The annual coupon payment for this bond is $400.b) i.in the case of the 8% $1,000 bond, if interest rates in the market increase, we would expect the price of the bond to decrease.
a) to calculate the annual coupon payment for a bond with a par value of $5000 and a coupon rate of 8%, you multiply the par value by the coupon rate:
annual coupon payment = par value * coupon rateannual coupon payment = $5000 * 0.08
annual coupon payment = $400 to calculate the current market price of the bond, we need to use the present value formula, taking into account the bond's future cash flows (coupon payments and the final principal payment) and the yield to maturity.
the bond pays interest annually for 18 years, so we have a series of coupon payments and a final principal payment.
using a financial calculator or spreadsheet software, we can calculate the present value of the bond's cash flows at a yield to maturity of 8.4%. the current market price of the bond is the sum of the present values of the cash flows.
ii. the price of a bond and interest rates have an inverse relationship. when interest rates increase, the price of a bond generally decreases, and vice versa. this is because when interest rates rise, newly issued bonds offer higher coupon payments, making existing bonds with lower coupon payments less attractive to investors. as a result, the price of existing bonds falls to align with the higher yields available in the market.
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Section B: Question 1
The following information is the capital structure of Heard Berhad:
Common stock: The last paid dividend was RM0.04 per share, and the current market price is RM5.16. The growth rate is 6% indefinitely. The total value of the company's outstanding stock is RM2,000,000.
Preferred stock: The fixed dividend is paid at a rate of 4% on par value of RM100. The price of the stock is RM85.00. Outstanding issuance value is RM1,000,000.
Mortgage: The loan of RM1.2 million was taken, paid over monthly instalment of RM6,236, for the next 25 years.
Business loan: The loan of RM1 million, with tenure of 10 years, is paid monthly for RM10,134.
The cost of capital of the common stock is____%
The cost of capital of the common stock for Heard Berhad is approximately 6.78%.
To calculate the cost of capital of the common stock, we can use the Gordon Growth Model (also known as the Dividend Discount Model). The formula for the cost of equity using this model is:
Cost of Equity = (Dividend per Share / Current Market Price) + Growth Rate
Given the information provided:
Dividend per Share = RM0.04
Current Market Price = RM5.16
Growth Rate = 6%
Plugging in the values into the formula:
Cost of Equity = (0.04 / 5.16) + 0.06
= 0.0078 + 0.06
= 0.0678
Converting to a percentage, the cost of capital of the common stock is approximately 6.78%.
Therefore, the cost of capital of the common stock is 6.78%.
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XYZ is a retailer and sells 161,000 units per year. It purchases
from a single supplier. Fixed costs per order are $908 and carrying
cost is $14 per unit. How many units should XYZ purchase per order?
Xyz should purchase approximately 20,421 units per order to minimize the total cost of ordering and carrying inventory.
To determine the optimal order quantity for xyz, we can use the economic order quantity (eoq) formula. the eoq formula helps minimize the total cost of ordering and carrying inventory. the formula is as follows:
eoq = √[(2 * annual demand * fixed order cost) / carrying cost per unit]
given the following information:annual demand = 161,000 units
fixed order cost = $908carrying cost per unit = $14
plugging in these values into the formula:
eoq = √[(2 * 161,000 * $908) / $14]
eoq = √[(2 * 161,000 * $908) / $14]
eoq = √[(2 * 161,000 * $908) / $14]
eoq ≈ √[5,837,936,000 / $14]
eoq ≈ √416,995,428.57
eoq ≈ 20,421.33
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pursue an aggressive or conservative current asset policy, as well as an aggressive or conservative financing policy. The following information is available: - Annual sales are $40,000,000. - Fixed assets are $20,000,000. - The debt ratio is 60 percent. - EBIT is $4,000,000. - Tax rate is 20 percent. - With an aggressive policy, current assets will be 40 percent of sales; with a conservative policy, current assets will be 60 percent of sales. - With an aggressive financing policy, short-term debt will be 60 percent of the total debt; with a conservative financing policy, short-term debt will be 10 percent of the total debt. - Interest rate for short-term debt is 5 percent. Interest rate for long-term debt is 9 percent. Required: a) Determine the return on equity for the aggressive approach and for the conservative approach. b) Discuss which approach you would choose.
A) ROE = Net income / Total equity is the return on equity for the aggressive approach. B) The choice should align with the company's overall strategy, financial position, and risk tolerance.
a) To determine the return on equity (ROE) for the aggressive and conservative approaches, we need to calculate the net income and the total equity.
Aggressive approach:
Current assets = 40% of sales = 0.4 * $40,000,000 = $16,000,000
Current liabilities = short-term debt = 60% of total debt = 0.6 * 0.6 * Total assets
Total liabilities = Current liabilities + Long-term debt
Total equity = Total assets - Total liabilities
Net income = EBIT * (1 - Tax rate)
ROE = Net income / Total equity
Conservative approach:
Current assets = 60% of sales = 0.6 * $40,000,000 = $24,000,000
Current liabilities = short-term debt = 10% of total debt = 0.1 * 0.6 * Total assets
Total liabilities = Current liabilities + Long-term debt
Total equity = Total assets - Total liabilities
Net income = EBIT * (1 - Tax rate)
ROE = Net income / Total equity
b) The choice between an aggressive or conservative approach depends on the company's risk appetite and financial goals.
Aggressive approach: This approach aims to maximize short-term profits by maintaining lower levels of current assets and relying more on short-term debt financing.
Conservative approach: This approach focuses on stability and long-term sustainability by holding higher levels of current assets and relying more on long-term debt financing.
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How are your emotions impacting your decision-making? Provide specific examples of how your emotions triggered you to make a mistake or to make a good decision? How do you handle situations in which you notice that others are making decisions based on their emotions?
As an AI language model, I don't have emotions and cannot relate to personal experiences. However, I can provide some insight into how emotions can impact decision-making and how to handle situations where others are making decisions based on their emotions.
