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Words 690

Pages 3

Problem Based on Chapter 14, Residual Dividends

Middlesex Plastics Manufacturing had 2011 Net Income of $15.0 Million. Its 2012 Net Income is forecast to increase by 8%. The company’s capital structure has been 35% Debt and 65% Equity since 2010, and the company plans to maintain this capital structure in 2012. The company paid $3.0 Million cash dividends in 2011. The company is planning to invest in a major capital project in 2012. The capital budget for this project is $12.0 Million in 2012. 1. If Middlesex increases its cash dividends in 2012 at the same rate of growth as its Net Income rate, what will be the total 2012 dividend payout in Dollars? 2. What is the 2012 dividend payout ratio if the company increases its dividends at 8%? 3. If the company follows a residual dividend policy, and maintains its 35% Debt level in its capital structure, and invests in the $12.0 Million capital budget in 2012, what would be the Residual Dividend level (in Dollars) in 2012? What would be this Residual Dividends payout ratio? 4. How much additional capital (Debt and/or Equity) will the company have to raise from outside sources in 2012 if it invests in this capital project, and follows a residual dividend policy? 5. What would be the prudent dividend policy for 2012?: Pay dividends at the current dividend growth rate of 8%, or pay the residual dividend amount.

1. If Middlesex increases its cash dividends in 2012 at the same rate of growth as its Net Income rate, what will be the total 2012 dividend payout in Dollars?

Net Income increased by 8 percent: $15,000,000 * 0.08= $16,200,000

Total dividends payout in Dollars: $3,000,000 * 0.08= $3,240,000

2. What is the 2012 dividend payout ratio if the company increases its dividends at 8%.

The 2012 payout ratio is $3,240,000/16,200,000= 0.20%…...

...FIN – 516 – WEEK 2 HOMEWORK ANSWER KEY - REVISED PROBLEM BASED ON CHAPTER 15 – WACC & THE HAMADA FORMULA Bickley’s Unlevered Beta: bu = b / (1+(1-T) ( D/S) = 1.3/( 1+(1-.40)(30/70) = 1.3 / (1+(.60) (.4286)) = 1.03 Bickley’s New Levered Beta: bL = bu X (1+(1-.40) ( 15/85) = 1.03 X (1 + (.60)(0.1765) = 1.14 Bickley’s WACC with the 30/70 Capital Structure: Cost of Equity: ke = 3.5% +(1.3 X 7.5) = 13.25% WACC = [7.5% X (1 - .40) X 30%] + [13.25% X 70%] = 1.35% + 9.28% = 10.63% Bickley’s WACC with the 15/85 Capital Structure: Cost of Equity: ke = 3.5% + (1.14 X 7.5) = 12.05% WACC = [7.0% X (1-.40) X 15%] + [12.05% X 85%] = 0.63 + 10.24 = 10.87% PROBLEM BASED ON CHAPTER 26 – MODIGLIANI & MILLER EXTENSION MODELS WITH GROWTH ASSUMPTIONS Unlevered Value Vu = $2.0 Million (1 + 6.5%) / (11.5% - 6.5%) = $42.6 Million Levered Value VL = $42.6 Million + [.08 X .35 X $8.0 Million / 11.5% - 6.5%] VL = $42.6 Million + [224,000 / .05] = $47.08 Million Therefore, Equity is : S = $47.08 Million – $8.0 Million = $39.08 Million Expected Return by Levered Shareholder (Without Taxes) rsL = 0.115 + (0.115 - .08) X $8 /$ 39.08 = 12.22% With M & M with Taxes VL = Vu + (T X D) = $42.6 + (.35 X $8.0) = $45.4 Million Value of Equity: S = $45.4 – $8.0 = $37.4 Million rsL = 0.115 + (.115 - .08) (1-.35) (8 / 37.4) = 0.115 + 0.005 = 11.99%...

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...Claudia Gaeta FIN 516- Week 4 homework Chapter 20 – Problem 20 – 1 Profit or Loss on New Stock Issue Security Brokers Inc. specializes in underwriting new issues by small firms. On a recent offering of Beedles Inc., the terms were as follows: Price to public | $5 per share | Number of shares | 3 million | Proceeds to Beedles | $14,000,000 | The out-of-pocket expenses incurred by Security Brokers in the design and distribution of the issue were $300,000. What profit or loss would Security Brokers incur if the issue were sold to the public at the following average price? * a.$5 per share Gross Proceeds 3,000,000 x 5 = 15,000,000 Net Profit 15,000,000 – 14,000,000 – 300,000 = 700,000 b. $6 per share Gross Proceeds 3,000,000 x 6 = 18,000,000 Net Profit 18,000,000 – 14,000,000 – 300,000 = 3,700,000 * c.$4 per share Gross Proceeds 3,000,000 x 4 = 12,000,000 Net Profit 12,000,000 – 14,000,000 – 300,000 = -2,300,000 Chapter 20 – Problem 20 – 2 Underwriting and Flotation Expenses The Beranek Company, whose stock price is now $25, needs to raise $20 million in common stock. Underwriters have informed the firm’s management that they must price the new issue to the public at $22 per share because of signaling effects. The underwriters’ compensation will be 5% of the issue price, so Beranek will net $20.90 per share. The firm will also incur expenses in the amount of $150,000. How many shares......

