Record of receipt of application monies)25 June Application (3000 × $4) ............................................................... 12 000Allotment (3000 × $2) ................................................................. 6 000Ordinary Share Capital ...................................................... 18 000(To record issue of 3000 shares)25 June Cash .......................................................................................... 12 000Cash (Trust Account) ......................................................... 12 000(Transfer application money to bank account)BRIEF EXERCISE 14-6Land (5000 × $8) .......................................................................................... 40 000 Ordinary share capital (5000 × $8) ...................................................... 40 000 BRIEF EXERCISE 14-71 May Ordinary Share Capital (500 × $9) .............................................. 4 500Cash ................................................................................. 4 500 Record buy-back of sharesBRIEF EXERCISE 14-8Cash (5000 × $60) ........................................................................................ 300 000 Preference Share Capital (5000 × $60) ............................................... 300 000 BRIEF EXERCISE 14-9INGHAM LTDStatement of Financial Position (partial)as at 30 JuneShareholders’ equityShare capitalShares5000 Ordinary shares, fully paid ..................................................... $ 50 0003000 Preference shares, fully paid .................................................. 300 000 Total share capital ................................................................. 350 000 Retained earnings ...................................................................................................... 45 000 Total Shareholders’ equity .............................................................. $395 000 BRIEF EXERCISE 14-10Book value per share = $20.25 or ($810 000 ÷ 40 000).SOLUTIONS TO EXERCISESEXERCISE 14-1(a) 10 Jan Cash (70 000 × $10) .......................................................... 700 000Ordinary share capital(70 000 × $10)....................... 700 00010 June Cash (40 000 × $16) .......................................................... 640 000Ordinary share capital(40 000 × $16)....................... 640 000(b) Share Capital70 000 Ordinary Shares, fully paid ..................................... 700 00040 000 Ordinary Shares, fully paid ..................................... 640 000 1340 000EXERCISE 14-2(a)10 July Cash (Trust Account) (100 000 × $10) ..................... 1 000 000Application ...................................................... 1 000 00010 Aug Application (100 000 × $10) ..................................... 1 000 000Allotment (100 000 × $10) ........................................ 1 000 000Ordinary Share Capital .................................... 2 000 00010 Aug Cash ....................................................................... 1 000 000Cash (Trust Account) ...................................... 1 000 00030 Aug Cash ....................................................................... 1 000 000Allotment ......................................................... 1 000 00010 Sep Call (100 000 × $10)................................................. 1 000 000Ordinary Share Capital .................................... 1 000 00030 Sep Cash ....................................................................... 1 000 000Call ................................................................. 1 000 000(b)XYZ LIMITEDStatement of Financial Position (partial)as at 30 JuneShareholders’ equityShare capital100 000 ordinary shares, fully paid .................................................. $3 000 000 Total share capital ............................................................... 3 000 000 Retained earnings ......................................................................................... 70 000 Total shareholders’ equity.................................................... $3 070 0001 July Cash (Trust Account) (40 000 × $4) .......................... 160 000Application..................................................... 160 0001 Aug Application (40 000 × $4) ......................................... 160 000Allotment (40 000 × $4) ............................................ 160 000Ordinary Share Capital .................................. 320 0001 Aug Cash ...................................................................... 160 000Cash (Trust Account) .................................... 160 00015 Aug Cash ...................................................................... 160 000Allotment ....................................................... 160 00030 Aug Call (40 000 × $4) ..................................................... 160 000Ordinary Share Capital .................................. 160 00015 Sep Cash ...................................................................... 160 000Call ................................................................ 160 0001 Jan Cash ...................................................................... 