When making decisions, emotions can play a significant role in the process. For instance, negative emotions such as anxiety, fear, and anger can lead to irrational decision-making, while positive emotions such as happiness and enthusiasm can lead to more optimistic decision-making.Emotions can trigger one to make a mistake or make a good decision. For instance, if someone is afraid of trying new things, they might miss out on an opportunity because of their fear of failure.
In contrast, if someone is feeling confident, they might take on a new challenge and succeed.However, it's crucial to acknowledge one's emotions and understand how they impact decision-making. By understanding this, one can learn to regulate their emotions and make rational decisions even in high-pressure situations.To handle situations in which others are making decisions based on their emotions, it's essential to remain objective and not let emotions cloud your judgment.
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Following are not the benefits of contingent labor.
1. Increased employee commitment 2. reduced cost 3. increased
strategic focus 4. increased flexibility
Course: human resource management
The correct answer is option B, i.e., reduced cost.Contingent labor is a type of work arrangement in which organizations hire workers on a temporary basis. Contingent workers, also known as freelancers, temporary workers, or independent contractors, are hired on a contract basis and are not considered regular employees.
The following are some of the benefits of employing contingent labor:
Increased Flexibility: Contingent labor provides businesses with greater flexibility to respond quickly to changes in demand and to work on a project-by-project basis
.Increased Strategic Focus: Contingent labor allows businesses to concentrate on their core competencies by outsourcing tasks that are not part of their core business.
Reduced Administrative Costs: Contingent labor allows businesses to reduce their administrative expenses because they do not have to manage employee benefits, taxes, or other compliance issues associated with regular employment.
Increased Access to Skilled Workers: Contingent labor can provide access to a pool of highly skilled workers who may not be available for full-time employment.
Increased Innovation: Contingent labor can contribute to a more innovative and dynamic work environment because it brings new perspectives and ideas to the business.
The main benefit of contingent labor is reduced cost. Contingent labor can help businesses reduce their labor costs by outsourcing non-core functions and reducing their administrative expenses. However, this is not one of the benefits of employing contingent labor. Therefore, option B is the correct answer.
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Find CVS Health Corp. (which purchased Target’s pharmacy and clinical business in 2015)’s financial statements and disclosure notes (i.e., 10-K) for the year ended December 31, 2017 (issued on February 14, 2018) at www.investors.cvshealth.com
1. CVS indicates in Note 1 that it has some short-term investments that consist of certificates of deposit (CDs).
a. How has CVS classified those CDs for accounting purpose?
b. Per CVS’s balance sheet, what was the balance in CVS’s short-term investments as of December 31, 2017, and December 31, 2016?
c. Per CVS’s statement of cash flows, what cash transactions affected short-term investments during 2017?
d. Prepare a T-account that summarizes transactions affecting CVS’s short-term investments during 2017. Speculate as to the explanation for any "plug" figure necessary to make the T-account balance.
2. Per Note 1, CVS has equity-method investments in SureScripts, LLC, and in Heartland Healthcare Services. CVS indicates that those investments are immaterial for the year ended December 31, 2017. Assuming that the Heartland investment is material,
a. How would Heartland’s earnings affect CVS’s income statement?
CDs have been classified by CVS as short-term investments for accounting purposes. The carrying amount of certificates of deposit is recorded at cost, which approximates fair value, and is considered to be cash equivalents.
CDs are generally short-term investments that mature in 90 days to 1 year from the date of acquisition. At December 31, 2017 and December 31, 2016, CVS had a balance of 2,543 and 207 million, respectively, in short-term investments.
b. As per the statement of cash flows, transactions that affected short-term investments during 2017 include: CVS purchased short-term investments worth 15,931 million and sold short-term investments worth 15,396 million in 2017.
The difference in cash inflow and outflow leads to a net increase of 535 million in short-term investments for 2017.
c. T-account that summarizes transactions affecting CVS's short-term investments during 2017:
The amount of income earned or loss incurred by CVS from Heartland Healthcare Services would be reported in the "equity method investment income" line item on CVS's income statement.
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In an oligopolistic market, there are three firms (A, B, C) which compete by setting quantities. The marginal cost of production is 20 and there is no fixed costs. The market demand function is P = 200 − Q, where Q is the total quantity sold by the three firms. (a) Find the equilibrium quantities, price and profits. (b) Briefly describe the "Merger Paradox" and critique its outcome. (c) Assume that firms A and B merge and that all firms continue to act as Cournot competitors after the merger. However, because of the cost savings the marginal cost of the "AB" firm becomes 20b, with 0 < b < 1. Find the post-merger equilibrium quantities, price and profits.
The new, larger firm can benefit from economies of scale and cost savings while continuing to maintain the same high prices as before. Hence, the merger Paradox refers to the idea that mergers may not be a good thing for consumers because they may result in higher prices and reduced output.
a) Equilibrium Quantities: Each firm will produce 40 units (totaling 120 units).
Price: P = 200; Q = 200; 120 = 80.
Profits: Profit A = Profit B = Profit C
= (80-20)*40 = $2400 each.
Total profits: $7200.
(b) The merger paradox describes a situation where two smaller firms merge and become larger. The new, larger firm can benefit from economies of scale and cost savings while continuing to maintain the same high prices as before. Hence, the merger Paradox refers to the idea that mergers may not be a good thing for consumers because they may result in higher prices and reduced output.
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what would be the monthly payment on a 90000 mortgage
Assuming a 30-year mortgage with an interest rate of 3.5%, the monthly payment would be approximately $404.
