7
For cost estimation, simple regression differs from multiple regression in that simple regression uses only
One independent variable, while multiple regression uses more than one independent variable.
The use of derivatives to either hedge or speculate results in
Offsetting risk when hedging and increased risk when speculating.
A forward contract involves a commitment today to purchase a product
On a specific future date at a price determined today.
Multiple regression analysis involves the use of Dependent Variables Independent Variables
One More than one
You are currently holding a call option on a stock with an exercise price of $100. If the current stock price is $90, your net proceeds by exercising this option will be
$(10)
Jackson Co. has the following information for the first quarter of this year: Machine Cleaning Hours Expense January 2,100 $ 900 February 2,600 1,200 March 1,600 800 April 2,000 1,000 Using the high-low method, what is Jackson's variable cost of cleaning per machine hour?
$.40
In order to analyze sales as a function of advertising expenses, the sales manager of Smith Company developed a simple regression model. The model included the following equation, which was based on 32 monthly observations of sales and advertising expenses with a related coefficient of determination of .90. Sales = $10,000 + (2.5 × Advertising expenses) If Smith Company's advertising expenses in 1 month amounted to $1,000, the related point estimate of sales would be
$12,500
Mat Co. estimated its materials handling costs at two activity levels as follows: Kilos Handled Cost 80,000 $160,000 60,000 132,000 What is Mat's estimated cost for handling 75,000 kilos?
$153,000
t Pattern: Jackson Co. has the following information for the first quarter of this year: Machine Cleaning Hours Expense January 2,100 $ 900 February 2,600 1,200 March 1,600 800 April 2,000 1,000 Using the high-low method, what is Jackson's fixed cost?
$160
Day Mail Order Co. applied the high-low method of cost estimation to customer order data for the first 4 months of the current year. What is the estimated variable order-filling cost component per order? No. of Month Orders Cost January 1,200 $ 3,120 February 1,300 3,185 March 1,800 4,320 April 1,700 3,895 6,000 $14,520
$2.00
In preparing the annual profit plan for the coming year, Fine Company wants to determine the cost behavior pattern of the maintenance costs. Fine has decided to use linear regression by employing the equation y = a + bx for maintenance costs. The results of the regression analysis are given below. a 684.65 b 7.2884 Based upon the data derived from the regression analysis, 420 maintenance hours in a month would mean that Fine Co.'s maintenance costs (rounded to the nearest dollar) would be budgeted at
$3,746
How much must the stock be worth at expiration in order for a call holder to break even if the exercise price is $60 and the call premium was $3?
$63.00
Cook Co.'s total costs of operating five sales offices last year were $500,000, of which $70,000 represented fixed costs. Cook has determined that total costs are significantly influenced by the number of sales offices operated. Last year's costs and number of sales offices can be used as the bases for predicting annual costs. What would be the budgeted cost for the coming year if Cook were to operate seven sales offices?
$672,000
attern: Jackson Co. has the following information for the first quarter of this year: Machine Cleaning Hours Expense January 2,100 $ 900 February 2,600 1,200 March 1,600 800 April 2,000 1,000 Jackson's management expects machine hours for the month of May to be 1,400 hours. What is their expected total cost for the month of May using the high-low method?
$720
The regression analysis results for ABC Co. is shown as y = 90x + 45. The standard error (Sb) is 30 and coefficient of determination (r2) is 0.81. The budget calls for production of 100 units. What is ABC's estimate of total costs?
$9,045
In regression analysis, which of the following coefficients of correlation represents the strongest linear relationship between the independent and dependent variables?
-.89
The coefficient of correlation that indicates the weakest linear association between two variables is
-0.11
Using regression analysis, Fairfield Co. graphed the following relationship of its cheapest product line's sales with its customers' income levels: IMAGE If there is a strong statistical relationship between the sales and customers' income levels, which of the following numbers best represents the correlation coefficient for this relationship?
-0.93
What coefficient of correlation results from the following data? X Y 1 10 2 8 3 6 4 4 5 2
-1
A manufacturing company required 800 direct labor hours to produce the first batch of four units of a new motor. Management believes that a 90% learning curve will be experienced over four batches of production. How many direct labor hours will be required to manufacture the next 12 units?