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...A graded original plagrism free answer can be downloaded from here http://www.homeworkmarket.com/content/fin-516-week-4-homework FIN 516 WEEK 4 HOMEWORK FIN 516 Week 4 Homework Problem 23-3 on Implied Price of Funding based on Chapter 23 Starware Software was founded last year to develop software for gaming applications. Initially, the founder invested $800,000 and received 8 million shares of stock. Starware now needs to raise a second round of capital, and it has identified an interested venture capitalist. This venture capitalist will invest $1 million and wants to own 20% of the company after the investment is completed. a. How many shares must the venture capitalist receive to end up with 20% of the company? What is the implied price per share of this funding round? b. What will the value of the whole firm be after this investment (the post–money valuation)? Problem 23-4 on IRR of Venture Capital based on Chapter 23 (Excel file included) Suppose venture capital firm GSB partners raised $100 million of committed capital. Each year over the 10-year life of the fund, 2% of this committed capital will be used to pay GSB’s management fee. As is typical in the venture capital industry, GSB will only invest $80 million (committed capital less lifetime management fees). At the end of 10 years, the investments made by the fund are worth $400 million. GSB also charges 20% carried interest on the profits of the fund (net of management......

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...FIN 516 Advanced Managerial Finance To Buy this Class Copy & paste below link in your Brower http://homeworkregency.com/downloads/fin-516-advanced-managerial-finance/ Or Visit Our Website Visit : http://www.homeworkregency.com Email Us : homeworkregency@gmail.com FIN 516 Advanced Managerial Finance FIN 516 Week 1 Homework FIN 516 Week 2 Homework FIN 516 Week 3 Homework FIN 516 Week 4 Homework FIN 516 Week 5 Homework FIN 516 Week 6 Homework FIN 516 Week 7 Homework FIN516 WEEK 2 MINI CASE ASSIGNMENT (3 Different Papers) FIN516 WEEK 2 MINI CASE ASSIGNMENT- Ford Motors FIN516 WEEK 2 MINI CASE ASSIGNMENT -General Electric FIN516 WEEK 2 MINI CASE ASSIGNMENT -Microsoft Corporation FIN 516 Week 4 Quiz FIN 516 Week 5 IPO Paper FIN 516 Week 8 Final Exam FIN 516 Week 1 Homework Problem 17-7 on Ex-dividend Price Based on Chapter 17 Payout Policy Natsam Corporation has $250 million of excess cash. The firm has no debt and 500 million shares outstanding with a current market price of $15 per share. Natsam’s board has decided to pay out this cash as a one-time dividend. Problem 17-15 on Distribution to Shareholders Based on Chapter 17 Payout Policy Suppose that all capital gains are taxed at a 25% rate and that the dividend tax rate is 50%. Arbuckle Corporation is currently trading for $30 and is about to pay a $6 special dividend. Problem 17-19 on Dividend Capture Strategy Based on Chapter 17 Payout Policy Que Corporation pays a regular dividend......

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...FIN 516 Advanced Managerial Finance To Buy this Class Copy & paste below link in your Brower http://homeworkregency.com/downloads/fin-516-advanced-managerial-finance/ Or Visit Our Website Visit : http://www.homeworkregency.com Email Us : homeworkregency@gmail.com FIN 516 Advanced Managerial Finance FIN 516 Week 1 Homework FIN 516 Week 2 Homework FIN 516 Week 3 Homework FIN 516 Week 4 Homework FIN 516 Week 5 Homework FIN 516 Week 6 Homework FIN 516 Week 7 Homework FIN516 WEEK 2 MINI CASE ASSIGNMENT (3 Different Papers) FIN516 WEEK 2 MINI CASE ASSIGNMENT- Ford Motors FIN516 WEEK 2 MINI CASE ASSIGNMENT -General Electric FIN516 WEEK 2 MINI CASE ASSIGNMENT -Microsoft Corporation FIN 516 Week 4 Quiz FIN 516 Week 5 IPO Paper FIN 516 Week 8 Final Exam FIN 516 Week 1 Homework Problem 17-7 on Ex-dividend Price Based on Chapter 17 Payout Policy Natsam Corporation has $250 million of excess cash. The firm has no debt and 500 million shares outstanding with a current market price of $15 per share. Natsam’s board has decided to pay out this cash as a one-time dividend. Problem 17-15 on Distribution to Shareholders Based on Chapter 17 Payout Policy Suppose that all capital gains are taxed at a 25% rate and that the dividend tax rate is 50%. Arbuckle Corporation is currently trading for $30 and is about to pay a $6 special dividend. Problem 17-19 on Dividend Capture Strategy Based on Chapter 17 Payout Policy Que Corporation pays a regular dividend......