The monthly payment of a $90,000 mortgage will depend on a variety of factors, including the length of the loan, the interest rate, and any additional fees or charges. To calculate the monthly payment on a $90,000 mortgage, you need to consider several factors, including the interest rate, the length of the loan, and any additional fees or charges. In general, the longer the loan term, the lower the monthly payment will be, but the more you'll pay in interest over the life of the loan. Conversely, a shorter loan term will result in a higher monthly payment, but you'll pay less interest over time. The interest rate is one of the biggest factors that will determine your monthly mortgage payment. This rate can vary depending on several factors, including your credit score, the amount of your down payment, and the overall state of the economy. As of this writing, interest rates are at historic lows, which can make buying a home more affordable for many people. Finally, you'll need to factor in any additional fees or charges associated with your mortgage, such as closing costs or mortgage insurance. These fees can add up quickly and can significantly impact your monthly payment, so it's important to be aware of them from the outset.If you're trying to calculate the monthly payment on a $90,000 mortgage, it's important to use an online mortgage calculator or work with a qualified lender to ensure that you're getting an accurate estimate of your costs
If you're considering a mortgage for $10,000, there are several factors to consider when calculating your monthly payment. The length of the loan, the interest rate, and any additional fees or charges can all impact your payment amount. Using an online mortgage calculator or working with a qualified lender can help you get an accurate estimate of your costs. Assuming a 30-year mortgage with an interest rate of 3.5%, the monthly payment on a $90,000 mortgage would be approximately $404.
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Suppose that you purchased a Baa rated $1000 annual coupon bond with an 7.5% coupon rate and a 19-year maturity at par value. The current rate on 19-year US treasuries is 3%. Two years later, you look in the newspaper, and find that the yield on comparable debt is 9.188%, how much is the bond currently worth?
The value of a bond can be calculated using the present value formula, which takes into account the bond's coupon payments and the yield to maturity.
To calculate the value of the bond, we need to determine the present value of the future cash flows, which include the coupon payments and the final payment of the bond's par value.
Given that the bond has a $1000 par value, a 7.5% coupon rate, and a 19-year maturity, we can calculate the annual coupon payment as follows:
Coupon Payment = Par Value * Coupon Rate = $1000 * 7.5% = $75
To determine the present value of the coupon payments, we need to discount each payment using yield to maturity. The yield to maturity is the rate of return required by investors in the market.
Since the current rate on 19-year, US treasuries is 3%, we can use this as the discount rate for the first two years. So, the present value of the coupon payments for the first two years can be calculated as follows:
PV of Coupon Payments = Coupon Payment / (1 + Yield to Maturity) + Coupon Payment / (1 + Yield to Maturity)^2
PV of Coupon Payments = $75 / (1 + 0.03) + $75 / (1 + 0.03)^2
Next, we need to calculate the present value of the remaining coupon payments and the final payment of the bond's par value using the new yield of 9.188%. Since 17 years are remaining until maturity, the present value of the remaining cash flows can be calculated as follows:
PV of Remaining Coupon Payments = Coupon Payment / (1 + Yield to Maturity)^3 + Coupon Payment / (1 + Yield to Maturity)^4 + ... + Coupon Payment / (1 + Yield to Maturity)^19
PV of Remaining Coupon Payments = $75 / (1 + 0.09188)^3 + $75 / (1 + 0.09188)^4 + ... + $75 / (1 + 0.09188)^19
Finally, we need to calculate the present value of the bond's par value at maturity:
PV of Par Value = Par Value / (1 + Yield to Maturity)^19
Now, we can calculate the total value of the bond by summing up the present values of the coupon payments and the par value:
Bond Value = PV of Coupon Payments + PV of Remaining Coupon Payments + PV of Par Value
Substituting the given values and performing the calculations will give us the final answer for the bond's current worth.
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Neptune purchased a new storage facility on April 1, 2021. The new building cost $80,000. A new member of the accounting team recorded depreciation on the new facility using the sum-of-the-years (SYD) method. The manager was impressed with his hard work, since he appropriately used partial year depreciation and used the method correctly. However, she had to remind him Neptune uses the straight line method for buildings. Unfortunately, the mistake in method wasn't corrected before the financial statements were created. Critical Thinking Calculate each of the required ratios using the original values (before any changes) and the updated values (after your changes). At the time of the purchase, the operations manager estimated that the new facility would be used for 5 years and would have a $2,000 salvage value.
What are the journal entries for this scenario?
Journal entries are the recording of transactions in accounting books. In the given scenario, Neptune purchased a new storage facility on April 1, 2021. The new building cost $80,000. The operations manager estimated that the new facility would be used for 5 years and would have a $2,000 salvage value.
The depreciation on the new facility is recorded using the sum-of-the-years (SYD) method. Neptune uses the straight-line method for buildings. Therefore, the following are the required journal entries for the scenario: Journal entry on April 1, 2021:
Date Account Titles Debit Credit Building
80,000 Cash 80,000 (To record the purchase of the new storage facility)
Journal entry on December 31, 2021:
Date Account Titles Debit Credit Depreciation Expense
5,200 Accumulated Depreciation 5, 200(To record the depreciation of the new storage facility for the year using the sum-of-the-years (SYD) method)
Journal entry on December 31, 2021:
Date Account Titles Debit Credit Depreciation Expense
12,400 Accumulated Depreciation 12,400(To correct the depreciation for the year using the straight-line method)
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Coastal Coffee Corporation – grows and produces cocoa beans in Costa Rica; exports green cocoa beans, which are sold internationally at US$30.00 per kilogram.
Canada Coffee Roasters Corp – Canadian importer of coffee from around the world. Canada Coffee Roasters buys coffee beans from international exporters, and roasts and packages them for its customers, Canadian coffee retailers, under various brand names. Its customers include Second Cup and Balzacs Coffee.
Term Sheet - Using the attached template, LIST AND EXPLAIN eight (8) elements (or terms) that you have agreed to include in your term sheet (and ultimately in the final contract) with the other company;
For each term, provide details of the term; and reason for including it. Be as specific as possible.
For example, you may want to address payment terms, currency, shipping and delivery arrangements, and dispute resolution. You may improvise or add facts if needed.
Coastal Coffee Corporation and Canada Coffee Roasters Corp have agreed to include eight terms in their term sheet and final contract.