1,792
If the return on the market portfolio is 10% and the risk-free rate is 5%, what is the effect on a company's required rate of return on its stock of an increase in the beta coefficient from 1.2 to 1.5?
1.5% increase.
Stock X has a beta of 1.6 and a required rate of return of 14%. Consistent with the capital asset pricing model (CAPM), what is the expected return on the market if the risk-free rate is equal to 6%?
11%
Using the capital asset pricing model (CAPM), the required rate of return for a firm with a beta of 1.5 when the market return is 10% and the risk-free rate is 8% is
11%
An analyst covering Guilderland Mining Co. common stock estimates the following information for next year: Expected return on the market portfolio 12% Expected return on Treasury securities 5% Expected beta of Guilderland 2.2 Using the CAPM, the analyst's estimate of next year's risk premium for Guilderland's stock is closest to
15.4%
Using the capital asset pricing model (CAPM), the required rate of return for a firm with a beta of 1.25 when the market return is 14% and the risk-free rate is 6% is
16.0%
The common stock of Wisconsin's Finest Cheese has a beta coefficient of 1.7. The following information about overall market conditions is available: Expected return on U.S. Treasury bonds 6% Expected return on the market portfolio 8.5% Using the capital asset pricing model (CAPM), what is the risk premium on the market?
2.5%
The results of regressing y against x are as follows: Coefficient Intercept 5.23 Slope 1.54 When the value of x is 10, the estimated value of y is
20.63
A particular manufacturing job is subject to an estimated 80% learning curve. The first unit required 50 labor hours to complete. What is the cumulative average time per unit after eight units are completed?
25.6 hours.
Fact Pattern: Aerosub, Inc., has developed a new product for spacecraft that includes the production of a complex part. The manufacture of this part requires a high degree of technical skill. Management believes there is a good opportunity for its technical force to learn and improve as they become accustomed to the production process. The production of the first unit requires 10,000 direct labor hours. Management projects an 80% learning curve and wants to produce a total of eight units. After completing the first unit, the estimated total direct labor hours Aerosub will require to produce the seven additional units will be
30,960 hours
A particular manufacturing job is subject to an estimated 80% learning curve. The first unit required 50 labor hours to complete. If the learning curve is based on a cumulative average time per unit assumption, what is the time required to complete the second unit?
30.0 hours
A learning curve of 80% assumes that direct labor costs are reduced by 20% for each doubling of output. What is the incremental cost of the 16th unit produced as an approximate percentage of the 1st unit produced? All units within a batch are considered to have the average completion time for that batch.
31%
It is estimated that a particular manufacturing job is subject to an 80% learning curve. The first unit required 50 labor hours to complete. What is the cumulative average time per unit after completing four units?
32.0 hours.
Stock M has a beta of 1.2 and a required rate of return of 10%. Consistent with the capital asset pricing model (CAPM), what is the risk-free rate of return if the market rate of return is equal to 9%?
4%
Fact Pattern: Aerosub, Inc., has developed a new product for spacecraft that includes the production of a complex part. The manufacture of this part requires a high degree of technical skill. Management believes there is a good opportunity for its technical force to learn and improve as they become accustomed to the production process. The production of the first unit requires 10,000 direct labor hours. Management projects an 80% learning curve and wants to produce a total of eight units.
40,960 hours.
A particular manufacturing job is subject to an estimated 90% learning curve. The first unit required 50 labor hours to complete. What is the cumulative average time per unit after four units are completed?
40.5 hours.
Fact Pattern: Aerosub, Inc., has developed a new product for spacecraft that includes the production of a complex part. The manufacture of this part requires a high degree of technical skill. Management believes there is a good opportunity for its technical force to learn and improve as they become accustomed to the production process. The production of the first unit requires 10,000 direct labor hours. Management projects an 80% learning curve and wants to produce a total of eight units. Upon completion of the eighth unit, Aerosub's cumulative average direct labor hours required per unit of the product will be
5,120 hours.
DQZ Telecom is considering a project for the coming year that will cost $50 million. DQZ plans to use the following combination of debt and equity to finance the investment. Issue $15 million of 20-year bonds at a price of $101, with a coupon rate of 8%, and flotation costs of 2% of par. Use $35 million of funds generated from earnings. The equity market is expected to earn 12%. U.S. Treasury bonds are currently yielding 5%. The beta coefficient for DQZ is estimated to be .60. DQZ is subject to an effective corporate income tax rate of 40%. Compute DQZ's expected rate of return, under the capital asset pricing model (CAPM).
