What c should the company choose if it wishes to eliminate

Assignment Help Financial Management

Reference no: EM131913123

Hedging and long-Term Supply Contracts.

Consider a breakfast cereal company that will make and sell $10.0(H).000 of cereal next year.

It's only cost is that it must buy 200,000 bushels of wheat to make that cereal.

The market price per bushel of wheat next year. P. is unknown; the company faces the risk that wheat prices will be high. (Wheat cannot be stored, so you can't buy the wheat this year and store it to use next year.)

Buying in advance. Assume that the company has the ability to precommit this year to buy bushels of wheat next year at a price of $100. Let C represent the number of bushels the company precommits to buy in advance; the company needs 200,000 bushels in total, so any of the bushels not bought in advance must be bought at price of wheat next year, P.

i. Please write down the company's profit next year as a function of the number of bushels the company precommits to buy in advance (C) and the price of wheat next year (P). (profit = $4,000,000 +200 x P - C x $50 is an example of a wrong answer written in the right way)

ii. What C should the company choose if it wishes to eliminate all wheat price risk?

Reference no: EM131913123

Questions Cloud

Computing weighted average cost of capital : The weighted average cost of capital is 9 percent. The current market value of the equity is $22 million and the corporate tax rate is 35 percent.

How much money would have been in the account in 1992 : In 1492, Queen Isabella sponsored Christopher Columbus journey by giving him $10,000. If she had placed this money in a bank account.

What is meant by the terms net realizable value : What is meant by the terms net realizable value? How do accountants determine the net realizable value of receivables? Why is this amount important?

Cost of capital for an otherwise identical all-equity firm : What is the cost of capital for an otherwise identical all-equity firm?

What c should the company choose if it wishes to eliminate : What C should the company choose if it wishes to eliminate all wheat price risk?

What is recommendation assuming variable manufacturing costs : What is your recommendation assuming all variable manufacturing costs will be eliminated and fixed manufacturing costs for the company are fixed?

What can ratio analysis contribute to financial planning : What can ratio analysis contribute to financial planning and analysis? What are the determinants of the dynamic adjustment process

What is the sales variance shown in a flexible budget report : If actual sales revenue is $550,000 based on sales of 5,000 units, what is the sales variance shown in a flexible budget performance report?

What lot size should be produced : A producer of electronic parts wants to take account of both production rate and demand rate in deciding on its lot sizes. A particular $50 part.

User Account

All Pages