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Question one
The offer refers to producer-producer competition because the airline is in a market that does not traditionally such offers. Therefore, coming up with the idea is aimed at giving Southwest Airlines an edge over its rivals.
Question two
Assuming that the venture has zero initial costs, the maximum amount that should be paid at the beginning of the investment period is $998,177.51.
Question four
Value of the firm is $6,666,667 before and after paying out dividends. This is based on Modigliani and Miller’s assumption that dividend decisions are irrelevant to the firm’s value. Therefore, the value of the firm before and after paying dividends remains the same.
Question five
The preferential share paying out $125 at a required rate of return of return of 5% has a present value of$2,500.
Question six
Question seven
a. One should pursue the MBA if the net increases in cash flows exceed the net outflowsin net present value terms. Opportunity cost is that cost of not undertaking the program.
b. There would be an increase in the demand for MBA degrees because of the increase in the opportunitycost of lacking such a degree.
Question eight
a. Her accounting profits are $170,000
b. Her economic profits are $60,000
Question ten
a. Her accounting profits are $240,000 or $80,000 per year.
b. Her economic profits are$30,000 per year or$81,697.44 in present value terms
Question eleven
Question twelve
The model with energy saving of $45 would lead to net savings of $50. It should be bought based on the assumption that buying the alternative leads to increased energy costs of $750.
Question thirteen
The suggested plan should be adopted based on the premise that it motivates employees to align their objectives with those of the company. This is expected to lead to higher profitability even though the suggested plan offers higher pay per day when compared to the old pay plan.
Question fourteen
a. Accounting costs are $145,000. Implicit cost is $100,000. Opportunity cost is $100,000. Accounting profit is $80,000. Economic loss is $120,000.
b. Jafaar already earns positive accounting profits. However, he would need an additional $75,000 in order to turn a positive economic profit.
Question fifteen
The company should undertake the project as it will lead to positive net cash flows of $107,364.15. The $200 million incurred up to this point is considered to be a sunk cost.
Question twenty
The acquisition is overpriced as VMWare has a present value of $564.7 million against the $625 million that was paid. If growth increases to 4%, the acquisition is undervalued as VMWare will have a present value of $792 million compared to the $625 million paid.
Question twenty two
The strategy is not sustainable as it would lead to intense rivalry between producers and driven by consumers. The consumer-producer rivalry is likely to drive prices down in an unsustainable fashion.
Question twenty three
The pay plan should be altered to include the amount of profit made per unit while retaining some aspects of a fixed salary. Attaching pay to sales only leads to the sales manager compromising profits for sales.
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