1 000 000Preference Share Capital .............................. 1 000 0001 March Land ...................................................................... 140 000Ordinary Share Capital .................................. 140 0001 June Ordinary Share Capital (5000 x $10) ........................ 50 000Cash.............................................................. 50 000 (b)A. LIMITEDStatement of Financial Position (partial)as at 30 JuneShareholders’ e quityShare capital45 000 ordinary shares, fully paid .......................................................... $ 570 00040 000 preference shares, fully paid ...................................................... 1 000 000Total share capital ...................................................................... 1 570 000 Retained earnings ............................................................................................. 45 000 Total shareholders’ equity .......................................................... $1 615 00015 May Call (10 000 × $4) .............................................................. 40 000Ordinary Share Capital ........................................... 40 00030 May Cash (8000 × $4) ............................................................... 32 000Call ......................................................................... 32 00030 May Ordinary Share Capital (2000 × ($8 + $8 +$4)) .................. 40 000Call (2000 × $4) ...................................................... 8 000Forfeited Shares Account (2000 × ($8 + $8) ........... 32 00010 June Cash (2000 × $16) ............................................................. 32 000Forfeited Shares Account (2000 × $4) ............................... 8 000Ordinary Share Capital (2000 × $20) ...................... 40 000 (b)Forfeited Shares AccountNo. 612 Date Explanation Ref. Debit Credit Balance30 May 32 000 32 000 10 June 8 000 24 000EXERCISE 14-52 March Equipment .................................................................................. 60 000Ordinary Share Capital (5000 × $12) ................................. 60 000 12 June Cash .......................................................................................... 750 000Ordinary Share Capital (60 000 × $12.50) ......................... 750 000 11 July Cash (1000 × $55) ...................................................................... 55 000Preference Share Capital (1000 × $55) ............................. 55 000 28 Nov. Ordinary Share Capital (2000 × $10) .......................................... 20 000Cash ............................................................................ 20 000EXERCISE 14-6(1) Land ................................................................................................... 110 000Ordinary Share Capital ............................................................... 110 000 (2) Land (20 000 × $11) ............................................................................ 220 000Ordinary Share Capital (20 000 × $11) ....................................... 220 000(a) Mar. 1 Ordinary Share Capital (25 000 × $8.50) ......................... 212 500Cash....................................................................... 212 500 (b)SMALL LTDStatement of Financial Position (partial)as at 1 May 2010Shareholders’ equityShare Capital75 000 ordinary shares, fully paid ............................................................ 37 500Retained earnings ............................................................................................. 125 000 Total Shareholders’ equity .............................................................. 162 500 EXERCISE 14-8(a) 1 Feb. Cash (20 000 × $51) ..................................................... 1 020 000Preference Share Capital .................................... 1 020 000(20 000 × $51)1 June Cash (10 000 × $57) ..................................................... 570 000Preference Share Capital .................................... 570 000(10 000 × $57)(b)Preference Share CapitalDate Explanation Ref. Debit Credit BalanceFeb. 1 June 1 1 020 000570 0001 020 0001 590 000(c) Preference Share Capital — listed under Share Capital in the shareholders’ equity section ofthe balance sheet.EXERCISE 14-9CORAL LTDPartial Statement of Financial Positionas at 30 June 2010Shareholders’ equityShare capital100 000 Ordinary shares, fully paid........................................................ 1 500 00030 000 Ordinary shares, partly paid ....................................................... 280 00050 000 Preference shares, 8% dividend, fully paid ................................. 500 000Total share capital ......................................................... 2 280 000 Retained earnings ........................................................................... 1 134 000 T otal shareholders’ equity............................................. $3 414 000MEMOTo: CEO __________________________From: Your name , Chief AccountantRe: Questions about Shareholders’ Equity SectionYour memorandum about the shareholders’ equity section was received this morning. I hope the following will answer your questions.(a) 600 000 ordinary shares have been issued.