Marketing Problems and answers
1.) Suppose that in 2010, Global launches an aggressive marketing campaign that boosts sales by 15%. However, their operating margin falls from 5.57% to 4.50%. Suppose that they have no other income, interest expenses are unchanged, and taxes are the same percentage of pretax income as in 2009.
- What is Global’s EBIT in 2010?
Ans: Let us assume the Net Sales in 2009 to be Y
Operating Margin = Operating Income / Net sales.
Operating Income = Operating Margin X Net Sales
Operating margin is 4.5%
Net sales = Y(1+.15) = 1.15Y
Operating Income = .45 x 1.15Y
This is the Earnings before Interest and Tax (EBIT)
- What is Global’s income in 2010?
Ans: Global’s income will be EBIT – ( Interest and Tax )
= (0.45X1.15Y) – Interest and Tax
- If Global P/E Ratio and number of shares outstanding remain unchanged, what is Global’s share price in 2010?
- PE ratio = Market value per share / Earning per share
Market value per share = PE Ratio X Earnings per share.
2.) Suppose a firm’s tax rate is 35%
- What effect would a $10 million operating expense have on this year’s earnings? What effect would it have on next year’s earnings?
Ans: When the operating expenses is $10 million, the operation profit will reduce by this amount and the proportionately the tax component will reduced and the net earning will be net off of this tax amount.
- What effect would a $10 million capital expense have on this year’s earnings if the capital is depreciated at a rate of $2 million per year for five years? What effect would it have on next year’s earnings?
Ans: Depreciation is a non-cash expense, it increases free cash flow while decreasing reported earnings, and proportionately the earnings will reduce by $ 2 million. This will have the same impact on all years for the next 5 years.
3.) Suppose the risk-free interest rate is 4%.
- Having a $200 today is equivalent to having what amount in one year?
Ans: 200 *(1+ 4/100) = 208 This is the value we will have after one year.
- Having $200 in one year is equivalent to having what amount today?
Ans: 200 *(96/100) = 192
- Which would you prefer, $200 today or $200 in one year? Does your answer depend on when you need the money? Why or Why not?
Ans : The Answer will depend when one needs the money. Here the opportunity cost will have to taken into consideration to decide what one loses / gains and depending on this one can decide.
4.) Your firm has a risk-free investment opportunity where is can invest $160,000 today and receive $170,000 in one year. For what level of interest rates is this project attractive?
Ans: The interest earned = $ 10,000
The interest rate = 10,000/160000 X 100 = 6.25 %
5.) Suppose Bank One offers a risk-free interest rate of 5.5% on both savings and loans, and Bank Enn offers a risk-free interest rate of 6% on both savings and loans.
- What arbitrage opportunity is available?
Ans: Borrow from bank one and deposit in bank Enn as you will earn 6% from bank Enn for the deposit and you can pay only 5.5 % interest for the loan from bank one, you will arbitrage 0.5%
- Which bank would experience a surge in the demand for loans? Which bank would receive a surge in deposits?
Ans: Bank one for loans and Bank Enn for deposits
- What would you expect to happen to the interest rates the two banks are offering?
Ans: Both the banks will match each others offering to avoid this arbitrage.