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# Week 1

E2.1.
Category
A
L
OE
E
R
E
A
G
OE
L
A
L

Financial
Statement(s)
BS
BS
BS
IS
IS
IS
BS
IS
BS
BS
BS
BS

Category
A
Accumulated depreciation...
L
Long-term debt
A
Equipment
LS
Loss on sale of short-term investments...
OE
Net income
A
Merchandise inventory
L
Other accrued liabilities
OE
Dividends paid.
E
Cost of goods sold
OE
R
Interest income.
E
Selling expenses..

Financial
Statement(s)
BS
BS
BS
IS
IS
BS
BS
Neither*
IS
BS
IS
IS

Cash
Accounts payable...
Common stock
Depreciation expense..
Net sales..
Income tax expense.
Short-term investments...
Gain on sale of land.
Retained earnings
Dividends payable..
Accounts receivable
Short-term debt
E2.2.

## * Trick question! Dividends paid appears only on the Statement of Changes in

Owners Equity. Dividends paid are distributions of earnings that reduce retained
earnings on the balance sheet. Dividends paid are not expenses, and do not
appear on the income statement.
E2.4.
Use the accounting equation to solve for the missing information
Firm A:
A =
L + PIC + ( Beg. RE + NI - DIV = End. RE )
\$ ? = \$80,000 + \$55,000 + ( \$50,000 + 68,000 - \$12,000 =
? )

In this case, the ending balance of retained earnings must be determined first:
\$50,000 + \$68,000 - \$12,000 = End. RE.
Retained earnings, 12/31/09 = \$106,000
Once the ending balance of retained earnings is known, total assets can be determined:
A = \$80,000 + \$55,000 + \$106,000
Total assets, 12/31/09 = \$241,000
Firm B:
A = L + PIC + ( Beg. RE +
NI - DIV = End. RE )
\$435,000 = ? + \$59,000 + ( \$124,000 + \$110,000 - ? = \$186,000 )

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

Total liabilities, 12/31/09 = \$190,000
\$124,000 + \$110,000 - DIV = \$186,000
Dividends declared and paid during 2009 = \$48,000
Firm C:
A

PIC

+ ( Beg. RE +

## \$155,000 = \$75,000 + \$45,000 + (

NI

- DIV = End. RE )
+ \$25,500 - \$16,500 =
?
)

In this case, the ending balance of retained earnings must be determined first:
\$155,000 = \$75,000 + \$45,000 + End. RE
Retained earnings, 12/31/09 = \$35,000
Once the ending balance of retained earnings is known, the beginning balance of retained
earnings can be determined:
Beg. RE + \$25,500 - \$16,500 = \$35,000
Retained earnings, 1/1/09 = \$26,000

Week 2
E3.8.
a. Margin * 2.4 Turnover = 12% ROI
Margin = 5%
5% Margin = (Net Income / Sales \$96,000,000)
Net Income = \$4,800,000 (or \$4.8 million)
b. ROE = (\$4,800,000 Net income / \$32,000,000 Average owners' equity) = 15%

P3.11.

## a. ROI = Margin * Turnover

= (Net income / Net revenues) * (Net revenues / Average total assets)
= (\$5,044 / \$35,382) * (\$35,382 / ((\$48,314 + \$48,368) / 2))
= (14.3% Margin * 0.73 turnover) = 10.4%
b. ROE = Net income / Average stockholders' equity
= \$5,044 / ((\$36,182 + \$36,752) / 2) = 13.8%
c. Working capital = Current assets - Current liabilities
Current assets ......... ........... ........... ........... ........... ...........
- Current liabilities.... ........... ........... ........... ........... ...........
= Working capital...... ........... ........... ........... ........... ...........
d. Current ratio = Current assets / Current liabilities
Current assets ......... ........... ........... ........... ...........
/ Current liabilities .... ........... ........... ........... ...........
= Current ratio ........... ........... ........... ........... ...........

12/30/06
\$18,280
8,514
\$ 9,766

12/31/05
\$21,194
9,234
\$11,960

12/30/06
\$18,280
8,514
2.1

12/31/05
\$21,194
9,234
2.3

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

Current liabilities
12/30/06
12/31/05
Cash and cash equivalents..... ........... ........... ........... \$ 6,598
\$ 7,234
Short-term investments ......... ........... ........... ........... ...........
2,270
3,990
Trading assets ........... ........... ........... ........... ...........
1,134
1,458
Accounts receivable, net ....... ........... ........... ........... ...........
2,709
3,914
Total (quick assets) ... ........... ........... ........... ........... \$12,711
\$16,596
Total (quick assets) ........... ........... ........... ...........
/ Current liabilities.... ........... ........... ........... ........... ...........
= Acid-test ratio ........ ........... ........... ........... ........... ...........

\$12,711
8,514
1.5

\$16,596
9,234
1.8

E4.1.
ASSETS
Accounts

= LIABILITIES +

Merchandise

Notes

Accounts

a.
b.
c.
d.
e.
f.
g.
h.
i.
j.

+8,000

OWNERS' EQUITY
Paid in

Retained

## + Capital + Earnings + Rev - Exp

+8, 000

+5,000

+5,000

-1,750

+1,750

-1,400

-1,400

-9,000

+15,000

+6,500

-4,000

-1,200

+4,200

+6,000
+6,500 -4,000
+100

+3,900

+9,600

-100

+3,000

-9,000

+13,500
+1,850*

-9,000
-1,850

k.
l.

+3,160

-3,160

-4,720
______

-4,720
_____

8,490 + 6,440

_____
+

6,200

_____

_____

_____

1,750

= 5,000 +

6,230

_____
+

8,000 +

_____

______

_____

+ 20,000 - 16,350

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

Net income for the month: Revenues \$20,000 - Expenses \$16,350 = Net income \$3,650
* Ordinarily, the Wages Payable account would be increased for employee wage expense
that has been incurred but not yet paid.
Optional Continuation:
BLUE CO. STORES, INC.
Income Statement
Sales..
Cost of goods sold.
Gross profit
Rent expense.
Wages expense..
Net income (this exercise ignores income taxes)..
E4.1.

\$20,000
(13,000)
\$ 7,000
(1,400)
(1,850)
(100)
\$ 3,650

(continued)
BLUE CO. STORES, INC.
Balance Sheet
Assets:
Cash...
Accounts receivable..
Merchandise inventory..
Total current assets
Equipment (this exercise ignores depreciation)
Total assets

\$ 8,490
6,440
6,200
\$21,130
1,750
\$22,880

Liabilities:
Notes payable
Accounts payable..
Total liabilities..

\$ 5,000
6,230
\$11,230

Owners Equity:
Paid-in Capital...
Retained earnings *...
Total owners equity..
Total liabilities and owners equity...

\$ 8,000
3,650
\$11,650
\$22,880

* Since this was the first month of operations, the Retained Earnings account would have
a \$0 beginning balance. Thus, the net income for the month creates a positive balance in
retained earnings.