9.20%
Fact Pattern: Alpha Company produces several different products and is making plans for the introduction of a new product. Overhead costs have not been established for the new product, but monthly data on total production and overhead cost for the past 24 months have been analyzed using simple linear regression. The results below were derived from the simple regression and provide the basis for overhead cost estimates for the new product: Dependent variable (y) -- Factory overhead costs Independent variable (x) -- Direct labor hours Computed values: y intercept $40,000 Coefficient of independent variable $2.10 Coefficient of correlation 0.953 Standard error of estimate $2,840 Standard error of regression coefficient 0.42 Mean value of independent variable $18,000 Coefficient of determination 0.908 What percentage of the variation in Alpha's overhead costs is explained by the independent variable?
90.8%
Each of the following financial instruments is a derivative except
A fixed interest, 5-year note payable.
If risk is purposely undertaken in the foreign currency market, the investor in foreign currency then becomes
A spectacular
The betas and expected returns for three investments being considered by Sky, Inc., are given below. Expected Investment Beta Return A 1.4 12% B 0.8 11% C 1.5 13% The return on the market is 11% and the risk-free rate is 6%. If the capital asset pricing model (CAPM) is used for calculating the required rate of return, which investments should the management of Sky make?
B only.
A measure that describes the risk of an investment project relative to other investments in general is the
Beta coefficient.
A firm must pay an invoice denominated in a foreign currency in 30 days. Which one of the following is an appropriate strategy for mitigating the associated exchange rate risk?
Buy a call option
If risk is purposely undertaken in the foreign currency market, the investor in foreign currency then becomes
Buy foreign currency forward today.
An American importer of English clothing has contracted to pay an amount fixed in British pounds 3 months from now. If the importer worries that the U.S. dollar may depreciate sharply against the British pound in the interim, it would be well advised to
Buy pounds in the forward exchange market.
An American importer expects to pay a British supplier 500,000 British pounds in 3 months. Which of the following hedges is best for the importer to fix the price in dollars?
Buying British pound call options.
When calculating a company's cost of common stock, an analyst evaluates the following four components: risk-free rate, stock's beta coefficient, rate of return on the market portfolio, and required rate of return on the company's stock. Which of the following measurement models is being used?
Capital asset pricing.
If a firm is considering the use of learning curve analysis in the determination of labor cost standards for a new product, it should be advised that this technique ordinarily is most relevant to situations in which the production time per unit decreases as additional units are produced and the unit cost
Decreases.
A massive inflation across the entire economy of one of a firm's trading partners has benefited the firm greatly by making its fixed amount of payables denominated in that country's currency much cheaper. This exemplifies exchange rate risk stemming from
Economic exposure
Platinum Co. has a receivable due in 30 days for 30,000 euros. The treasurer is concerned that the value of the euro relative to the dollar will drop before the payment is received. What should Platinum do to reduce this risk?
Enter into a forward contract to sell 30,000 euros in 30 days.
A regression equation
Estimates the dependent variable(s).
An analysis of a company's planned equity financing using the Capital Asset Pricing Model (or Security Market Line) incorporates only the
Expected market earnings, the risk-free rate, and the beta coefficient.
If Dexter Industries has a beta value of 1.0, then its
Expected return should approximate the overall market.
Which one of the following is not a determinant in valuing a call option?
Forward contract price.
Which one of the tools listed below for addressing transaction exposure to currency exchange rate risk is available only to large entities with established banking relationships?
Forward contracts
In a regression analysis, the coefficient of determination measures
Goodness of fit.
Multiple regression differs from simple regression in that it
Has more independent variables.
An importing partnership has experienced a dramatic surge in its exporting business and is looking for ways to minimize its risks from foreign currency fluctuations. The partnership's imports and exports to European Union countries are at similar levels. Which of the following methods most effectively minimizes risk?
Hold payables and receivables due in the same currency and amount.
Given demand in excess of capacity, no spoilage or waste, and full use of a constant number of assembly hours, the number of components needed for an assembly operation with an 80% learning curve should Increase for successive periods. Decrease per unit of output.
