Scholes Systems supplies a particular type of office chair to large retailers. Scholes is concerned about the possible effect of inflation on its operations. Presently, the company sells 80,000 units for $60 per unit. The variable production costs are $30, and fixed costs amount to $1,400,000. Production engineers have advised management that they expect labor costs to rise by 15% and unit materials costs to rise by 10% in the coming year. Of the $30 variable costs, 50% are from the labor and 25% are from materials. Variable overhead costs are expected to increase by 20%. Sales prices cannot increase more than 10%. It is also expected that fixed costs will rise by 5% as a result of increased taxes and other miscellaneous fixed charges.
The company wishes to maintain the same level of profit in real dollar terms. It is expected that to accomplish this objective, profits must increase by 6% during the year.

a. Compute the volume in units and dollar sales level necessary to maintain the present profit level, assuming that the maximum price increase is implemented.

b. Compute the volume of sales and the dollar sales necessary to provide the 6% increase in profits, assuming that the maximum price increase is implemented.

c. If the volume of sales were to remain at 80,000 units, what price change would be required to attain the 6% increase in profits?

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Scholes Systems supplies a particular type of office chair to large retailers. Scholes is concerned about the possible effect of inflation on its operations. Presently, the company sells 80,000 units for $60 per unit. The variable production costs are $30, and fixed costs amount to $1,400,000. Production engineers have advised management that they expect labor costs to rise by 15% and unit materials costs to rise by 10% in the coming year. Of the $30 variable costs, 50% are from the labor and 25% are from materials. Variable overhead costs are expected to increase by 20%. Sales prices cannot increase more than 10%. It is also expected that fixed costs ...

Solution Summary

This solution is comprised of a detailed explanation to compute the volume in units and dollar sales level necessary to maintain the present profit level, assuming that the maximum price increase is implemented.

A) Using the Black-Scholes-Merton model, calculate the price of a call and put given a market price of the underlying stock of $83, the exercise price of $85, 65 days to expiration, a risk-free rate of 4.5 percent, and the historical annual standard deviation of 30 percent.
B) Does an arbitrage opportunity exist and what is i

For a call option on a non-dividend paying stock, the strike price is $29, the stock price is $30, the risk-free rate is 6% per annum, the volatility is 20% per annum and the time to maturity is 3 months. What is the price of the call option?
a. $2.02
b. $2.35
c. $2.67
d. $2.89
e. None of the above.

Calculate of the price of a call option by binomial tree models and compare the results with the theoretical Black-Scholes formula.
Parameters:
Strike price = $120;
Expiration time = 1 year;
Annual interest rate = 0.05;
Stock volatility = 0.35.
For the initial stock price, S0 = 100.45
Requirements:
1. Find the price

The current stock price of Johnson and Johnson is $64 and the stock does not pay dividends. The instantaneous risk free rate of return is 5%. The instantaneous standard deviation of J&J's stock is 20%. You wish to purchase a call option on this stock with an exercise price of $55 and an expiration date 73 days from now.
Using

A) Consider an option on a non-dividend-paying stock when the stock price is $40, the exercise price is $40, the risk-free interest rate is 9%, the volatility is 30% per annum, and the time to maturity is 12 months. Using the Black-Scholes valuation model, what is the price of a European-style call option under these conditions?

Parameters
Strike price = $120;
Expiration time = 1 year;
Annual interest rate = 0.05;
Stock volatility = 0.35.
For the initial stock price, S0 = 100.45
Requirements
Find the price of the call option by the Black-Scholes formula rounded
to the nearest cent.

Parameters
Strike price = $120;
Expiration time = 1 year;
Annual interest rate = 0.05;
Stock volatility = 0.35.
For the initial stock price, S0 = 100.45
Requirements
1. Find the price of the call option by the Black-Scholes formula rounded to the nearest cent.

Given the Black-Scholes-Merton Model:
The Microsoft stock price is 25.80 and the risk free rate is 0.20%. The option expires on July 15th and is 17 days to maturity.
a. Calculate the intrinsic value and the price of a call option with a strike of $25, assume 23% volatility.
b. Calculate the intrinsic value and the price

Assume you have been given the following information on Purcell Industries
Current Stock Price= $15 Exercise Price Option=$15
Time to maturity of option=6 months Risk-free rate=6%
d2=.00000 d1=.24495
N(d2)=.50000 N(d1)=.59675
Using the Black-Scholes Option Pri

What is the value of a 9-month call with a strike price of $45 given the Black-Scholes Option Pricing Model and the following information?
Stock price: $48
Exercise price: $45
Time to expiration: .75
Risk-free rate : .05
N(d1): .718891
N(d2): .641713
A. $2.03
B. $4.86
C. $6.69
D. $8.81
E. $9.27