(b) The issue price is $4 per share. (Ordinary shares issued $2 400 000 ÷ 600 000 shares.)(c) The issue price of the preference shares is $100 per share. (Preference share $1 200 000 ÷12 000 shares.)(d) The dividend rate is 5% or ($60 000 ÷ $1 200 000).(e) The Retained Earnings balance is still $3 716 000. Cumulative dividends in arrears are onlydisclosed in the notes to the financial statements.If I can be of further help, please contact me.COMMUNICATIONS LTDStatement of Financial Position (partial)Shareholde rs’ equityShare capital60 000 ordinary shares, fully paid1 ................................................ $ 925 00015 000 preference shares, fully paid ............................................. 300 000Total share capital ............................................................... 1 225 000 Retained earnings .................................................................................. 120 000 Total shareholders’ equity ............................................................. $1 345 0001 Ordinary share capital made up as follows:30 000 issued at $15 per share $450 00020 000 issued at $16 per share 320 00010 000 issued at $15.50 per share 155 000$925 000EXERCISE 14-12Total shareholders’ equity................................................................................. $2 500 000 Ordinary shares issued ..................................................................................... ÷ 125 000 Book value per share ........................................................................................ $ 20 EXERCISE 14-13Total shareholders’ equity (after deducting preference share capital) ................ $300 000 Ordinary shares issued ..................................................................................... ÷ 100 000 Book value per ordinary share .......................................................................... $ 3SOLUTIONS TO PROBLEMSPROBLEM 14-1(a) Jan. 10 Cash (100 000 × $6) ........................................................ 600 000Ordinary Share Capital (100 000 × $6) ..................... 600 000 Mar. 1 Cash (10 000 × $55) ........................................................ 550 000Preference Share Capital (10 000 × $55) ................. 550 000 Apr. 1 Land ................................................................................ 180 000Ordinary Share Capital (25 000 × $7.20) .................. 180 000 May 1 Cash (75 000 × $8) .......................................................... 600 000Ordinary Share Capital (75 000 × $8) ....................... 600 000 Aug. 1 Equipment ....................................................................... 100 000Ordinary Share Capital (10 000 × $10) ..................... 100 000 Sept. 1 Cash (5000 × $12)........................................................... 60 000Ordinary Share Capital (5000 × $12) ........................ 60 000 Nov. 1 Cash (2000 × $58)........................................................... 116 000Preference Share Capital (2000 × $58) .................... 116 000 (b)Preference Share CapitalDate Explanation Ref. Debit Credit BalanceMar. 1 Nov. 1 J1J1550 000116 000550 000666 000Ordinary Share CapitalDate Explanation Ref. Debit Credit BalanceJan. 10 Apr. 1 May 1 Aug. 1 Sept. 1 J1J1J1J1J1600 000180 000600 000100 00060 000600 000780 001380 0001 480 0001 540 000(c) HOUMBLE LTDStatement of Financial Position (partial)as at 31 Dec 2010Shareholders’ equ ityShare capital215 000 ordinary shares, fully paid ............................................. $ 1 540 00012 000 preference shares, fully paid ........................................... 666 000Total share capital ............................................................. $2 206 000。

CHAPTER 8USING FINANCIAL FUTURES, OPTIONS, SWAPS, AND OTHER HEDGING TOOLSIN ASSET-LIABILITY MANAGEMENTGoal of This Chapter: The purpose of this chapter is to examine how financial futures, option, and swap contracts, as well as selected other asset-liability management techniques can be employed to help reduce a bank’s potential exposure to loss as market conditions change. We will also discover how swap contracts and other hedging tools can generate additional revenues for banks by providing risk-hedging services to their customers.Key Topics in this Chapter•The Use of Derivatives•Financial Futures Contracts: Purpose and Mechanics•Short and Long Hedges•Interest-Rate Options:Types of Contracts and Mechanics•Interest-Rate Swaps•Regulations and Accounting Rules•Caps, Floor, and CollarsChapter OutlineI. Introduction: Several of the Most Widely Used Tools to Manage Risk ExposureII. Use of Derivative ContractsIII. Financial Futures Contracts: Promises of Future Security Trades at a Set PriceA. Background on FuturesB. Purposes of Financial Futures TradingC. Most Popular Types of Futures ContractsD. The Short Hedge in FuturesE. The Long Hedge in Futures1. Using Long and Short Hedges to Protect Income and Value2. Basis Risk3. Basis Risk with a Short Hedge4 Basis Risk with a Long Hedge5. Number of Futures Contracts NeededIV. Interest Rate OptionsA. Nature of Interest-Rate OptionsB. How They Differ from Futures ContractsC. Most Popular Types