I only
Currency A's spot rate for currency B is 2.5 (i.e., A = 2.5B). Currency C's spot rate for currency A is 2. Which of the following is a correct statement?
Imports of country B's goods are more affordable than imports of country A's goods.
The letter x in the standard regression equation is best described as a(n)
Independent variable.
Correlation is a term frequently used in conjunction with regression analysis and is measured by the value of the coefficient of correlation, r. The best explanation of the value r is that it
Is a measure of the relative relationship between two variables.
If a call option is "out-of-the-money,"
It is not worth exercising because the value of the underlying asset is less than the exercise price.
A currency trader is willing to give 100 Japanese yen today in exchange for one U.S. dollar. After 30 days, 110 Japanese yen are required to buy a dollar. Which of the following is a correct statement?
Japan is expected to lose purchasing power in 30 days.
Stock J has a beta of 1.2 and an expected return of 15.6%, and stock K has a beta of 0.8 and an expected return of 12.4%. What is the expected return on the market and the risk-free rate of return, consistent with the capital asset pricing model?
Market return is 14%; risk-free is 6%.
An Indian company is owed €5 million from a German company payable in 30 days. To mitigate the risk of the euro depreciating against the rupee over the next month, the Indian company has taken out a 30-day loan from an Italian bank and converted it to rupees. The payoff amount of the loan on the due date is €5 million. The hedging tool being used by the Indian company is known as a
Money market hedge
In determining cost behavior in business, the cost function is often expressed as y = a + bx. Which one of the following cost estimation methods should not be used in estimating fixed and variable costs for the equation?
Multiple regression.
Which of the following options is(are) worth exercising? Exercise Price of Price Underlying Asset Put Option A $30 $27 Call Option B $29 $26 Put Option C $25 $25 Call Option D $20 $24
Options A and D.
The coefficient of determination, r squared, in a multiple regression equation is the
Percentage of variation in the dependent variable explained by the variation in the independent variables.
An Australian firm is consulting for a Chinese company. The Chinese company must pay for the project's final report in 30 days using Australian dollars. The most likely hedge for the Chinese company to enter into in the 30-day forward market in response to the transaction exposure inherent in this situation is
Purchase dollars
A company has recently purchased some stock of a competitor as part of a long-term plan to acquire the competitor. However, it is somewhat concerned that the market price of this stock could decrease over the short run. The company could hedge against the possible decline in the stock's market price by
Purchasing a put option on that stock
In using regression analysis, which measure indicates the extent to which a change in the independent variable explains a change in the dependent variable?
R-squared.
If the coefficient of correlation between two variables is zero, how might a scatter diagram of these variables appear?
Random points.
A company with significant sales in a particular foreign country has recently been subjected to extreme variations in the exchange rate with that country's currency. These variations are expected to continue. To mitigate the resulting economic exposure, a likely strategy for the company to implement would be to
Reduce sales to that country
The difference between the required rate of return on a given risky investment and that on a riskless investment with the same expected return is the
Risk premium.
A company headquartered in Vancouver, British Columbia, is building a pipeline for a company in Russia. The invoice amount is due in 90 days and is denominated at 28 million rubles. The Canadian dollar is trading for 28 rubles currently and 29 rubles 90 days forward. Which of the following strategies will the Canadian firm most likely pursue in the 90-day forward market to hedge the transaction exposure inherent in this situation?
Sell 28,000,000 rubles
A put is an option that gives its owner the right to do which of the following?
Sell a specific security at fixed conditions of price and time.
A manufacturer located in the Philippines has sold computer components to a Japanese electronics firm. The invoice amount is due in 60 days, and the Japanese firm has sufficient economic clout to require that the invoice be denominated in yen. Which of the following strategies will the Filipino firm most likely pursue to hedge the transaction exposure inherent in this situation?
Sell yen in the 60-day forward market
In the standard regression equation y = a + bx, the letter b is best described as a(n)
Slope of the regression line.
When the U.S. dollar is expected to rise in value against foreign currencies, a U.S. company with foreign currency denominated receivables and payables should
Speed up collections and slow down payments.