P4.17.
Balance Sheet
Income Statement
.
Assets = Liabilities + Owners Equity Net income = Revenues - Expenses
a. Cash
Common Stock
+1,000,000
+1,000,000
b. Cash
+500,000

Notes Payable
+500,000

c. Cash
-380,00

Salaries Exp
-380,000

d. Merchandise Accounts
Inventory
Payable
+640,000
+640,000
e. Accounts Rec
+910,000
Merchandise Inv
-580,000

Sales
+910,000

Cost of
Goods Sold
-580,000

Balance Sheet
Income Statement
.
Assets = Liabilities + Owners Equity Net income = Revenues - Expenses

f. Cash
-110,000

Rent Exp
-110,000

g. Equipment Accounts
+150,000
Payable
Cash
+100,000
-50,000
h. Cash
-720,000

Accounts
Payable
-720,000

i. Cash
-36,000

Utilities Exp
-36,000

j. Cash
+825,000
Accounts Rec
-825,000
k.

Interest Pay
+60,000

Interest Exp
-60,000

l.

Rent Payable
+10,000

Rent Exp
-10,000

Journal entries:
a. Dr. Cash ....... ........... ........... ........... ........... ........... ........... ........... 1,000,000
Cr. Common Stock ........ ........... ........... ........... ........... ...........
1,000,000
b. Dr. Cash ....... ........... ........... ........... ........... ........... ........... ...........
Cr. Notes Payable .......... ........... ........... ........... ........... ...........

500,000

## c. Dr. Salaries Expense ........... ........... ........... ........... ........... ...........

Cr. Cash . ........... ........... ........... ........... ........... ........... ...........

380,000

## d. Dr. Merchandise Inventory .. ........... ........... ........... ........... ...........

Cr. Accounts Payable .... ........... ........... ........... ........... ...........

640,000

500,000

380,000

640,000

## e. Dr. Accounts Receivable ...... ........... ........... ........... ........... ...........

Cr. Sales ........... ........... ........... ........... ........... ........... ...........
Dr. Cost of Goods Sold ........ ........... ........... ........... ........... ...........
Cr. Merchandise Inventory.......... ........... ........... ........... ...........

910,000

f. Dr. Rent Expense ..... ........... ........... ........... ........... ........... ...........
Cr. Cash . ........... ........... ........... ........... ........... ........... ...........

110,000

## g. Dr. Equipment .......... ........... ........... ........... ........... ........... ...........

Cr. Cash . ........... ........... ........... ........... ........... ........... ...........
Cr. Accounts Payable .... ........... ........... ........... ........... ...........

150,000

## h. Dr. Accounts Payable ........... ........... ........... ........... ...........

Cr. Cash . ........... ........... ........... ........... ........... ........... ...........

720,000

## i. Dr. Utilities Expense ........... ........... ........... ........... ........... ...........

Cr. Cash . ........... ........... ........... ........... ........... ........... ...........

36,000

j. Dr. Cash ....... ........... ........... ........... ........... ........... ........... ...........
Cr. Accounts Receivable ........... ........... ........... ...........

825,000

## k. Dr. Interest Expense . ........... ........... ........... ........... ........... ...........

Cr. Interest Payable ....... ........... ........... ........... ........... ...........

60,000

l. Dr. Rent Expense ..... ........... ........... ........... ........... ........... ...........
Cr. Rent Payable (or Accounts Payable) ........... ...........

10,000

910,000
580,000
580,000

110,000

50,000
100,000

720,000

36,000
825,000

60,000
10,000

P4.18.
a. Solution approach: Prepare a T-account to determine the Cash account balance, and
then review the results of the horizontal model representations (or journal entries above).
Since there are a limited number of transactions in Problem 4.17., the balances of all of
the other accounts should be easy to determine.
Cash
a.
b.
j.

1,000,000
500,000
825,000

1,029,000

c.
f.
g.
h.
i.

380,000
110,000
50,000
720,000
36,000

a.

KISSICK, CO.
Income Statement
Sales .. ........... ........... ........... ........... ........... ........... ........... ...........
Cost of goods sold ..... ........... ........... ........... ........... ........... ...........
Gross profit ... ........... ........... ........... ........... ........... ........... ...........
Rent expense . ........... ........... ........... ........... ........... ........... ...........
Utilities expense ........ ........... ........... ........... ........... ........... ...........
Salaries expense ........ ........... ........... ........... ........... ........... ...........
Loss from operations . ........... ........... ........... ........... ........... ...........
Interest expense ......... ........... ........... ........... ........... ........... ...........
Net loss (the problem ignores income taxes) ........... ........... ...........

\$ 910,000
(580,000)
\$ 330,000
(120,000)
(36,000)
(380,000)
\$(206,000)
(60,000)
\$(266,000)

KISSICK, CO.
Balance Sheet
Assets:
Cash .. ........... ........... ........... ........... ........... ........... ........... ...........
Accounts receivable .. ........... ........... ........... ........... ........... ...........
Merchandise inventory .......... ........... ........... ........... ........... ...........
Total current assets .... ........... ........... ........... ........... ........... ...........
Equipment (the problem ignores depreciation) ......... ........... ...........
Total assets .... ........... ........... ........... ........... ........... ........... ...........
Liabilities:
Accounts payable ...... ........... ........... ........... ........... ........... ...........
Interest payable ......... ........... ........... ........... ........... ........... ...........
Rent payable .. ........... ........... ........... ........... ........... ........... ...........
Total current liabilities .......... ........... ........... ........... ........... ...........
Notes payable ........... ........... ........... ........... ........... ........... ...........
Total liabilities .......... ........... ........... ........... ........... ........... ...........
Owners Equity:
Common stock ......... ........... ........... ........... ........... ........... ...........
Deficit * ......... ........... ........... ........... ........... ........... ........... ...........
Total owners equity . ........... ........... ........... ........... ........... ...........
Total liabilities and owners equity ... ........... ........... ........... ...........

\$1,029,000
85,000
60,000
\$1,174,000
150,000
\$1,324,000
\$

20,000
60,000
10,000
\$ 90,000
500,000
\$ 590,000
\$1,000,000
(266,000)
\$ 734,000
\$1,324,000

Since this was the first year of operations, the Retained Earnings account would have a
\$0 beginning balance. Thus, the net loss for the year creates a deficit.

b. Note to Instructor: Students should be able to determine the net loss amount
because there are so few transactions to analyze in Problem 4-17 (the solution to these
transactions is provided on the texts website). Begin the in-class discussion by asking,
What do you think went wrong that caused such a large net loss?

Point out that it is not unusual for a start-up company to show a significant net
loss in the first year of operationsbecause of the cost of organizing the
business, and because the revenue-generating process may be delayed for several
months (or longer) until the firms products can be successfully marketed.