1. Product Specifications: This term outlines the specific requirements for the coffee beans, including quality, grade, and variety. It ensures that both parties have a clear understanding of the expected product standards. 2. Quantity and Pricing: The term specifies the agreed-upon volume of coffee beans to be purchased and the pricing structure. It helps establish a mutual understanding of the quantities required and the corresponding costs 3. Payment Terms: This term defines the payment schedule and methods, such as partial payments or installment plans. Clear payment terms ensure a smooth financial transaction process and reduce the risk of disputes. 4. Delivery Schedule: The term includes the agreed-upon timeline for the delivery of coffee beans. It helps both parties plan their operations effectively and ensures timely availability of the product for Canada Coffee Roasters' customers. 5. Packaging and Labeling: This term specifies the packaging and labeling requirements for the coffee beans. It ensures that the product is properly packaged and labeled according to relevant regulations and standards. 6. Quality Assurance: This term outlines the quality control measures, including inspections and certifications, to ensure the consistent quality of the coffee beans. It helps maintain customer satisfaction and protects the reputation of both companies. 7. Dispute Resolution: This term establishes the procedures for resolving any disputes that may arise during the partnership. It may include methods like negotiation, mediation, or arbitration, providing a framework for resolving conflicts amicably. 8. Confidentiality and Non-Disclosure: This term safeguards sensitive information shared between the two companies, such as trade secrets or proprietary data. It ensures that both parties maintain confidentiality and protects their respective intellectual property.
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A business plan involves planning resources and developing a budge which is then compared with sales promotions to ascertain the true __________
A. Competitive situation in the market place
B. Market size that can be captured
C. Level of positioning
D. Number of product attributes
A business plan is a comprehensive document that outlines a company's strategy for achieving its goals and objectives. It serves as a roadmap for a business, outlining its objectives, challenges, and strategies for achieving success.
It includes information on the company's target market, product or service offering, financial projections, and marketing strategies.Planning resources and developing a budget A business plan includes planning resources and developing a budget. It is important to identify the resources needed to start and operate a business, as well as to allocate a budget for these resources.
This can include funds for equipment, inventory, marketing, and personnel. Sales promotions can then be used to ascertain the true competitive situation in the marketplace. Sales promotions A sales promotion is a marketing strategy that aims to increase sales or customer interest in a product or service. It can include discounts, coupons, rebates, or other incentives.
By comparing the budget with sales promotions, a company can evaluate its competitive situation in the marketplace and adjust its strategies as needed. This helps to ensure that the company is meeting its financial goals and objectives, while also staying ahead of its competitors.
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Anthony Moss, owner of Moss Interiors, is negotiating for the purchase of Sandhill Galleries. The following balance sheet of Sandhill is given in an abbreviated form as follows. Prepare the entry to record the purchase of Sandhill Galleries on Moss's books. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter O for the amounts. List all debit entries before credit entries.)
The entries to record the purchase of Sandhill Galleries on Moss's books are shown below. Anthony Moss is the owner of Moss Interiors and he is negotiating to buy Sandhill Galleries.
The following balance sheet of Sandhill is given in an abbreviated form. We are required to prepare the entry to record the purchase of Sandhill Galleries on Moss's books. Anthony Moss, owner of Moss Interiors, is negotiating for the purchase of Sandhill Galleries The following balance sheet of Sandhill is given in an abbreviated form as follows:
BALANCE SHEET Cash$ 25,000
Accounts Payable$ 50,000
Accounts Receivable75,000
Capital Stock$100,000
Inventory150,000
Retained Earnings50,000
Equipment200,000
Accumulated Depreciation (75,000)
Total Assets$450,000
Total Claims$450,000
To record the purchase of Sandhill Galleries, the following entry is required.
Accounts Payable 50,000
Capital Stock 100,000
Retained Earnings 50,000
Inventory 150,000
Equipment 200,000
Accumulated Depreciation (75,000)
Cash 25,000
Total $450,000
Sandhill Galleries has inventory, equipment, and accumulated depreciation on its balance sheet. The company also has $25,000 in cash and $75,000 in accounts receivable. It has accounts payable of $50,000 and capital stock of $100,000.
Retained earnings are also listed on the balance sheet as $50,000.
The purchase of Sandhill Galleries is recorded by debiting inventory for $150,000, equipment for $200,000, and accumulated depreciation for $75,000.
The company's capital stock is credited for $100,000 and retained earnings for $50,000.
The accounts payable is also credited for $50,000, and the remaining $25,000 is debited to cash.
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A(n) ________ keeps a company from leaving an industry; whereas a(n) ________ is an obstruction that makes it difficult for a company to enter an industry.
A. exit barrier; entry barrier
B. substitute product; entry barrier
C. strategic group; exit barrier
D. substitute product; complementor
E. complementor; exit barrier
A(n) exit barrier keeps a company from leaving an industry; whereas a(n) entry barrier is an obstruction that makes it difficult for a company to enter an industry. Thus, the main answer to the given question is option A.
Barriers to entry and barriers to exit are two sides of the same coin. Barriers to entry are hurdles that new companies must overcome when they enter a market, while barriers to exit are hurdles that a company must overcome when it leaves a market.
A barrier to entry can take several forms, including the following:
Regulations that are particularly onerous
Patent or trademark protection are in place. An existing company has an extensive distribution network, which can make it difficult for new entrants to get their products to customers.
Brand recognition that is well-established that new entrants cannot quickly duplicate.
Limited access to critical resources such as water, land, and raw materials.
Legal issues such as the difficulty of obtaining a permit.
A strong barrier to entry can help a company maintain a dominant position in a market by making it difficult for new entrants to challenge them.
A barrier to exit can take several forms, including the following:
Long-term contractual obligations, such as long-term leases on facilities.
Expenditures that are difficult to recover, such as research and development costs, sunk costs, and fixed costs.
Legal difficulties, such as environmental cleanup obligations, contract obligations, and union agreements that are difficult to break.
Legacy costs such as pension and retiree health-care benefits that are difficult to reduce.
Customers with long-term contracts.
A strong exit barrier can keep a company in a market where it is no longer profitable, reducing industry competition.
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Thunderhorse Oil. Thunderhorse Oil is a U.S. oil company. Its current cost of debt is 7.60%, and the 10-year U.S. Treasury yield, the proxy for the risk-free rate of interest, is 3.10%. The expected return on the market portfolio is 8.10%. The company's effective tax rate is 39%. Its optimal capital structure is 45% debt and 55% equity. a. If Thunderhorse's beta is estimated at 1.30, what is Thunderhorse's weighted average cost of capital? b. If Thunderhorse's beta is estimated at 1.00, significantly lower because of the continuing profit prospects in the global energy sector, what is Thunderhorse's weighted average cost of capital?
