Reference no: EM131307903
There are two second-hand car dealer. First, dealer A, which always sells high-quality cars that is carefully inspects, it costs deal A $8000 to buy each car that it sells. The second dealership, dealer B, always sells lower-quality cars. On average, it costs dealer B only $5000 for each car that it sells. If consumers knew the quality of the second-hand car that they are buying, they would gladly pay $10000 on average for dealer A, but only $7000 on average for dealer B. Without more information, consumers do not know the quality of each dealer's cars. In this case, consumers would figure that they have a 50% chance of ending up with high-quality car, and are thus willing to pay $8500 for a car. Therefore, dealer A has an idea: He will offer a bumper-to-bumper warranty for all cars he sells. He knows that a warranty lasting X years will cost $500X on average, and he also knows that if dealer B tries to offer the same warranty, it will cost dealer B $1000X on average.
a. Suppose dealer A offers a 1-year warranty on all cars it sells.
a1. What is dealer B's profit if it does not offer a 1-year warranty? What if it does offer a 1-year warranty?
a2. What is dealer A's profit if dealer B does not offer a 1-year warranty? What if it does offer a 1-year warranty?
a3. Will dealer B match dealer A 1-year warranty? Explain your answer. a4. It is good idea for dealer A to offer a 1-year warranty? Explain your answer.
b. What if dealer A offers a 2-years warranty? Will this generate a credible signal of quality? How about 3-years warranty?
c. If you were advising dealer A, how long a warranty would you advise him to offer? Explain why.
|
What is your marginal tax rate and average tax rate
: Your company generated $3.0 million in revenue for 2014 and incurred $2.35 million in expenses. What is your average tax rate? What is your marginal tax rate?
|
|
Compute the annual allowable depreciation
: Using the SL method, compute the annual allowable depreciation for a machine that costs $47,000 to purchase and $3,000 to install with a 9-year life and a $5,000 salvage value.
|
|
What is cost basis of new asset for depreciation purposes
: A new truck was purchased for $160,000 by trading in a similar truck that had a book value of $51,300. Assuming that the trade-in allowance is $45,000, what is the cost basis of the new asset for depreciation purposes?
|
|
Calculating need for dissability insurace using worksheet
: Calculating need for dissability insurace using the worksheet below and also discuss how you`de go about purchasing this coverage. Estimate current monthly take-home pay $. Estimate existing monthly benefits. Estimated monthly disability benefits nee..
|
|
Always sells high-quality cars that is carefully inspects
: There are two second-hand car dealer. First, dealer A, which always sells high-quality cars that is carefully inspects, it costs deal A $8000 to buy each car that it sells. What is dealer B's profit if it does not offer a 1-year warranty? What if it ..
|
|
NPV of this project given the abandonment option
: XYZ, Inc. is considering a 5 year, 12% WACC capital budgeting project under three scenarios. If conditions are excellent, the cash flows from this project are expected to be $4,000 per year; Calculate the expected NPV of this project given the abando..
|
|
Which method is perfered to be used for a localised company
: What are the strengths and weaknesses of each method: DCF, BYRP & CAPM when used in conjuction with WACC. In addtion, which method is perfered to be used for a localised company that needs to raise capital for expansion? Lets say a trucking company t..
|
|
Using the Units of Production Method
: You purchase a 3D printer for $75,000 that you expect to print 8,000 parts over its lifetime. You print 1,500 parts your first year. Assume no salvage value for the printer. What is your allowable depreciation for the first year using the Units of Pr..
|
|
Bonds have four years remaining to maturity
: The Heyman Company’s bonds have 4 years remaining to maturity. Interest is paid annually; the bonds have a $1,000 par value; and the coupon interest rate is 9 percent. What is the yield to maturity at a current market price of (1) $829 and (2) $1,104..
|