For Archmage

Bakery Problem Set

		Problem Assignments: Week 8
			Assigned Problems				Points
1
1-A	What is the contribution margin of the product?					2 points	2
	Answer:	$4.50
	FIXED COST	$50,000.00
	P	$7.50
	V	$3.00
	TOTAL	$4.50
1-B	Calculate the breakeven point in unit sales and dollars.
	Answer:		Breakeven in units is		11,112	3 points	2
	Answer:		Breakeven in dollars is		$83,340.00	3 points	2
	Why is the answer not 11,111.111 units?						2
	p	$ 7.50
	x	$ 4.50
	v	$ 3.00
	f	$ 50,000.00
	b/e point (0)	11111.111	11112.00
	b/e in dollars		$ 83,340.00
1-C	What is the operating profit (loss) at 5,000 units per year?
	Answer:	-$27,500.00	Loss			3 points	2
	P	$7.50
	V	$3.00
	X	5000
	F	$50,000.00
		-$27,500.00
1-D	What is the operating profit (loss) at 15,000 units per year?
	Answer:	$17,500.00				3 points	2
	P	$7.50
	V	$3.00
	X	15000
	F	$50,000.00
		$17,500.00
1-E
	fixed cost	$ 50,000.00
	variable cost	$ 3.00
	price per unit	$ 7.50
	operating costs	$ (27,500.00)	$ 17,500.00	$ 4.50
	units	5,000	15,000	11,112
						10 points	10
2-A
	Answer	$3,620.69					2
	# of Shares		100
	Value per share		31.5
	Exchange rate		$ 1.00	=	0.87	=	$ 0.87
	Total Value in Euros		3150.00
	Total Value in Dollars		$ 3,620.69	[3150/.87]
2-B
	Exchange rate		1	=	$ 1.15	=	$ 1.15
	Total Value in Euros		3150
	Total Value in Dollars		$ 3,622.50	[3150*1.15]
	Answer		$ 3,622.50				4
2-C
	Answer	$3,000.00					2
	Value of Stock		27.95
	Exchange Rate		1	$ 1.07330
	Value in USD		$ 30.00
	Value of 100 Stocks		$ 3,000	[30*100]
2-D
	Answer	17%			17%		5
3
	Answer	You calculate					5
	Price of Paiting		¥ 3,000,000.00
	Exchange Rate		¥ 1.00	=	$ 0.15244
	Amount in USD		$457,320.00

The Sarah Cupcake Co. has fixed costs of $50,000 per year. It sells cupcakes in boxes of 6 for $7.50 each. Variable costs per unit are $3. This includes raw materials, packaging and costs of labor and electricity for the ovens.

Break Even Chart

fixed cost 50000 variable cost 3 price per unit 7.5 operating costs -27500 17500 4.5 units 5000 15000 11112

Plot a breakeven chart (graph). Use the foregoing figures and other data as necessary. You should get straight lines.

Mrs. Moore owns 100 shares of stock in Daimler-Benz valued at €31.50 Euros per share. What is the value in $U.S. of her stock if the current exchange rate is $1.00 = €0.87?

What is the value of Mrs. Moore's stock in USD (dollars) if the exchange rate is €1.00 = $1.15?

What was the value of Mrs. Moore's stock in USD (dollars) when she purchased the stock for €27.95 in April 2003? At the time, €1.00 = $1.07330

The stock pays no dividend. If Mrs. Moore sells the stock, what will have been her return in percent? You have the information about the cost and proceeds of the sale above.

Lisa Murphy sees a painting for auction in Japan that is expected to sell for ¥3,000,000. How much money in dollars will that be at the exchange rate at the start of this week?

Contribution Margin formula is P-V P= Price per product ($7.50) V = Variable cost per product ($3) CM For Sarah Cupcakes is $4.50

Breakeven Point is where the profit is equal to zero (0) BREAKEVEN POINT IN DOLLARS: P=$7.50 V=$3.00 X=? F=$50000 0=($7.50-$3.00) =x, then $50000/4.50 = 11,111.111 for x x=11,111.111 rounded to 11,112 (=roundup,0) in dollars: p*x (7.50*11,112) = $83,340

BREAK EVEN IN UNITS: P=$7.50 V=$3.00 X=? F=$50000 0=($7.50-3) $50000/4.50 = 11,111.111 x=11,111.111 rounded to 11,111 break even units is 11,112 rounded

The answer cannot be 11,111.11 units because you cannot make .11 of a cupcake (any cupcake made will be 1 unit, not a fraction of one). Additionally, each cupcake is being sold as a whole cupcake/1 unit. The next full unit has to be considered in the break even analysis.

(P-V)X-F P=7.50 V=3.00 X=5000 F=50000 (7.50-3)5000-50000

(P-V)X-F P=7.50 V=3.00 X=15000 F=50000 (7.50-3)15000-50000

Return = (selling price - buying price)/selling price ($3620.69-$3000)/3620.69 = 17% Also (3622.50-3000)/3622.50 =17%

Echange rate was obtained from oanda.com 5/26/16 @ 6pm.