The required answer to this question isThunderhorse Oil's weighted average cost of capital (WACC), we need to consider the cost of both debt and equity components which is = (0.55) * Re + (0.45) * Rd * (1 - 0.39)
WACC = (E/V) * Re + (D/V) * Rd * (1 - Tax Rate)
E = Market value of equity
V = Total market value of the firm (equity + debt)
Re = Cost of equity
D = Market value of debt
Rd = Cost of debt
Tax Rate = Effective tax rate
a. Thunderhorse's Beta = 1.30
b. Thunderhorse's Beta = 1.00
a. Thunderhorse's Beta = 1.30:
Given:
Cost of debt (Rd) = 7.60%
Risk-free rate (RF) = 3.10%
Market risk premium (MRP) = Expected return on the market portfolio - Risk-free rate = 8.10% - 3.10%
Beta (β) = 1.30
Effective tax rate = 39%
Optimal capital structure:
Debt = 45%
Equity = 55%
Re = RF + β * MRP
= 3.10% + 1.30 * (8.10% - 3.10%)
WACC = (E/V) * Re + (D/V) * Rd * (1 - Tax Rate)
= (0.55) * Re + (0.45) * Rd * (1 - 0.39)
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State whether the risk of material misstatement at financial
statement level should be assessed as low,
medium or high. Give reasons for your decision
The risk of material misstatement at the financial statement level should be assessed as a medium to high level. Below are the reasons for this decision:Explanation: Material misstatement is the risk that an error or fraud will result in the financial statements being materially misstated.
It is divided into two parts: inherent risk and control risk. The financial statement level is an aggregate level of inherent and control risks that are important to the financial statements taken as a whole.Below are the factors that contribute to the assessment of the risk of material misstatement at the financial statement level:Significant judgments made by management.
These judgments could include estimates such as the allowance for doubtful accounts or the valuation of intangible assets. It may be difficult to verify these estimates and, as a result, they could be incorrect. This increases the risk of material misstatement. Size and complexity of the company: The size and complexity of the company can lead to a higher risk of material misstatement.
Larger companies may have more transactions and accounts, which increases the risk of errors or fraud.Legislation and regulations: If the company operates in an industry that is highly regulated, the risk of material misstatement may be higher. Regulations may be complex and difficult to understand, which could lead to errors or misstatements.
Segregation of duties: A lack of segregation of duties could increase the risk of fraud or errors. For example, if one person is responsible for both recording and approving transactions, they could be more likely to make errors or commit fraud. Other factors: Other factors, such as changes in accounting policies or technology, could also contribute to the risk of material misstatement at the financial statement level.
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CASE STUDY
The Case for All Day Breakfast
In evaluating the All Day Breakfast (ADB) proposal, management
identified a key trend that helped drive decisions on its earlier
successful initiatives and ca
The Case for All Day Breakfast: A Case Study The fast-food industry is very competitive, and companies must continuously innovate and adapt to keep up with changing consumer preferences and trends.
McDonald's, the world's largest fast-food chain, recognized this and, in 2015, launched its All Day Breakfast (ADB) initiative to attract and retain customers.
In assessing the ADB proposal, McDonald's management considered a crucial trend that had driven the company's earlier successful initiatives and campaigns.
As a result, McDonald's continued to promote and develop the ADB initiative by introducing new breakfast items and expanding its menu options. McDonald's ADB initiative demonstrates the importance of keeping up with changing consumer preferences and offering products and services that cater to their needs. The initiative was successful because it provided customers with the convenience and flexibility they desired, and it allowed McDonald's to differentiate itself from competitors in a crowded market.
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Quantitative Problem 1: Hubbard Industries just paid a common dividend, D
0 , of $1.40. It expects to grow at a constant rate of 4% per year. If investors require a 12% return on equity, what is the current price of Hubbard's common stock? Do not round intermediate calculations. Round your answer to the nearest cent $ per share Zero Growth Stocks: The constant growth model is sufficiently general to handle the case of a zero growth stock, where the dividend is expected to remain constant over time. In this situation, the equation is:
P0 = r 5D
owners to regular, fixed dividend payments in perpetuity. The valuation equation is simply the current dividend divided by the required rate of investors require an 10% return on the preferred stock, what is the price of the firm's perpetual preferred stock? Round your answer to the nearest $ per share Nonconstant Growth Stocks: For many companies, it is not appropriate to assume that dividends will grow at a constant rate. Most firms go through life cycles where they experience different nonconstant growth valuation equation:
P0 = (1+r e )1D 1+ (1+r s ) 2D 2+⋯+)(1+r 8)ND N +(1+r)NP^N
Basically, this equation calculates the present value of dividends received during the nonconstant growth period and the present value of the stock's horizon value, which is the value at the horizon date of all dividends expected thereafter. Quantitative Problem 3: Assume today is December 31, 2019. Imagine Works Inc. just paid a dividend of $1.15 per share at the end of 2019 . The dividend is expected to grow at 18% per year for 3 years, after which time it is expected to grow at a constant rate of 5% annually. The company's cost of equity ( r ) is 9.5%. Using the dividend growth model (allowing for nonconstant growth), what should be the price of the company's stock today (December 31 , 2019)? Do not round intermediate calculations. Round your answer to the nearest cent. $ per share
To calculate the current price of Hubbard's common stock, we can use the constant growth model, also known as the Gordon Growth Model. The formula for the constant growth model is:
P0 = D0 * (1 + g) / (r - g)
Where:
P0 = Current price of the stock
D0 = Current dividend payment
g = Growth rate of dividends
r = Required rate of return on equity
In this case, the current dividend (D0) is $1.40, the growth rate (g) is 4% (0.04), and the required rate of return (r) is 12% (0.12). Plugging these values into the formula:
P0 = $1.40 * (1 + 0.04) / (0.12 - 0.04)
P0 = $1.40 * 1.04 / 0.08
P0 = $18.20
Therefore, the current price of Hubbard's common stock is $18.20 per share.