## Kissisk Co. is a merchandising firm (not a manufacturer) because it has

purchased \$640,000 of Merchandise Inventory. The company must be renting its
store location because it has incurred rent expense of \$120,000, but owns no land
or buildings.

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

Much of the firms cash was borrowed on a two-year, 12% note payable (as
opposed to generating cash flows from operations). Thus, interest and principal
payments will be substantial in the firms second year of operationsand this

Some of the excess cash may be only temporarily available. For example, much
of the excess cash is likely to be needed for the acquisition of sales facilities, so
that the firm can reduce its rent expense in future years.

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

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

E9.6.
a. Sales (in millions) ..... ........... ........... ........... ........... ........... ........... \$141.6
Cost of goods sold...... ........... ........... ........... ........... ........... ...........
?
Gross profit .... ........... ........... ........... ........... ........... ........... ........... \$ ?

100.0%
?
.
31.6%

Gross profit = (\$141.6 million sales * 31.6% gross profit ratio) = \$44.7 million
Cost of goods sold = (\$141.6 million sales - \$44.7 million gross profit) = \$96.9 million
Alternative computation for cost of goods sold:
\$141.6 million sales * (100% - 31.6%) cost of goods sold ratio = \$96.9 million
b. Selling price ... ........... ........... ........... ........... ........... ........... ........... \$ ?
Cost to manufacture ... ........... ........... ........... ........... ........... ...........
1,860
Gross profit .... ........... ........... ........... ........... ........... ........... ........... \$ ?

100.0%
31.6%

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

c. Management could use the \$2,719.30 estimated selling price as a target in conducting
marketing research studies to estimate the sales volume for the new product (within this
general price range), thus, helping to assess its ultimate prospects for success at this price.

E9.11.
a. (\$760,000 sales on account + \$24,000 decrease in accounts receivable) = \$784,000
source of cash. Since accounts receivable decreased during the year, more accounts were
collected in cash than were created by credit sales.

Sales on account

Accounts Receivable
760,000 Cash collections
from customers

Excess of collections
over sales on account

784,000

24,000

b. (\$148,000 income tax expense + \$34,000 decrease in income taxes payable) = \$182,000
use of cash. Tax payments exceeded the current years income tax expense because the
payable account decreased.
Income Taxes Payable
Cash payments for taxes 182,000 Income tax expense

148,000

Excess of payments
over expense

34,000

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

accounts payable) = \$403,000 use of cash. Cost of goods sold reflects inventory uses.
Inventory purchases were greater than inventory uses because inventory increased during
the year, but part of the inventory purchases were not paid for in cash because accounts
payable also increased during the year.

Inventory purchases

Inventory
422,000 Cost of goods sold
Excess of purchases
over cost of goods sold

## Cash paid to suppliers

Excess of purchases over
payments

Accounts Payable
403,000 Inventory purchases

19,000

408,000

14,000

422,000

d. (\$240,000 increase in net book value + \$190,000 depreciation expense) = \$430,000 use
of cash. Since depreciation is an expense that does not affect cash, the amount of cash
paid to purchase new buildings exceeded the increase in net book value. (Note: In some
years, a firm may spend an enormous amount of cash to acquire new buildings and
equipment, yet still report a decrease in net book value.)
Buildings, net of Accumulated Depreciation
Purchase of buildings
430,000 Depreciation expense

190,000

## Excess of purchases over

depreciation expense
240,000

P9.18.
a. Net sales ......... ........... ........... ........... ........... ........... ........... ........... ...........
Cost of goods sold...... ........... ........... ........... ........... ........... ........... ...........
Gross profit .... ........... ........... ........... ........... ........... ........... ........... ...........
Research and development expenses . ........... ........... ........... ........... ...........
Selling, general and administrative expenses ........... ........... ........... ...........
Operating income (or Income from operations) ........ ........... ........... ...........
b. Operating income (or Income from operations) ........ ........... ........... ...........
Interest expense.......... ........... ........... ........... ........... ........... ........... ...........
Income from continuing operations before taxes ...... ........... ........... ...........
Provision for income taxes .... ........... ........... ........... ........... ........... ...........
Income from continuing operations ... ........... ........... ........... ........... ...........
Loss from discontinued operations, net of tax savings of \$5,000 ..... ...........
Earnings before extraordinary item ... ........... ........... ........... ........... ...........
Extraordinary gain from fire insurance proceeds, net of tax
expense of \$28,000 . ........... ........... ........... ........... ........... ...........
Net income ..... ........... ........... ........... ........... ........... ........... ........... ...........

\$579,000
(272,000)
\$307,000
(37,000)
(51,000)
\$219,000
\$219,000
(64,000)
\$155,000
(74,000)
\$ 81,000
(16,000)
\$ 65,000
104,000
\$169,000

P9.23.
a. Solution approach: Prepare a statement of cash flows-direct method (see Exhibit 9-9).
Cash flows from operating activities:
(in millions)
Cash collected from customers .......... ........... ........... ........... ........... ........... \$1,350
Interest and taxes paid ........... ........... ........... ........... ........... ........... ...........
(90)
Cash paid to suppliers and employees ........... ........... ........... ........... ...........
(810)
Net cash provided by operating activities ...... ........... ........... ........... ........... \$ 450
b. Cash flows from investing activities:
Purchase of land and buildings .......... ........... ........... ........... ........... ...........
\$(170)
Proceeds from the sale of equipment . ........... ........... ........... ........... ...........
40
Net cash used for investing activities ........... ........... ........... ........... ...........
\$( 130)

## c. Cash flows from financing activities:

Payment of long-term debt .... ........... ........... ........... ........... ........... ...........
Issuance of preferred stock .... ........... ........... ........... ........... ........... ...........
Cash dividends declared and paid ...... ........... ........... ........... ........... ...........
Net cash used for financing activities ........... ........... ........... ........... ...........

\$ (220)
300
(340)
\$( 260)

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

Week 3
Thomas & Maurice Chapter 1
1.

a.

b.
c.
d.

3.

a.
b.
c.

## Total explicit cost = \$793,000 (= 555,000 + 45,000 + 28,000 + 165,000)

Total implicit cost = \$190,000 (= 175,000 + 0.15 100,000)
Total economic cost = \$983,000 (= 793,000 + 190,000)
Accounting profit = \$177,000 (= 970,000 793,000)
Economic profit = \$13,000 (= 970,000 983,000)
The owners accounting profit is \$13,000 less than what he could have earned in
salary and return on investment of his \$100,000, i.e., his economic profit is
\$13,000. Thus, he would have made \$13,000 more if he had kept his job and
invested his \$100,000 in stocks of other businesses.
Burton's explicit cost's are \$18,000 per month. His implicit costs are \$20,000 per
month (\$15,000 + \$5,000).
Opportunity cost = explicit + implicit costs = \$18,000 + 20,000 = \$38,000 per
month
Burton Cummings costs of production (= \$38,000/month) exceed his revenues
by \$13,000 (=25,000 38,000). Rather than lose \$13,000 per month, Burton
could rent his rig (and receive \$15,000 per month) and drive trucks for another
firm (and earn \$5,000 per month). With this use of his resources he would earn
\$20,000 per month. Or, Burton could try his luck as a singer in a rock band.

