Hobbiton Farm grows corn, which it sells for $4per bushel. Variable costs are$1 per bushel; fixed...
Hobbiton Farm grows corn, which it sells for $4per bushel. Variable costs are$1 per bushel; fixed costs are $4.8 million. All costs and revenues are in cash. The only asset on Hobbiton’s balance sheet is land, which has both a book value and market value of $15 million. Hobbiton has no debt and a cost of equity capital of 12%. This represents a 4% risk-free interest rate plus an 8% premium that investors expect in exchange for bearing the risk of the investment. All earnings are distributed to the owners in the form of dividends. There are no income taxes.
Part I:
a. What is Hobbiton’s break-even point?
b. Suppose Hobbiton’s produces and sells 2.5 million bushels of corn. Find Hobbiton’s accounting income, return on equity (ROE), and residual income.
Is Hobbiton’s doing better, worse, or about the same as expected?
Part II:
Hobbiton is considering buying a wheat field. The land would cost $5 million and generate annual cash flow and accounting income of $700,000.
a. Given Hobbiton still produces and sells 2.5 million bushels of corn on its existing farm, what happens to Hobbiton’s ROE and residual income if it purchases the wheat field?
b. Is the investment a good idea? Why or why not?
Homework Answers
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Hobbiton Farm grows corn, which it sells for $4per bushel.
Variable costs are$1 per bushel; fixed...
1. Suppose that corn currently costs $4 per bushel and that wheat currently costs $3 per...
1. Suppose that corn currently costs $4 per bushel and that wheat currently costs $3 per bushel. Also assume that the price elasticity of corn is 0.10, while the price elasticity of wheat is 0.15 Both have an income elasticity of 0.10. If the price of corn fell by 25 percent to $3 per bushel, by what percentage would the quantity demanded of corn increase? What if the price of wheat fell by 33 percent to $2 per bushel? a....
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Carson Electronics is a company based in California. It produces
electronic equipment and components and sells them within USA and
other countries. It considers BGT Electronics, also located in
California, as the industry leader.
The income statement and balance sheet of Carson
Electronics and BGT Electronics are shown in
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a new equipment that would reduce electricity
consumption by 40%. It has already
conducted a market research study at a cost of $3...
1. Suppose that corn currently costs $4 per bushel and that wheat currently costs $3 per bushel. Also assume that the price elasticity of corn is 0.10, while the price elasticity of wheat is 0.15 Both have an income elasticity of 0.10. If the price of corn fell by 25 percent to $3 per bushel, by what percentage would the quantity demanded of corn increase? What if the price of wheat fell by 33 percent to $2 per bushel? a....
A firm uses corn as an input into their production of ethanol. You require 1 bushel of corn to produce one gallon of ethanol. Each gallon of ethanol sells for $4. Fixed costs are $12, and you can produce and sell 10 gallons of ethanol this year. Corporate taxes on profits follow a progressive pattern, and are as follows: Tax Bracket First $4 of pre-tax profit Next $6 of pre-tax profit Next $8 of pre-tax profit Pre-tax profit greater than...
Please answer all three. Thank you.
lowa Corn Cooperative Corp. ("ICCC") grows and distributes corn to food manufacturers. ICCC has some bonds outstanding with 13 years to maturity, are trading at $1,043.25 per bond with a $1,000 face value, and the company has 350,000 of these bonds outstanding. The bonds pay interest annually based on an 7 25% coupon interest rate ICCC is planning to issue $30 million of new preferred stock, which will have a par value of $150.00...
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Stephen, MN heveUSDOT 0 Betsy Jensen stands near one of the farm trucks parked at the family farm near Stephen, Minn., on Monday. Dan Gunderson | MPR News Now that spring has finally arrived in Minnesota, the Jensen family is scrambling to get crops planted on their northern Red River Valley farm. But the usual optimism of a spring planting season is tempered this year by worries about the ongoing trade dispute between the United States and China. China has...
Determine three or four critical success factors for each of the four areas within the balanced scorecard -47 Strategic Poskloning Fowler's Farm is a 1.000-acre dairy and tobacco farm located in southern Virginia, Jack Fowler, the owner, has been farming since 1982. He initially purchased 235 acres and has made the following purchases since then: 300 acres in 1985, 150 acres in 1988, dairy equipment and buildings worth $350,000 in 1988, and 315 acres in 1998. The cost of farmland...
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ROE
Carson Electronics is a company based in California. It produces
electronic equipment and components and sells them within USA and
other countries. It considers BGT Electronics, also located in
California, as the industry leader.
The income statement and balance sheet of Carson
Electronics and BGT Electronics are shown in
Exhibit 1. Carson is planning to introduce
a new equipment that would reduce electricity
consumption by 40%. It has already
conducted a market research study at a cost of $3...
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