In the second quantitative problem, the dividend growth model is used to calculate the price of the company's stock. Since the dividend is expected to grow at a non-constant rate, we need to calculate the present value of the dividends during the non-constant growth period and the present value of the stock's horizon value.
Unfortunately, the specific dividend amounts and growth rates during the non-constant growth period are not provided in the question. Without this information, we cannot accurately calculate the price of the stock using the dividend growth model.
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Research the Committee of Sponsoring Organizations and find information on the COSO Internal Control Framework. Summarize the five components of internal control and tell why it is important in the context of an audit of financial statements.
The Committee of Sponsoring Organizations (COSO) is a private-sector organization dedicated to preventing fraud and unethical behavior in business. In 1992, the COSO released its Internal Control Integrated Framework, a guide for companies to develop effective internal controls.
The COSO Internal Control Framework consists of five components, which are explained below.
1. Control Environment The control environment is the overall attitude of the company towards internal control. It includes factors such as the company's management philosophy, operating style, and organizational structure.
2. Risk Assessment The risk assessment component involves identifying and analyzing risks that could affect the achievement of company objectives.
3. Control Activities Control activities are the policies and procedures that are implemented to mitigate the risks identified during the risk assessment process.
4. Information and Communication Information and communication refers to the systems used to gather, process, and report financial information. It also includes the way that information is communicated throughout the organization.
5. Monitoring Monitoring involves the ongoing review and evaluation of the company's internal control system. This includes internal audits, management reviews, and other types of monitoring activities.
The COSO Internal Control Framework is important in the context of an audit of financial statements because it provides a standardized approach to internal control.
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On June 1, 2025, Cullumber Service Co. was started with an initial investment in the company of $19,750 cash. Here are the assets, liabilities, and common stock of the company at June 30,2025 , and the revenues and expenses for the month of June, its first month of operations: During June, the company issued no additional stock but paid dividends of $1,738. (a1) Prepare an income statement for the month of June. Prepare a retained earnings statement for the month of June. (List items that increase retained earnings first.) CULLUMBER SERVICE CO. Balance Sheet Liabilities and Stockholders' Equity $ $
Income Statement for the Month of June 2025:
- Revenues: $0
- Expenses: $1,738 (Dividends)
- Net Income: $0
Retained Earnings Statement for the Month of June 2025:
- Beginning retained earnings: $0
- Add: Net Income: $0
- Less: Dividends: $1,738
- Ending retained earnings: -$1,738
Income Statement for the Month of June 2025:
Revenues:
- Sales revenue: $0 (not provided in the question)
Expenses:
- Dividends: $1,738
Net Income: $0 (since the sales revenue is not provided)
Retained Earnings Statement for the Month of June 2025:
Beginning retained earnings: $0 (since it's the first month of operations)
Add: Net Income: $0
Less: Dividends: $1,738
Ending retained earnings: -$1,738
In June 2025, Cullumber Service Co. started with an initial investment of $19,750 cash. However, the question does not provide any information about the company's sales revenue. Therefore, the income statement shows $0 in sales revenue and no net income. The company paid dividends of $1,738, which is deducted as an expense. As a result, the net income remains at $0.
The retained earnings statement begins with a starting balance of $0 since it's the first month of operations. The net income of $0 is added, and the dividends of $1,738 are subtracted. This results in an ending retained earnings balance of -$1,738, indicating a deficit for the month of June.
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Three investments are provided as follow:
Investment X : Risky asset; 20% return, 30% volatility
Investment Y: Risky asset; 15% return, 25% volatility
Investment Z: Risk-free asset; 8% return
Using the formula U=E(r)−(1/2)Aσ∗σ unless otherwise stated.
An investor would like to create a portfolio C with a mixture of investment X and Y. Let y be the portion he invested in Investment Y. Given that the correlation coefficient between the return from X and Y is 0.3.
(a) (3 points) Write the expected return and the volatility of the portfolio C in terms of y.
(b) ( 2 points) Find the Sharpe Ratio of the portfolio C if y=0.5.
(a)= When y = 0.5, the expected return of portfolio C is 17.5% and the volatility is 24.6%. (b)= When y = 0.5, the Sharpe Ratio of portfolio C is approximately 0.386 or 38.6%.
(a) To determine the expected return and volatility of portfolio C in terms of the investment in Y (y), we can use the formula for a weighted average:
Expected return of portfolio C = y * expected return of investment Y + (1 - y) * expected return of investment X
Volatility of portfolio C = √(y^2 * volatility of investment Y^2 + (1 - y)^2 * volatility of investment X^2 + 2y(1 - y) * correlation coefficient * volatility of investment Y * volatility of investment X)
For example, if y = 0.5:
Expected return of portfolio C = 0.5 * 15% + (1 - 0.5) * 20% = 7.5% + 10% = 17.5%
Volatility of portfolio C = √(0.5^2 * 25%^2 + (1 - 0.5)^2 * 30%^2 + 2 * 0.5 * (1 - 0.5) * 0.3 * 25% * 30%) = √(0.25 * 0.0625 + 0.25 * 0.09 + 2 * 0.5 * 0.5 * 0.3 * 0.25 * 0.3) = √(0.015625 + 0.0225 + 0.0225) = √0.060625 ≈ 0.246 or 24.6%
(b) The Sharpe Ratio measures the risk-adjusted return of an investment or portfolio. It is calculated by dividing the excess return (expected return minus risk-free rate) by the volatility.
To find the Sharpe Ratio of portfolio C when y = 0.5, we need to subtract the risk-free rate from the expected return and divide it by the volatility.
Sharpe Ratio of portfolio C = (expected return of portfolio C - risk-free rate) / volatility of portfolio C
For example, if the risk-free rate is 8%:
Sharpe Ratio of portfolio C = (17.5% - 8%) / 24.6% = 9.5% / 24.6% = 0.386 or 38.6%
Note: The formulas and calculations provided above are based on the given information and assumptions. It is important to double-check the accuracy and validity of the formulas and inputs before making any investment decisions.