of OptionsD. Purpose of Interest-Rate OptionsV. Regulations and Accounting Rules for Bank Futures and Options Trading105VI. Interest Rate SwapsA. Nature of swapsB. Quality swapsC. Advantages of Swaps Over Other Hedging MethodsD. Reverse swapsE. Potential Disadvantages of SwapsVII. Caps, Floors, and CollarsA. Interest Rate CapsB. Interest Rate FloorsC. Interest Rate CollarsVIII. Summary of the ChapterConcept Checks8-1. What are financial futures contracts? Which financial institutions use futures and other derivatives for risk management?Financial futures contacts are contracts calling for the delivery of specific types of securities at a set price on a specific future date. Financial futures contract help to hedge interest rate risk and are thus, used by any bank or financial institution that is subject to interest rate risk.8-2. How can financial futures help financial service firms deal with interest-rate risk?Financial futures allow banks and other financial institutions to deal with interest-rate risk by reducing risk exposure from unexpected price changes. The financial futures markets are designed to shift the risk of interest rate fluctuations from risk-averse investors to speculators willing to accept and possibly profit from such risks.8-3. What is a long hedge in financial futures? A short hedge?A long hedger offsets risk by buying financial futures contracts around the time new deposits are expected, when a loan is to be made, or when securities are added to the bank's portfolio. Later, as deposits and loans approach maturity or securities are sold, a like amount of futures contracts is sold. A short hedger offsets risk by selling futures contracts when the bank is expecting a large cash inflow in the near future. Later, as deposits come flowing in, a like amount of futures contracts is purchased.8-4. What futures transactions would most likely be used in a period of rising interest rates? Falling interest rates?Rising interest rates generally call for a short hedge, while falling interest rates usually call for some form of long hedge.8-5. How do you interpret the quotes for financial futures in The Wall Street Journal?106The first column gives you the opening price, the second and third the daily high and low price, respectively. The fourth column shows the settlement price followed by the change in the settlement price from the previous day. The next two columns show the historic high and low price and the last column points out the open interest in the contract.8-6. A futures is currently selling at an interest yield of 4 percent, while yields currently stand at 4.60 percent. What is the basis for these contracts?The basis for these contracts is currently 4.60% – 4% or 60 basis points.8-7. Suppose a bank wishes to sell $150 million in new deposits next month. Interest rates today on comparable deposits stand at 8 percent, but are expected to rise to 8.25 percent next month. Concerned about the possible rise in borrowing costs, management wishes to use a futures contract. What type of contract would you recommend? If the bank does not cover the interest rate risk involved, how much in lost potential profits could the bank experience?At an interest rate of 8 percent:= $1 million$150 million x 0.08 x 30360At an interest rate of 8.25 percent:$150 million x 0.0825 x 30= $1.031 million360The potential loss in profit without using futures is $0.0313 million or $31.3 thousand. In this case the bank should use a short hedge.8-8. What kind of futures hedge would be appropriate in each of the following situations?a. A financial firm fears that rising deposit interest rates will result in losses on fixed-rateloans?b. A financial firm holds a large block of floating-rate loans and market interest rates arefalling?c. A projected rise in market rates of interest threatens the value of the financial firm’sbond portfolio?a. The rising deposit interest rates could be offset with a short hedge in futures contracts (for example, using Eurodollar deposit futures).b. Falling interest yields on floating-rate loans could be at least partially offset by a long hedge in Treasury bonds.107c. The bank's bond portfolio could be protected through appropriate short hedges using Treasury bond and note futures contracts.8-9. Explain what is involved in a put option?A put option allows its holder to sell securities to the option writer at a specified price. The buyer of a put option expects market prices to decline in the future or market interest rates to increase. The writer of the contract expects market prices to stay the same or rise in the future.8-10. What is a call option?A call option permits the option holder to purchase specific securities at a guaranteed price from the writer of the option contract. The buyer of the call option expects market prices to rise in the future or expects interest rates to fall in the future. The writer of the contract expects market prices to stay the same or fall in the future.8-11. What is an option on a futures contract?An option on a futures contract does not differ from any other kind of option except that the underlying asset is not a security, but a futures contract.8-12. What