1.

a.
b.
c.
d.
e.
f.
g.
h.

## Demand will decrease, so price will decrease.

Supply will increase, so price will decrease.
Demand will increase, so price will increase.
Demand will decrease, so price will decrease.
Supply will decrease, so price will increase.
Supply will increase, so price will decrease.
Supply will increase (when the price of a complement in production increases),
so price will decrease.
Demand will decrease, so price will decrease.

60

4.

a.
b.
c.
d.

## No effect on demand (no shift)just a movement up the demand.

Decrease demand for hotels.
Demand for rental cars decreases.
Supply of overnight mail decreases.

5.

a.

## Imposing rent controls creates a shortage of low-income housing, which

decreases the quantity supplied at the lower rent imposed by the controls
compared to the amount of housing supplied at the market-clearing (higher) rent
level.

b.

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

c.

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

d.

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

e.

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

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

6.

## In the graph, let D0 be the initial demand for

tickets to Disneyland and S0 be the supply of
tickets to Disneyland. Slowing tourism causes
demand to decrease, as represented by the
demand curve D1. The new rides at Six Flags
further reduce demand to D2. These events all
result in lower ticket prices at Disneyland as well
as reduced attendance. This is not a violation of
the law of demand since price is falling due to a
decrease (shift) in demand, not a movement
along a given demand curve.

Pr ic e o f a t ic k e t (d o l la r s)

S
P

D
D

D
2

N u m b e r o f t ic k e t s

10.

## In the figure, the environmental curbs on burning

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

## Frank & Bernanke Chapter 18

4a. U.S. assets become less attractive, so the demand for dollars falls. The dollar
depreciates.
b. The demand for U.S. goods (software) falls, so the demand for dollars falls. The
dollar depreciates.
c. Financial investors switch funds from U.S. assets to East Asian assets, demand fewer
dollars (or supplying more). The dollar depreciates.
d. As Americans are dissuaded from buying imported automobiles, they supply fewer
dollars to the foreign exchange market. The dollar appreciates.
e. Financial investors would anticipate that the Fed will lower interest rates, making
U.S. financial assets less attractive. The demand for dollars falls and the dollar
depreciates. This effect may be offset to some degree by the impending recession itself,
which would be expected to lower the U.S. demand for imports and hence reduce the
supply of dollars, putting upward pressure on the dollar.
f. As Americans increase their spending on imported goods they supply more dollars to
the foreign exchange market. The dollar depreciates.

8. In dollars, the British automobile costs 20,000 x \$1.50/ or \$30,000. The price of the
U.S. car relative to the British car is thus \$26,000/\$30,000 = 0.867, that is, the U.S. car is
cheaper. From the British perspective, the value of the U.S. car in pounds is 26,000/1.50
= 17,333. The price of the British car relative to the U.S. car is 20,000/17,333 =
1.154 (which, by the way, equals 1/0.867). So, either way we calculate it, we find that
the British car is more expensive and the U.S. car is more competitively priced.

Week 4
Thomas & Maurice Chapter 3
1.

a.

One way of reducing traffic deaths is to reduce speed. While it may be possible
to eliminate all traffic deaths by allowing motorists to drive no faster than 15
MPH in cars equipped with driver and passenger air bags, most American drivers
would not view a 15 MPH speed limit as optimal. Most drivers seem willing to
accept some additional probability of death in return for faster speeds. The 70
MPH speed limit would be optimal if the marginal benefit of reducing speed
limits equals the marginal cost of reducing speed limits. Just because reducing
speed limits to 65 MPH would save even more lives does not, by itself, mean that
further reduction in speed limits should be undertaken. The marginal benefit of
speed reduction must be compared to the marginal cost.

b.

If it costs nothing to eliminate pollution (i.e. MC = 0), then the optimal level of
pollution would indeed be zero. When the marginal cost of pollution abatement
is greater than zero, as it is for virtually every type of pollution, the optimal level
of pollution occurs at that level of pollution for which the marginal benefit to
society of eliminating more pollution just equals the marginal cost of eliminating
more pollution. In fact, it is possible to have too little pollution if pollution
abatement activities have been undertaken such that the marginal cost of
abatement exceeds the marginal benefit.

c.

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

benefit exceeds the marginal cost. Since marginal benefit and marginal cost are
measures of additional (or extra) benefits and costs, benefits and costs already
incurred do not matter (i.e. do not affect MB and MC). Sunk costs or benefits do
not enter the decision making process, only incremental benefits and costs
matter.

d.

## see answer to part c

e.

Insurance premiums are fixed costs. The optimal level has nothing to do with
how high or how low fixed costs go.

2.

Appalachian Coal Mining should minimize net cost by choosing that level of pollution
(P) where the marginal benefit of pollution reduction equals the marginal cost of
pollution reduction:
1,000 10P = 40P
P* = 20 units of pollution.

3.

The second partner is basing his objection to the move on costs that are sunk. The money
spent on office stationary, business cards, and a sign that cannot be moved to the new
office are not marginal costs in the decision to move and should thus be ignored. In other
words, the cost of the old cards, old stationary, and old sign are sunk costs to be ignored
in making the decision to move the office, while any costs of purchasing new business
cards, new stationary, or a new sign are part of the marginal cost of making the move. If,
as the first partner seems to believe, MB exceeds MC for making the move, then net
benefit rises even though new cards, stationary, and a sign must be purchased.

4.

a.
b.
c.

2
\$500 (= \$25 20 radios not stolen due to hiring 1 guard)
4

## Frank & Bernanke Chapter 4

1.

Slowing population growth and an increased share of retired people both imply
slower growth in the number of people employed. If average labor productivity
(output per employed worker) continues to grow at earlier rates, total output will still
grow more slowly than before, because of slower growth in the number of workers.
If average labor productivity stagnates, then total output will grow very slowly or
even decline.
Living standards depend not on total output but on output divided by the total
population. Slowing population growth reduces total output but also the number of
people who share that output. So slower population growth in itself should not
affect living standards. However, a reduced share of the population that is working,
all else equal, will reduce output per person, lowering living standards. Slower
productivity growth will only worsen this problem.

4.

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

b. Normative (a statement about what the Fed should do).
c. Positive.
d. Positive.
e. Normative (depends on views about the fairness of the tax code).

5.