Data Summary: Fixed Cost = S50,000 Variable Cost = $3.00 PPU = $7.50 The bakery has to sell 11,112 cupcakes to break even.

GIBSON

Global Investment case
The Gibson Company is a United States (US) firm that is considering a joint venture with Brasilia, DF, a Brazilian firm that grows and processes coffee beans.
Gibson has a patent for a new coffee processing method. This intellectual property is motivating Gibson to expand beyond importing coffee to engaging in a joint
venture to process the coffee. Gibson will invest $8 million in the proposed joint venture project, which will help to finance Brasilia 's production using the newly
patented process.
The Brazilian government has guaranteed that the after-tax profits (denominated in Reals, the Brazilian currency) can be converted to US dollars at the current
exchange rate and sent to the Gibson Company each year. Current exchange rates can be found at								http://www.oanda.com.
For each of the first five years, 60 percent of the total profits will be distributed to Brasilia, while the remaining 40 percent will be converted to dollars to be sent to
Gibson. The income tax rate for the joint venture will be 10%. However, the Brazilian government is considering raising the income tax rate to 30%. At the present
time, the Brazilian government doe not impose a separate income tax on profits sent out of the country. However, the Brazilian government is considering imposing
an additional 10 percent income tax on profits distributed to a foreign company. Assume that there are no other forms of tax. After considering the taxes paid in
Brazil, assume an additional seven percent tax imposed by the US government on profits received by Gibson Company.
The expected total profits resulting from the joint venture per year are as follows:
Year	Total Profits from Joint Venture (in BRL)
1	40 million
2	60 million
3	70 million
4	90 million
5	120 million
Gibson's average cost of debt is 6 percent before taxes. Its average cost of equity is 9 percent. Assume that Gibson’s US income tax rate is 10 percent.
Gibson’s capital structure is 70 percent debt and 30 percent equity. Gibson adds between 2 and 5 percentage points to its cost of capital when deriving
its required rate of return on international joint ventures. Gibson plans to account for country and other risks within its cash flow estimates.
Gibson is concerned about country risk in the following two forms:
(1) Will the Brazilian government increase the corporate income tax rate from 10 percent to 30 percent (20 percent probability)? If this occurs,
	Gibson will receive additional tax credits on its US taxes, resulting in no US taxes on the profits from this joint venture.
(2) Will the Brazilian government impose a separate income tax of 10 percent on the profits distributed to foreign companies such as Gibson (20
	percent probability)? If this occurs, Gibson will not receive additional tax credits, and the company will still be subject to US tax on the profits from
	this joint venture.
Assume that the two types of country risk are mutually exclusive. If it does anything, the Brazilian government will only implement one of these changes in its tax policies
(i.e., the increase in the basic income tax on the profits of the joint venture or the additional income tax on profits distributed to foreign companies). The Brazilian government
may also choose to leave things as they are.
Assignment
1. Determine Gibson's cost of capital and required rate of return for the joint venture in Brazil.
Answer:	6.61%
LOW	8.61%
HIGH	11.61%
AVERAGE	10.11%
2. Determine the discrete probability distribution of Gibson's Net Present Value for this joint venture and calculate the Expected Net Present Value.
				SCENERIO 1: Based on original assumptions
	Year	Total Profits from Joint Venture (in BRL)	Gibson's share of profits(in million BRL)	Income Tax paid to Brazilian Govt @10% (in million BRL)	After tax profits distributed to Gibson (in million BRL)	Converted BRL into USD @0.27925 (in million)	Income tax paid in US @7% (in USD millions)	Net cash flow after all taxes (USD millions)
	1	40 million	16	1.60	14.40	4.02	0.28	3.74
	2	60 million	24	2.40	21.60	6.03	0.42	5.61
	3	70 million	28	2.80	25.20	7.04	0.49	6.54
	4	90 million	36	3.60	32.40	9.05	0.63	8.41
	5	120 million	48	4.80	43.20	12.06	0.84	11.22
	Year	Cash Flows Associated with JV (in millions)	Discount Factor @10.11%	Discounted value/PV Of Cash Flows
	0	$ (8.00)	1.00	-8.00
	1	3.74	0.908	3.40
	2	5.61	0.825	4.63
	3	6.54	0.749	4.90
	4	8.41	0.68	5.72
	5	11.22	0.618	6.93
	NPV			17.58
	PV CASH FLOW			27.52
				Scenario 2:Based on 30% corporate income tax by the Brazilian government
	Year	Total Profits from Joint Venture (in BRL)	Gibson's share of profits(in million BRL)	Income Tax paid to Brazilian Govt @30% (in million BRL)	After tax profits distributed to Gibson (in million BRL)	Converted BRL into USD @0.27925 (in million)
	1	40 million	16	4.80	11.20	3.13
	2	60 million	24	2.40	21.60	6.03
	3	70 million	28	2.80	25.20	7.04
	4	90 million	36	3.60	32.40	9.05
	5	120 million	48	4.80	43.20	12.06
	Year	Cash Flows Associated with JV (in millions)	Discount Factor @10.11%	Discounted value
	0	$ (8.00)	1.00	-8.00
	1	3.13	0.908	2.84
	2	6.03	0.825	4.97
	3	7.04	0.749	5.27
	4	9.05	0.68	6.15
	5	12.06	0.618	7.45
	NPV			18.70
				SCENERIO 3: Based on withholding tax by the Brazilian government
	Year	Total Profits from Joint Venture (in BRL)	Gibson's share of profits(in million BRL)	Income Tax paid to Brazilian Govt @10% (in million BRL)	After tax profits distributed to Gibson (in million BRL)	Converted BRL into USD @0.27925 (in million)	Income tax paid in USD @7% (in million)	Net cash flow after all taxes (in USD million)
	1	40 million	16	1.60	14.40	4.02	0.28	ERROR:#REF!
	2	60 million	24	2.40	21.60	6.03	ERROR:#REF!	ERROR:#REF!
	3	70 million	28	2.80	25.20	7.04	ERROR:#REF!	ERROR:#REF!
	4	90 million	36	3.60	32.40	9.05	ERROR:#REF!	ERROR:#REF!
	5	120 million	48	4.80	43.20	12.06	ERROR:#REF!	ERROR:#REF!
	Year	Cash Flows Associated with JV (in millions)	Discount Factor @10.11%	Discounted value
	0	$ (8.00)	1.00	-8.00
	1	3.37	0.908	3.06
	2	5.05	0.825	4.17
	3	5.89	0.749	4.41
	4	7.57	0.680	5.15
	5	10.10	0.618	6.24
	NPV			15.03
3. Would you recommend that Gibson participate in the joint venture? Explain.
	0.2		17.58
	0.2		18.7
	0.6		15.03
NPV	16.274
4. What do you think would be the key underlying factor that would have the most influence on the profits earned in Brazil as a result of the joint venture?
5. Under what circumstances might Gibson shift to more equity financing when considering joint ventures like this? What is the minimum required return that
would still make this investment worthwhile?
6. When Gibson was assessing this proposed joint venture, some of the managers in the company recommended that it borrow the Brazilian currency rather
than using US dollars to obtain some of the necessary capital for the initial investment. They suggested that such a strategy could reduce Gibson’s exchange
rate risk. Do you agree? Explain.
7. Discuss the benefits of the joint venture from the perspective of Brasilia. What is the maximum amount of money Brasilia should invest?

