4. You decide to sell short 100 shares of Charlotte Horse Farms when it is selling at its yearly high of $56. Your broker tells you that your margin requirement is 45 percent and that the commission on the purchase is $155. While you are short the stock, Charlotte pays a $2.50 per share dividend. At the end of one year, you buy 100 shares of Charlotte at $45 to close out your position and are charged a commission of $145 and 8 percent interest on the money borrowed. What is your rate of return on the investment?

5. You own 200 shares of Shamrock Enterprises that you bought at $25 a share. The stock is now selling for $45 a share. a. You put in a stop loss order at $40. Discuss your reasoning for this action. b. If the stock eventually declines in price to $30 a share, what would be your rate of return with and without the stop loss order?

6. Two years ago, you bought 300 shares of Kayleigh Milk Co. for $30 a share with a margin of 60 percent. Currently, the Kayleigh stock is selling for $45 a share. Assuming no dividends and ignoring commissions, compute (a) the annualized rate of return on this investment if you had paid cash, and (b) your rate of return with the margin purchase.

7. The stock of the Madison Travel Co. is selling for $28 a share. You put in a limit buy order at $24 for one month. During the month the stock price declines to $20, then jumps to $36. Ignoring commissions, what would have been your rate of return on this investment? What would be your rate of return if you had put in a market order? What if your limit order was at $18?

Problem 1:
Ray’s Satellite Emporium wishes to determine the best order size for its best-selling satellite dish (model TS111). Ray has estimated the annual demand for this model at 1,000 units.
His cost to carry one unit is $100 per year per unit, and he has estimated that each order cost $25 to place.
a) Using the EOQ model, how many should Ray order each time?
Problem 2
Problem 2:
Gentle Ben’s Bar and Restaurant uses 5,000 quart bottles of an imported wine each year. The effervescent wine cost $3 per bottle and is served only in whole bottles because it loses its bubbles quickly.
Ben figures that it cost $10 each time an order is placed and holding costs are 20% of the purchase price. It takes three weeks for an order to arrive. Weekly demand is 100 bottles (closed two weeks per year)
with a standard deviation of 30 bottles. Ben would like to use an inventory system that minimizes inventory cost and will provide 95% service probability. (Z≈1.65)
a) What is the economic quantity for Ben to order?
b) At what inventory level should he place an order?
Problem 3
Problem 3:
Retailers Warehouse (RW) is an independent supplier of household items to department stores. RW attempts to stock enough itmes for a 98% service probability.
A stainless steel knife set is one item it stocks. Demand (2,400 sets per year) is relatively stable over the entire year. Whenever new stock is ordered, a buyer must assure that numbers are correct for stock on hand
and then phone in a new order. The total cost involved to place an order is about $5. RW figures that holding inventory in stock and paying for interest on borrowed capital, insurance, and so on, add up to about $4
holding cost per unit per year.
Analysis of the past data shows that the standard deviation of demand from retailers is about four units per day for a 365-day year. Lead time to get the order is seven days.
a) What is the economic order quantity?
b) What is the reorder point?
Problem 4
Problem 4:
The following table gives the operation times and due dates for five jobs which are to be processed on a machine. Assign the jobs according to the shortest operation time and calculate the mean flow time.
Job Processing Time Due Date (Days Hence)
101 6 days 5
102 7 days 3
103 4 days 4
104 9 days 7
105 5 days 2
Problem 5
Problem 5:
The following table contains information regarding jobs that are to be scheduled through one machine:
Job Processing Time (Days) Due Date
A 4 20
B 12 30
C 2 15
D 11 16
E 10 18
F 3 5
G 6 9
a) What is the first-come, first-served (FCFS) schedule?
b) What is the shortest operating time (SOT) schedule?
c) What is the slack time remaining (STR) schedule?
d) What is the earliest due date (EDD) schedule?
e) What are the mean flow times for each of the schedules above?
Problem 6
Problem 6:
Jobs A, B, C, D, and E must go through Processes I and II in that sequence (Process I first, then Process II). Use Johnson’s rule to determine the optimal sequence which to schedule the jobs to minimize the total required time.
Job Required Processing Time on I Required Processing Time on II
A 4 5
B 16 14
C 8 7
D 12 11
E 3 9
Extra Credit: Use Johnson’s rule to determine the optimal sequence in which to schedule the jobs to minimize the total required time.

P7–2 Preferred dividends Slater Lamp Manufacturing has an outstanding issue of preferred

stock with an $80 par value and an 11% annual dividend.

a. What is the annual dollar dividend? If it is paid quarterly, how much will be paid

each quarter?

b. If the preferred stock is noncumulative and the board of directors has passed the

preferred dividend for the last three quarters, how much must be paid to preferred

stockholders in the current quarter before dividends are paid to common

stockholders?

c. If the preferred stock is cumulative and the board of directors has passed the preferred

dividend for the last three quarters, how much must be paid to preferred

stockholders in the current quarter before dividends are paid to common stockholders?

P7–8 Common stock value: Constant growth Use the constant-growth model (Gordon

growth model) to find the value of each firm shown in the following table.

Firm Dividend expected next year Dividend growth rate Required return

A $1.20 8% 13%

B 4.00 5 15

C 0.65 10 14

D 6.00 8 9

E 2.25 8 20

P7–10 Common stock value: Constant growth The common stock of Denis and Denis

Research, Inc., trades for $60 per share. Investors expect the company to pay a

$3.90 dividend next year, and they expect that dividend to grow at a constant rate

forever. If investors require a 10% return on this stock, what is the dividend growth

rate that they are anticipating?

P7–14 Common stock value: Variable growth Lawrence Industries’ most recent annual

dividend was $1.80 per share (D0 = $1.80), and the firm’s required return is 11%.

Find the market value of Lawrence’s shares when:

a. Dividends are expected to grow at 8% annually for 3 years, followed by a 5%

constant annual growth rate in years 4 to infinity.

b. Dividends are expected to grow at 8% annually for 3 years, followed by a 0%

constant annual growth rate in years 4 to infinity.

c. Dividends are expected to grow at 8% annually for 3 years, followed by a 10%

constant annual growth rate in years 4 to infinity.

P7–17 Using the free cash flow valuation model to price an IPO Assume that you have an

opportunity to buy the stock of CoolTech, Inc., an IPO being offered for $12.50 per

share. Although you are very much interested in owning the company, you are concerned

about whether it is fairly priced. To determine the value of the shares, you

have decided to apply the free cash flow valuation model to the firm’s financial data

that you’ve developed from a variety of data sources. The key values you have compiled

are summarized in the following table.

Free cash flow

Year (t) FCFt

2016 $ 700,000

2017 800,000

2018 950,000

2019 1,100,000

Other data

Growth rate of FCF, beyond 2019 to infinity = 2%

Weighted average cost of capital = 8%

Market value of all debt = $2,700,000

Market value of preferred stock = $1,000,000

Number of shares of common stock outstanding = 1,100,000

a. Use the free cash flow valuation model to estimate CoolTech’s common stock

value per share.

b. Judging on the basis of your finding in part a and the stock’s offering price,

should you buy the stock?

c. On further analysis, you find that the growth rate in FCF beyond 2019 will be

3% rather than 2%. What effect would this finding have on your responses in

parts a and b?

P7–19 Valuation with price/earnings multiples For each of the firms shown in the following

table, use the data given to estimate its common stock value employing price/

earnings (P/E) multiples.

Firm Expected EPS Price/earnings multiple

A $3.00 6.2

B 4.50 10.0

C 1.80 12.6

D 2.40 8.9

E 5.10 15.0