CASE STUDY: FINANCIAL RISK MANAGEMENT

The Manila Times is a large metropolitan newspaper. The paper is sold through dealers who are
charged P2.00 per copy that they sell. Unsold copies are returned to The Manila Times and full
credit is given. The unsold copies are sold as wastepaper for P0.20 each. The variable cost of
producing a paper is P1.00.

The Manila Times currently prints 500,000 papers each day. Management is considering a
change and has asked for your help. A recent study showed the following results.

Papers Returned Percentage of Time

100,000 20%

50,000 20%

0 60%

The study also indicated that when 500,000 copies were all sold, there were often more papers
demanded. The best estimates are that 25% of the time 500,000 copies are demanded, 25% of
the time 550,000 are demanded, and 10% of the time 600,000 papers could be sold if they were
available.

Required:

1. Determine the best strategy for The Manila Times.

2. Determine the value of perfect information.