information do T-bond and Eurodollar futures option quotes contain?The quotes contain information about the strike prices and the call and put prices at each different strike price for given months.8-13. Suppose market interest rates were expected to rise? What type of option would normally be used?If interest rates were expected to rise, a put option would normally be used. A put option allows the option holder to deliver securities to the option writer at a price which is now above market and make a profit.8-14. If market interest rates were expected to fall, what type of option would a financial institution’s manager be likely to employ?If interest rates were expected to fall, a call option would likely be employed. When interest rates fall, the market value of a security increases. The security can then be purchased at the option price and sold at a profit at the higher market price.8-15. What rules and regulations have recently been imposed on the use of futures, options, and other derivatives? What does the Financial Accounting Standards Board (FASB) require publicly traded firms to do in accounting for derivative transactions?108Each bank has to implement a proper risk management system comprised of (1) policies and procedures to control financial risk taking, (2) risk measurement and reporting systems and (3) independent oversight and control processes. In addition, FASB introduced statement 133 which requires that all derivatives are recorded on the balance sheet as assets or liabilities at their fair value. Furthermore, the change in the fair value of a derivative and a fair value hedge must be reflected on the income statement.8-16. What is the purpose of an interest rate swap?The purpose of an interest rate swap is to change an institution's exposure to interest rate fluctuations and achieve lower borrowing costs.8-17. What are the principal advantages and disadvantages of rate swaps?The principal advantage of an interest-rate swap is the reduction of interest-rate risk of both parties to the swap by allowing each party to better balance asset and liability maturities and cash-flow patterns. Another advantage of swaps is that they usually reduce interest costs for one or both parties to the swap. The principal disadvantage of swaps is they may carry substantial brokerage fees, credit risk and some basis risk.8-18. How can a financial institution get itself out of a swap agreement?The usual way to offset an existing swap is to undertake another swap agreement with opposite characteristics.8-19. How can financial-service providers make use of interest rate caps, floors, and collars to generate revenue and help manage interest rate risk?Banks and other financial institutions can generate revenue by charging up-front fees for interest rate caps on loans and interest rate floors on securities. In addition, a positive net premium on interest rate collars will add to a bank's fee income. Caps, floors, and collars help manage interest rate risk by setting maximum and minimum interest rates on loans and securities. They allow the lender and borrower to share interest rate risk.8-20. Suppose a bank enters into an agreement to make a $10 million, three-year floating-rate loan to one of its corporate customers at an initial rate of 8 percent. The bank and the customer agree to a cap and a floor arrangement in which the customer reimburses the bank if the floating loan rate drops below 6 percent and the bank reimburses the customers if the loan rate rises above 10 percent. Suppose that, at the beginning of the loan's second year, the floating loan rate drops to 4 percent for a year and then, at the beginning of the third year, the loan rate increases to 11 percent for the year. What rebates must be paid by each party to the agreement?The rebate owed by the bank for the third year must be:(11%-10%) x $10 million = $100,000.109The rebate that must be forwarded to the bank for the second year must be:(6%-4%) x $10 million = $200,000.Problems8-1. You hedged your bank’s exposure to declining interest rates by buying one March Treasury bond futures contract at the opening price on November 21, 2005(see exhibit 8-2). It is now January 9, and you discover that on Friday, January 6 March T-bond futures opened at 113-17 and settled at 113-16.a. What are the profits/losses on your long position as of settlement on January 6?Buy at 112-06 or 112 6/32 per contract = 112,187.50Value at settlement on January 6, 113-16 or 113 16/32 = 113,500.Gain = 113,500 – 112,187.50 = $1312.50b. If you deposited the required initial margin on 11/21 and have not touched theequity account since making that cash deposit, what is your equity accountbalance?The equity account balance will increase by the gain in the position,thus $1,150 + $1312.50 = $2,462.508-2 Use the quotes of Eurodollar futures contracts traded on the Chicago Mercantile Exchange on December 20, 2005 to answer the following questions:a. What is the annualized discount yield based on the low IMM index for the nearestJune contract?The annualized discount yield is 100 – 95.13 = 4.87 percentb. If your bank took a short position at the high price for the day for 15 