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Draw a clearly labeled aggregate expenditures graph that demonstrates the full-employment level of real output at 10,000 and autonomous consumption at 6,000. Demonstrate what will happen to the full-employment level of output when government spending decreases by 800. Show the impact of the multiplier on your graph.
1. Draw your own graph on a piece of paper (don't use or computer or download a graph from the internet).
2. Clearly label all axes and lines.
To demonstrate the relationship between aggregate expenditures, real output, and the impact of changes in government spending, we can use a basic aggregate expenditures graph. On the vertical axis, we can represent aggregate expenditures, while on the horizontal axis, we can represent real output.
Let's start by drawing a graph with the full-employment level of real output at 10,000 and autonomous consumption at 6,000. This means that when real output reaches 10,000, aggregate expenditures will be equal to 6,000. We can represent this point on the graph by plotting (10,000, 6,000). Next, let's consider the impact of a decrease in government spending by 800. The decrease in government spending reduces aggregate expenditures, shifting the aggregate expenditures line downward. The magnitude of this shift depends on the value of the spending multiplier.
Overall, the graph would show a downward shift in the aggregate expenditures line due to the decrease in government spending. This shift reflects the decrease in the full-employment level of output from 10,000 to 2,000. The slope of the line represents the spending multiplier, which determines the magnitude of the impact. Remember, this explanation is based on simplified assumptions and does not account for other factors that could influence aggregate expenditures.
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Suppose that a price-taker firm has a marginal cost function given by: MC= 20+0.2q. The firm could join a cartel in its industry and agree to a quota of units. The collusion drives the price of the good from $24.55 to $50.00.
Suppose that if the firm cheats on the cartel, it has no effect on the price. Calculate the producer surplus of this firm when they cheat on the cartel.5
The formula for calculating the producer surplus (PS) is given by: PS = TR - VC. The given information is: Marginal cost function, MC = 20 + 0.2q Initial price (without cartel), P = $24.55 Final price (with cartel), P' = $50Let the quota of units agreed upon by the cartel be q.
The total output of the industry after the cartel is formed is given by Q' = n × q', where n is the number of firms in the industry, which is not given. To calculate the quantity produced by the firm when it cheats on the cartel, we need to find out the level of output at which its marginal cost is equal to the initial price, P.20 + 0.2q = 24.55q = (24.55 - 20)/0.2q = 22.75 units. This is the quantity produced by the firm when it cheats on the cartel. The revenue earned by the firm when it cheats on the cartel is given by: TR = P × q = $24.55 × 22.75 = $558.81.
The variable cost (VC) of producing this quantity is given by the integral of the marginal cost function from 0 to 22.75 units.VC = ∫₀²²·⁷⁵ (20 + 0.2q) dqVC = 20q + 0.1q²|₀²²·⁷⁵VC = 20 × 22.75 + 0.1 × 22.75²VC = $501.47. Therefore, the producer surplus (PS) of the firm when it cheats on the cartel is given by: PS = TR - VCPS = $558.81 - $501.47PS = $57.34. Hence, the producer surplus of this firm when they cheat on the cartel is $57.34.
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You bring your boss a report indicating that the own-price elasticity of your main product is -0.9. He comes from the creative side of the business, and immediately asks, "so we're thinking about lowering the price by 14 percent. What will that do?" By what percentage will quantity demanded change according to your calculations? Provide the percentage as a whole number (i.e., 2.5 for 2.5%) and round to one decimal place.
The quantity demanded will change by approximately 12.6% when the price is lowered by 14%.
The own-price elasticity of your main product is -0.9. This means that a 1% decrease in price will result in a 0.9% increase in quantity demanded.
To calculate the percentage change in quantity demanded when the price is lowered by 14%, you can use the own-price elasticity formula:
Elasticity = Percentage change in quantity demanded / Percentage change in price
We know the elasticity (-0.9) and the percentage change in price (-14%). We want to find the percentage change in quantity demanded.
Let's calculate it step by step:
1. Convert the percentage change in price to a decimal:
Percentage change in price = -14% = -0.14 (decimal)
2. Plug in the values into the own-price elasticity formula:
-0.9 = Percentage change in quantity demanded / -0.14
3. Solve for the percentage change in quantity demanded:
Percentage change in quantity demanded = -0.9 * -0.14
4. Multiply the values:
Percentage change in quantity demanded = 0.126
5. Convert the decimal to a whole number:
Percentage change in quantity demanded = 12.6%
According to your calculations, the quantity demanded will change by approximately 12.6% when the price is lowered by 14%.
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Which of the following is NOT one of the assumptions of the basic EOQ model?
a. Only one product is involved.
b. Quantity discounts are not available.
c. Annual demand requirements are known and constant. Lead time does not vary.
d. Each order can be received in multiple deliveries.
The option that is NOT one of the assumptions of the basic EOQ (Economic Order Quantity) model is D) Each order can be received in multiple deliveries.
What is EOQ? EOQ refers to Economic Order Quantity. It is the measure of inventory management of the cost of carrying inventory and the cost of ordering the inventory, used to determine the number of units a company should add to its inventory.
EOQ helps to decide the number of items to be ordered and the duration between each of the orders. EOQ model has some assumptions, which are as follows:
Only one product is involved. Quantity discounts are not available. Annual demand requirements are known and constant. Lead time does not vary. The quantity ordered is delivered in full, on the date required for use.
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Lisa Lasher buys 400 shares of stock on margin at $23 per share. If the margin requirement is 50 percent, how much must the stock rise for her to realize a 40-percent return on her invested funds? (Ignore dividends, commissions, and interest on borrowed funds.) Round your answer to the nearest cent. $
Since the calculated amount is negative, it implies that the stock must decrease in value rather than rise in order for Lisa Lasher to realize a 40% return on her invested funds.