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...FIN 516 Week 2 Homework To Buy This material Click below link http://www.uoptutors.com/fin-516-new/fin-516-week-2-homework Problem 14-11 Based on Chapter 14: WACC and Modigiani & Miller Extension Models With Growth Assumptions Consider the entrepreneur described in Section 14.1 (and referenced in Tables 14.1–14.3). Suppose she funds the project by borrowing $750 rather than $500. a. According to MM Proposition I, what is the value of the equity? What are its cash flows if the economy is strong? What are its cash flows if the economy is weak? b. What is the return of the equity in each case? What is its expected return? c. What is the risk premium of equity in each case? What is the sensitivity of the levered equity return to systematic risk? How does its sensitivity compare to that of unlevered equity? How does its risk premium compare to that of unlevered equity? d. What is the debt-equity ratio of the firm in this case? e. What is the firm’s WACC in this case? Problem 14-18 Based on Chapter 14: WACC and Modigliani & Miller Extension Models With Growth Assumptions In mid-2012, AOL Inc. had $100 million in debt, total equity capitalization of $3.1 billion, and an equity beta of 0.90 (as reported on Yahoo! Finance). Included in AOL’s assets was $1.5 billion in cash and risk-free securities. Assume that the risk-free rate of interest is 3% and the market risk premium is 4%. a. What is AOL’s enterprise value? b. What is the beta of AOL’s business......

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...FIN 516 Week 3 Homework To Buy This material Click below link http://www.uoptutors.com/fin-516-new/fin-516-week-3-homework Problem 20-6 on Call Options Based on Chapter 20 You own a call option on Intuit stock with a strike price of $40. The option will expire in exactly 3 months’ time. a) If the stock is trading at $55 in 3 months, what will be the payoff of the call? b) If the stock is trading at $35 in 3 months, what will be the payoff of the call? c) Draw a payoff diagram showing the value of the call at expiration as a function of the stock price at expiration. Problem 20-8 on Put Options Based on Chapter 20 You own a put option on Ford stock with a strike price of $10. The option will expire in exactly 6 months’ time. a) If the stock is trading at $8 in 6 months, what will be the payoff of the put? b) If the stock is trading at $23 in 6 months, what will be the payoff of the put? c) Draw a payoff diagram showing the value of the put at expiration as a function of the stock price at expiration. Problem 20-11 on Return on Options Based on Chapter 20 Consider the September 2012 IBM call and put options in Problem 20-3. Ignoring any interest you might earn over the remaining few days’ life of the options, consider the following. a) Compute the break-even IBM stock price for each option (i.e., the stock price at which your total profit from buying and then exercising the option would be 0). b) Which call option is most likely to have a return of −100%? c) If...

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...FIN 516 Week 4 Homework To Buy This material Click below link http://www.uoptutors.com/fin-516-new/fin-516-week-4-homework Problem 23-3 on Implied Price of Funding Based on Chapter 23 Starware Software was founded last year to develop software for gaming applications. Initially, the founder invested $800,000 and received 8 million shares of stock. Starware now needs to raise a second round of capital, and it has identified an interested venture capitalist. This venture capitalist will invest $1 million and wants to own 20% of the company after the investment is completed. a) How many shares must the venture capitalist receive to end up with 20% of the company? What is the implied price per share of this funding round? b) What will the value of the whole firm be after this investment (the post-money valuation)? Problem 23-4 on IRR of Venture Capital Based on Chapter 23 Suppose venture capital firm GSB partners raised $100 million of committed capital. Each year over the 10-year life of the fund, 2% of this committed capital will be used to pay GSB’s management fee. As is typical in the venture capital industry, GSB will only invest $80 million (committed capital less lifetime management fees). At the end of 10 years, the investments made by the fund are worth $400 million. GSB also charges 20% carried interest on the profits of the fund (net of management fees). a) Assuming the $80 million in invested capital is invested immediately and all proceeds were received at......