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

b. Microeconomist (behavior of an individual market).
c. Macroeconomist (behavior of economy as a whole; uses aggregation to study a
d. Macroeconomist (behavior of the economy as a whole)
e. Macroeconomist (behavior of a broad macroeconomic aggregate, consumer
spending)

## Frank & Bernanke Chapter 18

7a. If the real interest rate in Eastland is higher than the real interest rate in Westland,
financial investors in Westland will want to buy Eastland assets, and hence will demand
eastmarks. The demand equation shows that, the greater the difference between the real
returns in Eastland and Westland, the higher the demand for eastmarks. Similarly, if the
return in Eastland is greater than the return in Westland, financial investors in Eastland
will not be eager to buy Westlands financial assets, and thus will not supply so many
eastmarks to the foreign exchange market. The supply equation implies that, the greater

the difference between the real returns in Eastland and Westland, the fewer eastmarks
will be supplied to the foreign exchange market.
b. If the real interest rates are equal, the last term drops out of both the supply and
demand equations. Setting demand equal to supply we can find the fundamental value of
the eastmark:
25,000 5,000e = 18,500 + 8,000e
6,500 = 13,000e
e = 0.5 westmarks/eastmark
c.

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

25,000 5,000e + 50,000(-0.02) = 18,500 + 8,000e 50,000(-0.02)
24,000 5,000e = 19,500 + 8,000e
4,500 = 13,000e
e = 0.346 westmarks/eastmark

So the increase in Westlands real interest rate has caused the fundamental value of the
eastmark to decline, relative to the westmark.
d. The depreciation of the eastmark makes Eastlands goods cheaper abroad, and makes
imports from Westland more expensive. So the depreciation should raise Eastlands net
exports and hence its aggregate demand.
e. To restore the fundamental value of the eastmark to 0.5 westmarks/eastmark,
Eastland will have to match the real interest rate increase in Westmark, setting rE = 0.12.
If the difference in real interest rates is zero, then the same calculation as in part b shows
that e = 0.5. However, the higher real interest rate in Eastland will depress aggregate
demand and output.
f. Because of the fixed exchange rate, Eastland was forced to match Westlands
monetary tightening, whether or not it was an appropriate move for Eastlands domestic
economy. This illustrates the point that maintaining a fixed exchange rate eliminates a
countrys ability to use monetary policy independently to stabilize its domestic economy.

Week 6
Chapter 1
7.
There is no doubt that growth of the Internet will open up new marketing
opportunities--it already has, and so far we're just seeing the tip of the iceberg.
Will growth of these services ultimately eliminate the need for retailers and
wholesalers? Perhaps over the longer run we will see services such as these
taking over for some types of retailers and wholesalers. Clearly, at present the
focus of the Internet (and other similar network systems) is on fast, interactive
communication. In the past, most marketing communication has been limited--

it's one way communication from seller to buyer--except in the case of personal
selling. The Internet, direct response cable TV, and even toll-free telephone
systems are quickly changing that.
The Internet can help to overcome separation in time and information. It might
also be possible to create very diverse "virtual" assortments of products that are
practical because they are available to a very large number of people. Thus, the
Internet is well suited for the buying and selling function (in some situations)
and the market information functions. As such, it might also reduce some of
the risk that otherwise might be inherent in transactions. On the other hand,
someone is likely to need to deal with the transporting and storing functions
While the person or company that sells over the Internet may not take the form
of a retail store, it's useful to remind students that firms that sell out of a catalog
are already using the basic approach characteristic of electronic shopping over a
computer network. What is different here is the sophistication of the
technology and speed of the communication more than the basic way the
operation works.
12.

The marketing concept is defined on page 15. A firm must have some
objective to guide its efforts--and a profit orientation provides such an
objective. But the marketing concept says that an organization should have
more than just profit as an objective. It should attempt to satisfy some
customers and make a profit. Profit can be seen not only as an objective but as
a constraint if one really gets carried away with the marketing concept. If a
marketing manager really wanted to satisfy some customers very well, he could
design a very pleasing marketing mix for them that might include free products
or services! Adding profit in the definition, however, would preclude such a
move. In other words, the marketing concept insists on some balance between
fully satisfying some target customers and meeting a firm's own objectives.

16.

Students will come up with a variety of benefits and costs associated with the
products for this question. At this point in their thinking about customer value,
it is probably less important that they be detailed or exhaustive in coming up
with examples than it is that they grasp the concept that each product (actually,
each marketing mix) may have a variety of different benefits and costs. A class
discussion is likely to highlight some cases when one student sees something as
a benefit, but a different student argues that it is not so much a benefit as it is a
cost if it is missing (e.g., good gas mileage may be a benefit of a car, or it may
represent a cost if it is missing). The fact that different customers may frame
benefits and costs in different ways is not treated as an important distinction in
the literature on customer value. On the other hand, it can be useful to know
when this sort of difference occurs because it is at least indirectly related to
customer expectations.

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

status; Costs: the opposite of any of the above as well as factors such as hard to
service, lack of warranty, price paid, or missing a needed battery.
(b) Weight-loss diet supplement: Benefits: more self-esteem, more energy,
greater sex appeal, convenient to prepare or consume; Costs: any unfavorable
side effects (nervousness, high blood pressure, etc), difficult or inconvenient to
obtain, high price.
(c) Cruise on a luxury liner: Benefits: excitement, variety, relaxation, pleasure,
social interactions; Costs: boredom, fear (say, of a fire or of the boat sinking),
sea-sickness, expense.
(d) Checking account from a bank: Benefits: convenience, record of spending
(and in some cases cancelled checks), ability to obtain cash; Costs: monthly
fees, check fees, fees for bounced checks, record keeping hassles,
inconvenience of going to bank, some businesses do not accept checks, time to
show identification.
Chapter 2
4.
It is important for a firm to have a clearly defined target market even if a
company sells its products only from a website. This question is designed to
prompt students to think about the idea of the website in the context of the
marketing mix. The fact that the firm is distributing to customers direct via
its website (rather than through wholesalers or retailers) is certainly an
important decision in the marketing mix context, but the fact that the website it
available to customers from all over the world doesnt mean that the firms
offering will be attractive to customers regardless of geographic location. The
marketer still needs to think about the benefits of its product offering relative to
the needs of some set of customers, what competitors are offering those
customers, when and how the product is going to get to the customers place,
what communications (promotion, customer service, etc.) the customers will
need, what price is appropriate, and the like. There is intense competition for
attention and business on the Internet, and just building a better mousetrap (if
the firm has in fact done thatwhether it is the product offering OR the
website itself!) is not any sort of assurance that it will attract, satisfy, and retain
customers. A firm that has a specific target market will be able to fine tune its
message and the rest of the marketing mix to the needs of the target customers,
and that increases the odds that it can offer them superior customer value.
10.

