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FIN- 370 Questions




Question;1. Firm A has $10,000 in assets entirely financed with equity.;Firm B also has $10,000 in assets, but these assets are financed by $5,000 in;debt (with a 10 percent rate of interest) and $5,000 in equity. Both firms sell;10,000 units of output at $2.50 per unit. The variable costs of production are;$1, and fixed production costs are $12,000. (To ease the calculation, assume no;income tax.);a. What is the operating income (EBIT) for both firms?;b. What are the earnings after interest?;c. If sales increase by 10 percent to 11,000 units, by what percentage will;each firm?s earnings after interest increase? To answer the question, determine;the earnings after taxes and compute the percentage increase in these earnings;from the answers you derived in part b.;d. Why are the percentage changes different?;2. The specialty chemical Company operates a crude oil refinery located in New;Iberia, LA. The company refines crude oil and sells the by-products to;companies that make plastic bottles and jugs. The firm is currently planning;for its refining needs for one year hence. Specifically, the firms analysts;estimate that specialty will need to purchase 1 million barrels of crude oil at;the end of of the current year to provide the feed stock for its refining needs;for the coming year. The 1 million barrels of crude oil will be converted into;by products at an average cost of $25 per barrel that Specialty expects to sell;for $190 million, or $190 per barrel of crude used. The current spot price of;oil is $135 per barrel and Specialty has been offered a forward contract by its;investment banker to purchase the needed oil for a delivery price in one year;of $140 per barrel.;a. Ignoring taxes, what will specialty's profits be if oil prices in one year;are as low as $120 or as high as $160, assuming that the firm does not enter;into forward contract? Round to the nearest dollar.;Price of Oil/ bbl Unhedged Annual Profits;$120;$125;$130;$135;$140;$145;$150;$155;$160;b. If the firm were to enter into forward contract, demonstrate how this would;be effectively lock in the firm's cost of fuel today, thus hedging the risk of;fluctuating crude oil prices on the firm's profits for the next year.;A B C D E F G;Price Total cost of Total Revenues Total Refining Unhedged Profits/loss Hedged;Annual;of Oil/ Oil (Ax1m) =$190x1m Costs Annual Forward Profits;bbl =$25x1m Profits Contracts =E+F;=C+B+D =(A-$140)x1m;120 120,000,000 190,000,000 25,000,000 45,000,000;125 125,000,000 190,000,000 25,000,000 40,000,000;130 130,000,000 190,000,000 25,000,000 35,000,000;135 135,000,000 190,000,000 25,000,000 30,000,000;140 140,000,000 190,000,000 25,000,000 25,000,000;145 145,000,000 190,000,000 25,000,000 20,000,000;150 150,000,000 190,000,000 25,000,000 15,000,000;155 155,000,000 190,000,000 25,000,000 10,000,000;160 160,000,000 190,000,000 25,000,000 5,000,000


Paper#49421 | Written in 18-Jul-2015

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