contracts, whatwould be the dollar gain or loss at settlement on December 20, 2005?Sell at high price: (1,000,000x[1-((4.87/100)x90/360)]x15 = 14,817,375Value at settlement: (1,000,000x[1-((4.86/100)x90/360)]x15 = 14,817,750Loss: 14,817,375 – 14,817,750 = -$375c. If you deposited the initial required hedging margin in your equity account upontaking the position described in b, what would be the marked to market value ofyour equity account at settlement?Initial margin = $700x15 = $10,500110You realize a $375 loss for this transaction.Thus your equity position is: $10,500 - $375 = $10,1258-3. What kind of futures or options hedges would be called for in the following situations?a. Market interest rates are expected to increase and First National Bank’s asset andliability managers expect to liquidate a portion of their bond portfolio to meetdepositor’s demands for funds in the upcoming quarter.First National can expect a lower price when they sell their bond portfolio unless it uses short futures hedges in which contracts for government securities are first sold and then purchased at a profit as security prices fall provided interest rate really do rise as expected. A similar gain could be made using put options on government securities or on financial futures contracts.b. Silsbee Savings Bank has interest-sensitive assets of $79 million and interest-sensitive liabilities of $88 million over the next 30 days and market interest rates are expected to rise. Silsbee Savings Bank’s interest-sensitive liabilities exceed its interest-sensitive assets by $11 million which means the bank will be open to losses if interest rates rise. The bank could sell financial futures contracts or use a put option on government securities or financial futures contracts approximately equal in dollar volume to the $11 million interest-sensitive gap to hedge their risk.c. A survey of Tuskee Bank’s corporate loan customers this month (January) indicates that, on balance, this group of firms will need to draw $165 million from their credit lines in February and March, which is $65 million more than the bank’s management has forecasted and prepared for. The bank’s economist has predicted a significant increase in money market interest rates over the next 60 days.The forecast of higher interest rates means the bank must borrow at a higher interest cost which, other things held equal, will lower its net interest margin. To offset the expected higher borrowing costs the bank's management should consider a short sale of financial futures contracts or a put option approximately equal in volume to the additional loan demand. Either government securities or EuroCDs would be good instruments to consider using in the futures market or in the option market.d. Monarch National Bank has interest-sensitive assets greater than interest sensitive liabilities by $24 million. If interest rates fall (as suggested by data from the Federal Reserve Board) the bank’s net interest margin may be squeezed due to the decrease in loan and security revenue.Monarch National Bank has interest-sensitive assets greater than interest-sensitive liabilities by $24 million. If interest rates fall, the bank's net interest margin will likely be squeezed due to the faster fall in interest income. Purchases of financial futures contracts followed by a subsequent sale or call options would probably help here.111e. Caufield Thrift Association finds that its assets have an average duration of 1.5 years and its liabilities have an average duration of 1.1 years. The ratio of liabilities to assets is .90. Interest rates are expected to increase by 50 basis points during the next six months.Caufield Bank and Trust Company has asset duration of 1.5 years and a liabilities duration of 1.1.A 50-basis point rise in money-market rates would reduce asset values relative to liabilities which mean its net worth would decline. The bank should consider short sales of government futures contracts or put options on these securities or on their related futures contracts.8-4. Your bank needs to borrow $300 million by selling time deposits with 180-day maturities. If interest rates on comparable deposits are currently at 4 percent, what is the cost of issuing these deposits? Suppose deposit interest rates rise to 5 percent. What then will be the marginal cost of these deposits? What position and types of futures contract could be used to deal with this cost increase?At a rate of 4 percent the interest cost is:$300 million x 0.04 x 180= $6,000,000360At a rate of 5 percent the interest cost would be:= $7,500,000$300 million x 0.05 x 180360A short hedge could be used based upon Eurodollar time deposits.8-5. In response to the above scenario, management sells 300, 90-day Eurodollar time deposits futures contracts trading at an IMM Index of 98. Interest rates rise as anticipated and your bank offsets its position by buying 300 contracts at an IMM index of 96.98. What type of hedge is this? What before-tax profit or loss is realized from the futures position?Bank sells Eurodollar futures at (1,000,000*[1-((2/100)*90/360)] $995,000 (per contract)Bank buys Eurodollar futures at (1,000,000*[(1-(3.02/100)*90/360]$992,450 (per contract) Expected Before-tax Profit $ 2,550 (per contract)And Total Profit would be 300*$2550 = $765,000In this case the bank has employed a short hedge which partially offsets the higherborrowing costs outlined above.8-6. It is March and Cavalier Financial Services Corporation is concerned about what an increase in interest rates will do to the value of its bond portfolio. The portfolio currently has a market value of $101.1 million and Cavalier’s management intends to liquidate $1.1 million in bonds in June to fund additional corporate loans. If interest rates increase to 6 percent, the bond will sell for $1 million with a loss of $100,000. Cavalier’s management sells 10 June Treasury bond contracts at 109-05 in March. Interest rates do increase, and in June Cavalier’s ma nagement offsets its position by buying 10 June Treasury bond contracts at 100-03.112113a.What is the dollar gain/loss to Cavalier from the combined cash and futures market operations described above?Loss on cash transaction: $100,000Gain on futures transaction: 109,156.25 – 100,093.75 = 9062.5 (per contract)Loss: 9062.50(10) – 100,000 = -$9,375b. What is the basis at the initiation of the hedge?110,000 – 109,156.25 = 843.75c. What is the basis at the termination of the hedge?100,000 – 100,093.75 = -93.75d. Illustrate how the dollar return is related to the change in the basis from initiationfrom termination?Dollar return = -93.75 – 843.75 = -937.50 per contract or –937.50(10) = -$93758-7. By what amount will the market value of a Treasury bond futures contract change ifinterest rates rise from 5 to 6 percent? The underlying Treasury bond has a duration of 10.48 years and the Treasury bond futures contract is currently quoted at 113-06 (Remember that Treasury bonds are quoted in 32nds)Change in value = -10.48 x $113,187.50 x .01/(1+.05) = -$11,297.198-8. Trojan National Bank reports that its assets have a duration of 8 years and its liabilities average 3 years in duration. To hedge this duration gap, management plans to employ Treasury bond futures, which are currently quoted at 112-17 and have a duration of 10.36 years. Trojan ’s latest financial report shows total assets of $120 million and liabilities of $97 million.Approximately how many futures contracts will the bank need to cover its overall exposure?Number of Futures Contracts Needed = 25.531,112*36.10000,000,120*]3*120978[ = 5748-9 You hedged your bank’s exposure to declining interest rates by buying one March call on Treasury bond futures at the premium quoted on December 13th , 2005 (see exhibit 8-4).a. How much did you pay for the call in dollars if you chose the strike price of 110?(Remember that option premiums are quoted in 64ths.)Price per call = 2.625 x 100,000 = $262,500b. Using the following information for trades on December 21, 2005, if you sold thecall on 12/21/05 due to a change in circumstances would you have reaped a profitor loss? Determine the amount of the profit/loss.Sell call at: 3.125 x 100,000 = 312,500Gain = 312,500 – 262,500 = $50008-10 Refer to the information given for problem 9. You hedged your bank’s exposure to increasing interest rates by buying one March put on Treasury bond futures at the premium quoted on December 13th, 2005 (see exhibit 8-4).a. How much did you pay for the put in dollars if you chose the strike price of 110?(Remember that premiums are quoted in 64ths.)Price per put = .765625 x 100,000 = $76,562.25b. Using the above information for trades on December 21, 2005, if you sold the puton 12/21/05 due to a change in circumstances would you have reaped a profit orloss? Determine the amount of the profit/loss.Sell put at: .421875 x 100,000 = $42,187.50Loss = $42,187.50 – 76,562.25 = -$34,374.758-11. You hedged your thrift institution’s exposure to dec lining interest rates by buying one March call on Eurodollar deposits futures at the premium quoted on December 13th, 2005 (see exhibit 8-4).a. How much did you pay for the call in dollars if you chose the strike price of 9525?(remember that premiums are quoted in IMM index terms)Value of the call: 6.25 x $25 = $156.25b. If March arrives and Eurodollar Deposit Futures have a settlement index atexpiration of 96.00, what is your profit or loss? (Remember to include the premiumpaid for the call option).Payout from settlement: (9600-9525) 75 basis points x $25 = $1,875Net gain: $1,875 –$156.25 = $1,718.758-12. You hedged your bank’s exposure to increasing interest rates by buying one March put on Eurodollar deposit futures at the premium quoted on December 13th, 2005 (see exhibit 8-4).a. How much did you pay for the put in dollars if you chose the strike price of 9,550?