This question is designed to get the students thinking about the various target
markets which might be aimed at for a particular product--and the many factors
which ought to be considered. If the instructor is familiar with the development
of a new marketing strategy, it probably will be preferable to substitute this
product for one of those suggested--in order to give the students a better "feel"
for reality.
This exercise can easily lead into an interesting discussion of marketing
strategy planning and all of the problems that can arise (but the instructor must

guard against it degenerating into just a "bull" session). The general approach
will be illustrated below for the new toothbrush.
The students must be led to see that there are many different potential target
markets before going on to the development of one whole strategy. It might
help to begin by trying to determine the degree of interest of some target
consumers in toothbrushes in general--and the extent of interest they might
have in the particular kind of product being considered. Using the marketing
strategy diagram (p. 49) as a framework--to begin to segment the "toothbrush
market"--you could lead them to ask questions such as: What do consumers
look for in toothbrushes? Why do they buy them? Where do they buy them?
How much do they pay for them? Who buys them? All of these questions
should be raised by the students. Obviously, no one answer can be developed
in the classroom for all these questions (there are many target markets), but
some tentative conclusions might be advanced--some consumers are worried
about their gums, not just their teeth, some people don't seem to think about
brushes at all, some what a brush that's easy to pack for travel, etc.
The next step would be to analyze the product in the light of the consumers'
image of toothbrushes and the ritual of toothbrushing. If this product seems to
have any possibilities for satisfying the needs of some consumers, then the
other three Ps--Place, Promotion, and Price--will have to be considered. Where
will have to be distributed. If the same types of places are chosen, a great deal
of promotion may not be necessary. However, if an entirely new set of places
is chosen, promotion may become more expensive. If the consumer is not
particularly enthused about new products of this type, even if they are superior,
then the latitude on pricing may be rather narrow. The marketing executive's
job would be to weigh all of these four Ps in the light of consumer analysis in
order to come up with a satisfactory marketing strategy.
At this time, a well-organized discussion of all these points probably should not
be expected of the students, but it is surprising what they can do. In the
following pages some examples of students' work are presented to give you
some idea of the caliber of work which can be expected this early in the course.
A.

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

design for a toothbrush:
Concerning the consumer:
1.
2.
3.
4.
5.

## Characteristics of buyer and users.

Size of purchase.
Unfavorable attitudes of buyers of brand.
Number of competitors and brands.

## 6. Differentiation of own brand from leaders.

Concerning the product:
1.
2.
3.
4.

Quality.
Models and sizes.
Attractiveness.
Shape, material, design, color, and copy.

## Concerning the place:

1. Number of wholesalers and retailers.
2. Degree of aggressive retailer cooperation.
Concerning the price:
1.
2.
3.
4.

Factory price.
Wholesalers' and retailers' price.
Discounts, allowances, and deals.
Price support.

## Concerning the promotion:

1. Selling.
3. Sales promotion.
**********
B.

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

determine the target market. The target for a new spinning reel would, most
naturally, be the sport fisherman. Since the consumer is of such great
importance in the selection of a strategy, he should be considered first and quite
well. To begin with, sport fishermen can be from any social or financial class.
This fact in itself presents somewhat of a problem. The reel has to be such that
it will appeal to the majority of the people from these different groups.
Next we have to determine just how we are going to design this item to
accomplish this. We have to make it so it has all the qualities we want to have
and still be priced right so it can be sold in the volume necessary to make a
profit. We have to decide whether we are going to make all the component
parts ourselves or if we are going to do any subcontracting. These and many
more considerations must be made in this connection.
Determining places of distribution to the customer is also very important. With
an article such as a fishing reel the best markets would no doubt be in or near

river towns, fishing resorts, lakes, or oceans. In this same department you must
determine how you are going to work your distribution end of the business,
whether you are going to use wholesale outlets, brokers, franchised dealers, etc.
The price of the reel now has to be set so that it will move fairly fast on the
market. Competition will naturally have something to do in determining this
price. You must also take into account the distributors and sales force and
whether you are going to pay them a high commission.
Since this is a new product, promotion is going to be of major importance in
establishing good markets. You will have to concern yourself with advertising,
sales promotions, and training salespeople among other things. I think these
would be the greatest problem areas you would encounter.
**********
C.

Consumers: The market target for the new wonder drug is all consumers, since
at one time or another everybody gets sick. The drug will be also aimed at
children since children are always getting sick. The drug should be promoted
more to residents of cold or damp sections of the country since susceptibility to
sickness is greater in these areas.
The number of other brands are few since this is a new wonder drug. Brand
loyalty will be low since this is a new product.
Product: The product will be in pill form. In must be decided how many sizes
of bottles and how many pills to each size there should be. The color of the
coating of the pill is important in order to make it attractive to children. The
color and graphical design of the box should stand out on the shelf.
The brand name should be easy to pronounce and should be connected to the
concept of curing sickness so that when someone thinks, "I am really sick, what
can I take to get better?", immediately the name will pop into his mind after
hearing it only once before.
Place: Samples should be distributed to doctors. The main distribution will be
through drugstores and drug counters in department stores.
Price: The price should be within the reach of everybody first of all. It should
be priced in the range of other drugs. Many people object to the high price of
drugs but most will pay the price if they think the product is good. If the price
is high, people feel that they are getting something good. So the price should
appear a little high but not so high as to take a big chunk out of the average
person's pocket.

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

should be made to have articles printed in the various medical journals to show
doctors how good the product really is. Television is the best medium for
advertising the product. 'A famous doctor says' approach should be avoided
since I think it is boring to people. But the doctor should not be left completely
out the advertisement. It should be brought out that the drug is safe for all ages.
**********
D.

## The new type of industrial stapling machine causes students considerable

trouble as few of them have had much industrial experience. This provides
another opportunity to emphasize the need for careful customer analysis.
For class discussion, it is useful to segment the stapling machine market into at
least two parts--thus requiring two sets of answers. The two basic markets are
for office use and for plant use for fastening boxes or for assembling wood or
metal pieces.
You might show that reaching office managers, production managers,
especially important affects the Place and Promotion variables. The problems
of marketing industrial products should only be raised here, as they are treated
extensively in the rest of the text. By the end of the book, the students will be
able to handle such a problem very nicely. It might be fruitful at this time,
however, to get the students to notice that industrial marketing would probably
be more economically-oriented than final consumer marketing.

Chapter 3
2.
Market segmentation is a two-step process of (1) naming broad productmarkets and (2) segmenting these broad product-markets in order to select
target markets and develop suitable marketing mixes. Naming a broad-product
market involves "breaking apart"--disaggregating--all possible needs into some
generic markets and broad product-markets in which the firm may be able to
operate profitably. This step tries to "narrow down" to product-market areas
where the firm is more likely to have competitive advantage. After this first
narrowing down step, the second step is segmenting--aggregating individual
customers with similar needs into a relatively homogeneous group of customers
who will respond to a marketing mix in a similar way. See text pages 65-67.
9.

## Positioning approaches show where proposed and/or present brands are

located in a market--as seen by customers. This information can help marketing
managers in a number of ways. First, it can help a marketing manager to decide
whether he wants to leave his product where it is--or try to make changes (for
example, in the product or in customer perceptions by changes in promotion). It

can show what brands are viewed as most similar to the firm's offering--and thus
it can help to identify which brand is competing most directly with which other
brands. It can also point to market segments whose needs are not being met by
current offerings. Sometimes it can also help in making decisions about whether
or not to try to combine several segments into a single target market.