To determine the amount the stock must rise for Lisa Lasher to realize a 40% return on her invested funds, follow these steps:
1. Calculate the total amount invested:
Total amount invested = Number of shares * Price per share
Total amount invested = 400 * $23
Total amount invested = $9,200
2. Calculate the required return:
Required return = Total amount invested * Return percentage
Required return = $9,200 * 40%
Required return = $3,680
3. Calculate the margin amount:
Margin amount = Total amount invested * Margin requirement
Margin amount = $9,200 * 50%
Margin amount = $4,600
4. Calculate the amount the stock must rise:
Amount the stock must rise = Required return / (Number of shares - Margin amount)
Amount the stock must rise = $3,680 / (400 - $4,600)
Amount the stock must rise = $3,680 / (-$2,600)
Amount the stock must rise = -$1.42
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There have been arguments about Ghana shelving inflation targeting
regime. Provide reasons?
It's important to focus on ensuring a stable and sustainable economic environment. Additionally, BOG is looking to ensure a more flexible approach, which enables it to respond better to shocks, especially in a rapidly changing global economic environment.
In recent times, there have been arguments about Ghana shelving inflation targeting regime. The following are the reasons behind the move.The Central Bank of Ghana (BOG) is currently reviewing its monetary policy strategy and is set to make changes, which will see the central bank shift from an inflation-targeting framework to a full-fledged flexible inflation targeting regime. One of the reasons for shelving the inflation targeting regime is that BOG wants to ensure the country’s economy becomes more flexible. The flexible inflation-targeting framework allows for short-term inflation volatility and a focus on the growth and stability of the real economy.Furthermore, the BOG's argument is that the strict adherence to inflation targeting alone in the midst of other macroeconomic developments can lead to adverse effects on output growth. It's important to focus on ensuring a stable and sustainable economic environment. Additionally, BOG is looking to ensure a more flexible approach, which enables it to respond better to shocks, especially in a rapidly changing global economic environment.
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Requirement 3 . Bathrooms and kitchens are typically the most important selling features of a home. Bennett Builders could differentiate the homes by upgrading the bathrooms and kit cost to the value
When constructing homes, builders strive to set their properties apart from others in the market. Among the key selling features, bathrooms and kitchens hold significant importance. To achieve differentiation, Bennett Builders can focus on upgrading these areas.
The objective of these upgrades is to enhance the value of the homes. This can be accomplished by incorporating unique and high-quality fittings in the bathrooms and kitchens. Upgrading countertops, lighting fixtures, and cabinets can elevate the overall quality of these spaces. Additionally, careful consideration of color schemes and design choices is crucial for differentiation. The fittings and fixtures should harmonize with the home's style. For instance, if the home boasts a traditional design, the fittings and fixtures should align with that aesthetic, thereby increasing the overall value of the property.
When undertaking upgrades, Bennett Builders should collaborate with architects and interior designers to determine the most suitable design for the bathrooms and kitchens. Factors such as design, quality, and functionality must be taken into account to ensure the final result aligns with the overall vision for the home.
By upgrading the bathrooms and kitchens, Bennett Builders can increase the value of their homes and distinguish them from the competition. These areas play a pivotal role in attracting potential buyers and showcasing the unique features and craftsmanship of the properties.
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Briefly explain the difference between beta as a measure of risk and variance as a measure of risk. Calculate both the variables for 2 chosen company and share your derivations of the risk faced by 2 chosen companies.
Beta and variance are risk measures, capturing systematic risk and total volatility for individual security or portfolios. Beta requires historical price and market index data, while variance requires returns data.
Beta is a measure of the sensitivity of a security's returns to the movements of the overall market. It indicates how much the security's returns are expected to move in relation to the market returns.
A beta of 1 means the security moves in line with the market, while a beta greater than 1 indicates higher volatility than the market, and a beta less than 1 indicates lower volatility. Beta helps investors assess the diversification benefits and risk of adding a particular security to their portfolio.
Variance, on the other hand, measures the dispersion or variability of individual returns from their average. It provides an indication of the total risk associated with an individual security or portfolio.
A higher variance implies greater volatility and higher risk. Variance is commonly used in portfolio risk analysis and helps investors understand the potential range of returns and assess the overall riskiness of a security or portfolio.
To calculate beta, we need historical price data for the security and a market index, such as the S&P 500. By running a regression analysis on the price data, we can derive the beta coefficient.
Variance, on the other hand, requires historical returns data. We calculate the average return and then calculate the squared differences between each return and the average return. The variance is the average of these squared differences.
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7
With perfect capital mobility, if inflation in the UK is forecasted to be 3% higher than in the US and interest parity holds, then:
Select one answer:
a. None of the above.
b. There will be opportunities for arbitrage.
c. The UK will become more competitive than the US.
d. There will be a depreciation of the pound with respect to the dollar.
Which of the following statements is NOT correct when the labour market has a monopsony? Select one answer:
a. The amount of workers hired in a monopsony is lower than in a competitive market.
b. A monopsonist wishing to hire an extra worker will need to pay a higher wage to each of their workers.
c. The labour supply curve is upward sloping.
d. Monopsonies are more likely to arise in big cities than in small towns.
With perfect capital mobility and the assumption that interest parity holds, a forecasted inflation rate in the UK that is 3% higher than in the US would lead to a depreciation of the pound with respect to the dollar.
As a result, capital would flow out of the UK and into the US, causing a decrease in the demand for pounds and an increase in the supply of pounds, leading to a depreciation of the pound.
In the labor market, a monopsony occurs when there is only one buyer of labor, giving it market power to influence wages and employment levels. In a monopsony, the amount of workers hired is generally lower than in a competitive market, as the monopsonist can exercise its market power to keep wages lower and restrict employment. This makes statement (a) correct.
Additionally, in a monopsony, a monopsonist wishing to hire an extra worker would need to pay a higher wage to each of their workers, as offering a higher wage is necessary to attract additional workers. This makes statement (b) correct.
The labor supply curve in a monopsony is upward sloping, as higher wages would incentivize workers to supply more labor. In contrast, in a competitive labor market, the supply curve would be perfectly elastic or horizontal. This makes statement (c) incorrect.
The likelihood of monopsonies arising in big cities versus small towns is not specified or directly related to the characteristics of a monopsony. Therefore, statement (d) is unrelated and cannot be determined from the information given.
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