A company has several long-term, floating-rate bonds outstanding. The company's cash flows have stabilized, and the company is considering hedging interest rate risk. Which of the following derivative instruments is recommended for this purpose?
Swap agreement.
A market analyst has estimated the equity beta of Modern Homes, Inc., to be 1.4. This beta implies that the company's
Systematic risk is higher than that of the market portfolio.
A company based in West Palm Beach, Florida, is building a resort in Jamaica. The Jamaican property owners must make a progress payment of US $1 million in 30 days. The spot rate for the U.S. dollar is 88 Jamaican dollars (J $), and the 30-day forward rate is J $90. The most likely hedge in response to the transaction exposure inherent in this situation is
The property owners will purchase US $1,000,000 in the 30-day forward market
A distinguishing feature of a futures contract is that
The price is marked to market each day.
If on the expiration day a put option is "in-the-money,"
The price of the underlying asset is lower than the exercise price.
According to the capital asset pricing model (CAPM), which of the following statements is true regarding the required rate of return for a security with a beta of 1?
The required rate of return is equal to the market return.
A management accountant performs a linear regression of maintenance cost vs. production using a computer spreadsheet. The regression output shows an "intercept" value of $322,897. How should the accountant interpret this information?
The value of y is $322,897 when x equals zero.
What does Beta measure in the capital asset pricing model?
The volatility of a stock relative to the market.
A U.S. manufacturer sold a piece of equipment to an engineering firm in New Zealand. The New Zealand firm must pay the invoice in U.S. dollars in 30 days and would like to mitigate the risk that the New Zealand dollar will depreciate against the U.S. dollar in the meantime. The type of exchange rate risk contemplated by the New Zealand firm is known as
Transaction exposure
A Chinese conglomerate owns a construction subsidiary that is building a port in Mozambique. The firm pays its workers in the Mozambican metical but keeps its books for the project in the South African rand. At the end of the fiscal year, the conglomerate must report consolidated financial statements denominated in the yuan. The exchange rate risk encountered by the conglomerate in the currency conversions leading up to its consolidated financial statements is known as
Translation exposure
To determine the best cost driver of warranty costs relating to glass breakage during shipments, Wymer Co. used simple linear regression analysis to study the relationship between warranty costs and each of the following variables: type of packaging, quantity shipped, type of carrier, and distance shipped. The analysis yielded the following statistics: Independent Coefficient of Standard Error Variable Determination of Regression Type of packaging 0.60 1,524 Quantity shipped 0.48 1,875 Type of carrier 0.45 2,149 Distance shipped 0.20 4,876 Based on these analyses, the best driver of warranty costs for glass breakage is
Type of packaging.
Learning curves are most often used to predict
Unit direct labor costs.
Box Co. uses regression analysis to estimate the functional relationship between an independent variable (cost driver) and overhead cost. Assume that the following equation is being used: y = a + bx What is the symbol for the independent variable?
x.
Sago Co. uses regression analysis to develop a model for predicting overhead costs. Two different cost drivers (machine hours and direct materials weight) are under consideration as the independent variable. Relevant data were run on a computer using one of the standard regression programs, with the following results: Machine hours Coefficient y intercept 2,500 b 5.0 r² = .70 Direct materials weight y intercept 4,600 b 2.6 r² = .50 Which regression equation should be used?
y = 2,500 + 5.0x
Pattern: In preparing the annual profit plan for the coming year, Wilkens Company wants to determine the cost behavior pattern of the maintenance costs. Wilkens has decided to use linear regression by employing the equation y = a + bx for maintenance costs. The prior year's data regarding maintenance hours and costs, and the results of the regression analysis, are given below and in the opposite column. Average cost per hour $9.00 a 684.65 b 7.2884 Standard error of a 49.515 Standard error of b .12126 Standard error of the estimate 34.469 r2 .99724 Hours of Maintenance Activity Costs January 480 $ 4,200 February 320 3,000 March 400 3,600 April 300 2,820 May 500 4,350 June 310 2,960 July 320 3,030 August 520 4,470 September 490 4,260 October 470 4,050 November 350 3,300 December 340 3,160 Sum 4,800 $43,200 Average 400 $ 3,600 If Wilkens Company uses the high-low method of analysis, the equation for the relationship between hours of activity and maintenance cost would be
y = 570 + 7.5x