Week 6
Chapter 4
3.
Various company objectives might have an impact on the appropriate
marketing strategy or strategies and then the marketing mix or mixes. This
particular example provides an opportunity to introduce a discussion of the
objectives that a giant company like Microsoft had when the Internet
opportunity became an issue versus the objectives of a smaller company that
was simply trying to become established. Thus, in the context of the specific
question, some objectives that the former programmer might pursue could
include:
(1)
(2)
(3)
(4)
(5)
(6)

## Maximize profits in the next two years.

Find strategies that would not prompt aggressive competition
(retaliation) by large, established firms in this market.
Rapid growth of the firm.
Build a reputation for reliable software and good technical support.
Offer a product that had clear advantages for at least some segment
of the market
Build a large enterprise.

Some of these objectives might be compatible with each other and lead to the
use of the same marketing strategy or strategies. However, some objectives
would clearly be incompatible. For example, trying to maximize profit in the
next two years (ignoring what happens afterward) would probably rule out the
development of a large-scale software application that would attempt to
compete with Microsofts Internet Explorer or AOLs browser. That kind of
effort would require much more time (to secure capital, hire a large number of
qualified programmers, and develop a very complex software product). Rather,
maximizing profit on a shorter term horizon might suggest some smaller scale,
more focused application. For example, the programmer might focus on an
Internet browser that was particularly well suited to the needs of real estate
agents because it did a really good job of handling multiple listing information
available on Internet websites. The real estate agent target market might be
willing to pay higher prices for the higher quality browser (i.e., more specific to
their needs) because it helped them earn more money.
6.

Students will have different opinions about the difficulty for the hardware store
of planning for the new competitive threat: a competing store to be opened by a
big home improvement chain. This scenario is in fact unfolding in smaller

towns all over the country as big chains like Home Depot, Lowes, and Home
Quarters have aggressively expanded the number of stores that they open.
Even though the question doesn't reveal much about the small store that is
currently in the town, the question is quite clear in suggesting that the current
store has a monopoly of sorts. It is also reasonable to expect that the new home
improvement store will be very much like other stores in the chain. Thus, it
might also be possible for the owner of the store to determine what happened in
the past when the chain went into similar markets. This might even reveal
markets in which a competitor had developed a very effective strategy for
fending off the attack. For example, in one such case the local store added
more service (including delivery) and more specialized services for building
contractorssuch as rental tools or small engine repairs. The chain could offer
lower prices on general home building items, but the smaller store had success
maintaining good margins and profits by having a very good assortment of
convenience items like nuts and screws and bolts that customers wanted to pick
up quickly. The local store also put more emphasis of items of special interest
in the local market (like water pipe heaters to prevent broken water pipes
during the cold winter) that were not well represented in the product line of the
chain store.
9.

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

been made to protect individual competitors in the hope that this
would preserve competition and help consumers.

15.

Answers here will vary significantly. However, examples of firms that are
appealing to senior citizens include: financial services firms (mutual fund
companies, banks, brokerage houses) who are offering a variety of retirement
planning products; companies in the health care business (including insurance
companies, hospitals, HMO, life-time care facilities); entertainment and leisuretime companies (travel agencies, recreational vehicles, adult education, crafts
such as woodworking or gardening); and producers of fashion products
(dresses, slacks, coats) designed to appeal to people whose bodies are not quite
as buff as they once were. Example of firms that are appealing to teens
include: transportation companies (automobiles); entertainment companies
(movies, music CDs, TV programming); food companies (snack foods, candy,
fast-food); educational services (colleges, music lessons, etc.); and companies

Chapter 5
1.
The "economic buyer" model of consumer behavior suggests that people know
all the facts (relevant to a purchase) and logically compare choices in terms of
cost and value received to get the greatest satisfaction from spending their time
and money. Thus, its focus is often on economic needs such as economy of
purchase or use, convenience, efficiency in operation or use, dependability in
use, or improvement in earnings.

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

that seem to be consistent with the economic buyer model and those that are
not. The amount of information that the consumer had (or decided to get) is a
factor that typically differentiates the different types of purchases. As these
differences are brought out, it may be useful to discuss the idea that consumers
are more willing to search for information and compare products (i.e.,
consistent with the economic buyer model) in some situations than in others-for example, when the purchase is important, the financial risk is significant,
etc. On the other hand, many purchases are made more or less habitually-especially once a satisfactory alternative has been found. For such purchases,
most consumers see the cost of searching for more information as too high
relative to its potential value.
Some students may realize that "economic buyer" comparisons are usually
easier to make when the alternative ways of meeting a need are comparable.
For example, it may be easier to compare different brands of 13" color
television sets than to decide whether to buy a new TV set or alternatively to
spend the money on a ski weekend. Both may involve entertainment needs, but
really represent very different alternatives. (Sometimes it is not easy to do
economic comparisons even when alternatives are, on the surface, more similar.
For example, a student who is interested in buying a large screen TV would
need to decide if the extra money for a HDTV model, or perhaps a thin LCD
model, was worth the difference in price. Evaluating the difference in price and
features might be made even more difficult by uncertainty about how prices
will change in the future (and/or how quickly more HD broadcasts become
available).
Student examples will often highlight purchases where economic buyer type
comparisons don't seem sensible--or perhaps even feasible. For example, a
purchase of a particular CD may be based on the emotional reaction to a
particular song--or a specific artist. A purchase of a specific fashion item might
be based on needs (such as status appeal or aesthetic reactions) that can't be
easily calibrated on some sort on "economic need" basis. On the other hand,
when the same basic products (brands) are available at different stores,
consumers may search for the "best deal" on the desired product.
8.

Students will have varied responses to this question, perhaps in part because of
differences in awareness of Hispanic people. There is not necessarily a right
answer to this question, but rather it is intended to prompt students to think
about how culture is pervasive in everyday activities such as grocery shopping.
There are in fact a number of chains that have been successful in targeting the
growing Hispanic subculture in California (and other areas). Some of the
changes in "product" include more "familiar" brands imported from Mexico
and different varieties of food, especially more choice of products that are basic
to Hispanic cooking. For example, rice is popular in the Hispanic diet and there

are likely to be many more varieties of rice; by contrast, potatoes are less
popular and there would not be as much interest in having a variety of different
types of potatoes. Place would be important. Stores should be located in places
that are convenient to Hispanics. There might be some problems in
maintaining inventories or getting timely deliveries of some products-especially if they are not ones that are readily available from local wholesalers
(including food brokers) or if they must be imported from Mexico. The most
obvious change in promotion is probably the change from English to Spanish.
However, there might also be a need for more personal selling in the store--as
Hispanic shoppers tend to be less accepting of self-service grocery shopping
than is typical for some segments of the U.S. population. In addition, "local"
media--such as Hispanic radio stations and newspapers--oriented toward
Hispanic shoppers might be the best bet for reaching the target market.
Experience has shown that Hispanic shoppers are willing to pay higher prices at
supermarkets that really cater to their needs and interests. Some students will
argue that prices will need to be oriented to value and "low everyday prices"-as many Hispanics are not in the top income groups. While that is true, it is
nevertheless the case that lower income Hispanics are willing to pay a bit extra
to be able to shop at a store where the products and service offered match their
taste.