WACC = Proportion of debt * pretax Cost of debt * (1- Tax rate) + proportion of equity * post tax cost of equity =70%*6%*(1-7%) + 30%*9% =6.61%

Required rate of return from Joint Venture in Brasilia = WACC + risk premium for international JV’s  =Between 6.61% + 2.00% =8.61% to 6.61% + 5.00% =11.61%   Depending on where the company puts Brazil within the international risk scenario, the required rate of return is between 8.61% to 11.61% . Assuming an average level of risk, we can take an average of the range and set the required rate of return to 10.11%

The major factor is the threat of increase in corporate tax as it results in maximum loss in NPV. Even with this threat; however, the JV will be a profitable option.

If the payoffs from the JV has a high variance, Gibson should seek more equity investment to protect against default in debt payment.   The minimum rate of return that would make this JV viable will depend upon the capital structure. If we add more debt, the required rate of return will decline. At the minimum required rate of return the expected NPV would become zero. However, here we have assumed that the cost of debt and equity would remain the same when we change the capital structure, which may not be true. If the cost of debt and equity increase as we increase the level of debt in the capital structure, it will not make any sense to change the capital structure.   At current capital structure, the minimum required rate of return is 10.11%.

Since JV’s investment and returns are in BRL, by borrowing in BRL, there is no currency risk associated with the interest and loan repayment. The exchange risk with regard to the loan payments will be reduced. However, Gibson still need to convert its profits into $USD to bring them into US so the risk related to the transfer of profit would still remain. The exchange risk will reduce but it will still be there.

The benefits of the joint venture to the Brasilia:   ==>60% profits for the first five years ==>Full profits after the first five years ==>Investment by Gibson will enable Brasilia access to low cost funds. The cost of funds to Gibson is probably less than that which Brasilia will put forth. ==>Acquisition of new coffee processing method   Maximum amount that Brasilia should invest will greatly depend on the cost of capital to Brasilia. Additionally, we do not know what the profits are/will be after year five. Therefore, the known data is insufficient to calculate this value.   Method:   Calculate the post tax cash flows to Brasilia (60% of profits for first five years and 100% thereafter, less tax in Brazil). Discount the cash flows with required rate of return and get the maximum amount which can be invested.

Echange rate was obtained from oanda.com 5/26/16 @ 11:15pm.

The probability distribution for the NPV is:       NPV Probability   17.58 million 0.20   18.70 million 0.20   15.03 million 0.60

The expected NPV for this JV = 0.20*17.58+0.20*318.70+0.60*15.03 = 16.274 million.    Since the expected NPV is positive, Gibson should participate in the joint venture (JV). With a discount rate of 10.11% and a span of 5 years, the projected cash flows are worth $25.5 million presently, which is greater than the initial $8,000,000.00 investment.The resulting positive NPV of the project is $16.274 million, which shows pursuing the above project to be sound.

http://www.oanda.com./ http://www.oanda.com/