(remember that premiums are quoted in IMM index terms)114Value of the put: 29.25 x $25 = $731.25b. If March arrives and Eurodollar Deposit Futures have a settlement index atexpiration of 96.00, what is your profit or loss? (Remember to include the premiumpaid for the put option).Payout from settlement: $0 (option is out of the money)Net loss: $0 - $731.25 = -$731.258-13. A bank is considering the use of options to deal with a serious funding cost problem. Deposit interest rates have been rising for six months, currently averaging 5 percent, and are expected to climb as high as 6.75% over the next 90 days. The bank plans to issue $60 million in new money market deposits in about 90 days. It can buy put or call options on 90 day Eurodollar time deposit futures contracts for a quoted premium of .31 or $775 for each million-dollar contract. The strike price is quoted as 9,500. We expect the futures to trade at an index of 93.50 within 90 days. What kind of option should the bank buy? What before tax profit could the bank earn for each option under the terms described?You are trying to protect the bank against rising interest rates, thus you want to buy a put option. Profit on put: payout from settlement = (9500-9350) 150 basis points x $25 = $3,750Net profit: $3,750 - $775 = $2,975If the bank bought the call option, the value at settlement would be $0 and the bank would loose the call premium of $775.8-14. Hokie Savings Bank wants to purchase a portfolio of home mortgage loans with an expected average return of 8.5 percent. The bank’s management is concerned that interest rates will drop and the cost of the portfolio will increase from the current price of $50 million. In six months when the funds become available to purchase the loan portfolio, market interest rates are expected to be in the 7.5 percent range. Treasury bond options are available today at a quoted price of $79,000 (per $100,000 contract), upon payment of a $700 premium, and are forecast to rise to a market value of $87,000 per contract. What before-tax profits could the bank earn per contract on this transaction? How many options should Hokie buy?Profit per contract: $87,000 - $79,000 -$700 = $7,300Hokie should buy enough options to offset the increase in the price of the loan portfolio. Thus, figure out the price increase and divide that number by 7,300 to get the number of options needed. 8-15. A savings and loan’s credit rating has just slipped, and half of its assets are long term mortgages. It offers to swap interest payments with a money-center bank in a $100 million deal. The bank can borrow short term at LIBOR (8.05 percent) and long term at 8.95 percent. The S&L must pay LIBOR plus 1.5 percent on short term debt and 10.75 percent on long term debt. Show how these parties could put together a swap deal that benefits both of them about equally.115This SWAP agreement would have the form:Fixed Rate the Floating Rate PotentialBorrower Pays the Borrower Interest-Rateif They Issue Pays on Short- SavingsLong-Term Bonds Term Loans of Each BorrowerS&L 10.75% LIBOR + 1.50% 1.20%Money- 8.95% LIBOR (8.05%) 0.90%Center BankDifference 1.80% 1.50% 0.30%in Rates Due toDifferences inCredit RatingsIf the money-center bank borrows long-term at 8.95 percent and the S&L at LIBOR + 1.50 percent (which is currently 8.05 + 1.50 or 9.55 percent) and they exchange interest payments, both would save if the S&L agreed to pay a portion of the bank’s basic borrowing rate. For example, the S&L could pay 160 basis points to the bank which would more than cover the difference. After the exchange in payments and basis points the S&L would pay 8.95% +1.6% or 10.55% which is lower than the S&L’s long term rate and the bank would pay 9.55%-1.6% or 7.95% which is less than the bank’s short term rate and each party would get the type of payment they want.8-16. A bank plans to borrow $55 million in the money market at a current interest rate of 4.5 percent. However, the borrowing rate will float with market conditions. To protect itself the bank has purchased an interest-rate cap of 5 percent to cover this borrowing. If money market interest rates on these funds suddenly climb to 5.5 percent as the borrowing begins, how much in total interest will the bank owe and how much of an interest rebate will it receive assuming the borrowing is only for one month?Total Amount Interest Number of Months Interest Owed = Borrowed * Rate Charged * 12= $55 million x 0..055 x 112= $0.527 million or $252,083.33.How much of an interest rebate will the bank receive for its one-month borrowing?116[]12MonthsofNumberxBorrowedAmt.xRateCap-RateInterestMarketRebateInterest == (.055 - .05) x $55 million x 112= $22,916.67.8-17. Suppose that Jasper Savings Association has recently granted a loan of $2.4 million to Fairhills Farms at prime plus .5 percent for six months. In return for granting Fairhills an interest cap of 8% on its loan, this thrift has received from this customer a floor rate on the loan of 6 percent. Suppose that, as the loan is about to start the prime rate declines to 5.25 percent and remains there for the duration of the loan. How much (in dollars) will Fairhill Farms have to pay in total interest on this six month loan? How much in interest rebates will Fairhills have to pay due to the fall in the prime rate?Total = Amount * Interest * Number of Months Interest Owed Borrowed Rate Charged 12= $2.4 million x (.0525 + .0050) x 612= $0.069 million or $69,000.Fairhills will have to pay an interest rebate to Exeter National Bank of:[]12MonthsofNumberxBorrowedAmt.xRateInterestCurrent-RebateFloorRebateInterest == (.060 - .0575) x $2.4 million x 612= $0.003 million or $3,000.117。