Week 7
Marchall, McManus, Viele Chapter 10
P10.11.
a. Net revenues in 2003 = \$30,141 million (table, p. 25)
b. Cost of goods sold in 2002 = \$26,764 - \$13,318 = \$13,446 million (table, p. 25)
c. Difference between operating income and net income in 2004 = \$10,130 - \$7,516
= \$2,614 million (table, p. 25)
d. Year(s) in which net income decreased as compared to the previous year = 2006 only
(table, p. 25)
e. Amount of interest income earned = \$636 million (table, p.70)
f. Number of shares of stock options outstanding at December 30, 2006
= 839.5 million (table, p.64)
g. Total revenues from unaffiliated customers outside of the United States
= \$29,896 million (table, p.87, Total revenues \$35,382 less U.S. \$5,486)

h. Amount committed for the construction or purchase of property, plant, and equipment
= Approximately \$3.3 billion (p.84)
i. Fair value of available-for-sale securities classified as floating rate notes
= \$3,512 million (p.68)
j. Cost of goods sold for the third quarter of 2006 = \$8,739 - \$4,294
= \$4,445 million (table, p.91use September 30 column)
P10.12.
a. Percentage of R&D relative to net revenues in 2006 = \$5,873 / \$35,382 = 16.6%
b. Amount by which property, plant and equipment decreased during 2006
(i.e., for depreciation, asset sales, and similar transactions) =
Net investment in property, plant & equipment, 2005 ...... ...........
Additions to property, plant & equipment, 2006 .. ........... ...........
Less: Decreases in property, plant & equipment, 2006 .... ..........
Net investment in property, plant & equipment, 2006 ...... ...........

\$17,111
5,779
( ? )
\$17,602 million

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

* Note that Depreciation Expense for 2006 was \$4,654 million and the Restructuring,
asset impairment, and net loss on retirement of assets category was \$635 million. These
two amounts add to \$5,289 million and thus are off by \$1 million due to rounding (see
the Statements of Cash Flows on page 51).
c. Year in which stockholders equity grew by the greatest amount over the previous year
= 2003, increased by \$2,378 (\$37,846 - \$35,468). (table, p. 25).
d. Change in total liabilities from 2002 to 2006 = \$2,860 increase, as computed below (see
table, p. 25):

2006
2002
Change
Total assets .... ........... ........... ........... ...........
Stockholders equity.. ........... ........... ...........
Total liabilities .......... ........... ........... ...........

\$48,368
36,752
\$11,616

\$44,224
35,468
\$ 8,756

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

f. Total amount of revenues from unaffiliated customers earned in Europe
= \$6,587 million (table, p.87)
g. The companys effective tax rate = 28.6% (table, p.73)

+\$4,144
+ 1,284
+\$2,860

h. Adjusted cost and estimated fair value of investments held in asset-backed securities
= Adjusted cost = \$1,633 million, Estimated fair value = \$1,636 million (table, p.68)
i. Market price range of common stock for the fourth quarter of 2006
= High = \$27.43, Low = \$22.65 (table, p.91)
j. Amount of land and buildings, exclusive of construction in progress
= \$14,544 million (table, p.58)

## Ross, Westerfield Jordan Chapter 3

6. We need to calculate the net income before we calculate the earnings per share.
The sum of dividends and addition to retained earnings must equal net income, so
net income must have been:
Net income = Addition to retained earnings + Dividends
Net income = \$530,000 + 190,000
Net income = \$720,000
So, the earnings per share were:
EPS = Net income / Shares outstanding
EPS = \$720,000 / 570,000
EPS = \$1.26 per share
The dividends per share were:
Dividends per share = Total dividends / Shares outstanding
Dividends per share = \$190,000 / 570,000
Dividends per share = \$0.33 per share
The book value per share was:
Book value per share = Total equity / Shares outstanding
Book value per share = \$6,800,000 / 570,000
Book value per share = \$11.93 per share
The market-to-book ratio is:
Market-to-book ratio = Share price / Book value per share
Market-to-book ratio = \$39 / \$11.93
Market-to-book ratio = 3.27 times
The P/E ratio is:

## P/E ratio = Share price / EPS

P/E ratio = \$39 / \$1.26
P/E ratio = 30.88 times
Sales per share are:
Sales per share = Total sales / Shares outstanding
Sales per share = \$16,000,000 / 570,000
Sales per share = \$28.07
The P/S ratio is:
P/S ratio = Share price / Sales per share
P/S ratio = \$39 / \$28.07
P/S ratio = 1.39 times
16. a.

## The current ratio is calculated as:

Current ratio = Current assets / Current liabilities
Current ratio2007 = \$166,869 / \$219,186
Current ratio2007 = 0.76 times
Current ratio2008 = \$222,608 / \$245,856
Current ratio2008 = 0.91 times

b.

## The quick ratio is calculated as:

Quick ratio = (Current assets Inventory) / Current liabilities
Quick ratio2007 = (\$166,689 104,339) / \$219,186
Quick ratio2007 = 0.28 times
Quick ratio2008 = (\$222,608 144,696) / \$245,856
Quick ratio2008 = 0.32 times

c.

## The cash ratio is calculated as:

Cash ratio = Cash / Current liabilities
Cash ratio2007 = \$18,288 / \$219,186
Cash ratio2007 = 0.08 times
Cash ratio2008 = \$22,455 / \$245,856
Cash ratio2008 = 0.09 times

d.

## Debt-equity ratio = Total debt / Total equity

Debt-equity ratio = (Current liabilities + Long-term debt) / Total equity
Debt-equity ratio2007 = (\$219,186 + 190,000) / \$339,693
Debt-equity ratio2007 = 1.20
Debt-equity ratio2008 = (\$245,856 + 131,250) / \$407,490
Debt-equity ratio2008 = 0.93
And the equity multiplier is:
Equity multiplier = 1 + Debt-equity ratio
Equity multiplier2007 = 1 + 1.20
Equity multiplier2007 = 2.20
Equity multiplier2008 = 1 + 0.93
Equity multiplier2008 = 1.93
e.

## The total debt ratio is calculated as:

Total debt ratio = Total debt / Total assets
Total debt ratio = (Current liabilities + Long-term debt) / Total assets
Total debt ratio2007 = (\$219,186 + 190,000) / \$748,879
Total debt ratio2007 = 0.55
Total debt ratio2007 = (\$245,856 + 131,250) / \$784,596
Total debt ratio2007 = 0.48