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...FIN 516 Week 4 Midterm To Buy This material Click below link http://www.uoptutors.com/fin-516-new/fin-516-week-4-midterm 1. Question : (TCO C) Pate & Co. has a capital budget of $3,000,000. The company wants to maintain a target capital structure that is 15 percent debt and 85 percent equity. The company forecasts that its net income this year will be $3,500,000. If the company follows a residual dividend policy, what will be its total dividend payment? 2. Question : (TCO F) The following data applies to Saunders Corporation’s convertible bonds: Maturity: 10 Stock price: $30.00 Par value: $1,000.00 Conversion price: $35.00 Annual coupon: 5.00% Straight-debt yield: 8.00% What is the bond’s straight-debt value? (a) $684.78 (b) $720.82 (c) $758.76 (d) $798.70 (e) $838.63 3. Question : (TCO B) The Congress Company has identified two methods for producing playing cards. One method involves using a machine having a fixed cost of $10,000 and variable costs of $1.00 per deck of cards. The other method would use a less expensive machine (fixed cost = $5,000), but it would require greater variable costs ($1.50 per deck of cards). If the selling price per deck of cards will be the same under each method, at what level of output will the two methods produce the same net operating income (EBIT)? (a) 5,000 decks (b) 10,000 decks (c) 15,000 decks (d) 20,000 decks (e) 25,000 decks 4. Question : (TCO B) Firm L has debt with a market value of $200,000 and a yield...

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...FIN 516 Week 5 Homework To Buy This material Click below link http://www.uoptutors.com/fin-516-new/fin-516-week-5-homework Problem 25-6 on Purchase Versus Lease Based on Chapter 25 Craxton Engineering will either purchase or lease a new $756,000 fabricator. If purchased, the fabricator will be depreciated on a straight-line basis over 7 years. Craxton can lease the fabricator for $130,000 per year for 7 years. Craxton’s tax rate is 35%. (Assume the fabricator has no residual value at the end of the 7 years.) a) What are the free cash flow consequences of buying the fabricator if the lease is a true tax lease? b) What are the free cash flow consequences of leasing the fabricator if the lease is a true tax lease? c) What are the incremental free cash flows of leasing versus buying? Problem 25-7 on Purchase Versus Lease Based on Chapter 25 Riverton Mining plans to purchase or lease $220,000 worth of excavation equipment. If purchased, the equipment will be depreciated on a straight-line basis over 5 years, after which it will be worthless. If leased, the annual lease payments will be $55,000 per year for 5 years. Assume Riverton’s borrowing cost is 8%, its tax rate is 35%, and the lease qualifies as a true tax lease. a) If Riverton purchases the equipment, what is the amount of the lease-equivalent loan? b) Is Riverton better off leasing the equipment or financing the purchase using the lease equivalent loan? c) What is the effective after-tax lease borrowing rate?......

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...FIN 516 Week 6 Homework To Buy This material Click below link http://www.uoptutors.com/fin-516-new/fin-516-week-6-homework Problem 28-9 on Acquisition Analysis Based on Chapter 28 Mergers and Acquisitions Your company has earnings per share of $4. It has 1 million shares outstanding, each of which has a price of $40. You are thinking of buying TargetCo, which has earnings per share of $2, 1 million shares outstanding, and a price per share of $25. You will pay for TargetCo by issuing new shares. There are no expected synergies from the transaction. a) If you pay no premium to buy TargetCo, what will your earnings per share be after the merger? b) Suppose you offer an exchange ratio such that, at current preannouncement share prices for both firms, the offer represents a 20% premium to buy TargetCo. What will your earnings per share be after the merger? c) What explains the change in earnings per share in part a)? Are your shareholders any better or worse off? d) What will your price-earnings ratio be after the merger (if you pay no premium)? How does this compare to your P/E ratio before the merger? How does this compare to TargetCo’s premerger P/E ratio? Problem 16-8 on Managerial Decision Based on Chapter 16 Financial Distress, Managerial Incentives, and Information As in Problem 1, Gladstone Corporation is about to launch a new product. Depending on the success of the new product, Gladstone may have one of four values next year: $150 million, $135 million, $95...

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...FIN 516 Week 7 Homework Set To Buy This material Click below link http://www.uoptutors.com/fin-516-new/fin-516-week-7-homework-set Problem 31-1 on Exchange Rates Based on Chapter 31 International Corporate Finance You are a U.S. investor who is trying to calculate the present value of a €5 million cash inflow that will occur 1 year in the future. The spot exchange rate is S = $1.25/€ and the forward rate is F1 = $1.215/€. You estimate that the appropriate dollar discount rate for this cash flow is 4% and the appropriate euro discount rate is 7%. a) What is the present value of the €5 million cash inflow computed by first discounting the euro and then converting it into dollars? b) What is the present value of the €5 million cash inflow computed by first converting the cash flow into dollars and then discounting? c) What can you conclude about whether these markets are internationally integrated, based on your answers to parts a) and b)? Problem 31-2 on Currency Appreciation Based on Chapter 31 International Corporate Finance Mia Caruso Enterprises, a U.S. manufacturer of children’s toys, has made a sale in Cyprus and is expecting a C£4 million cash inflow in 1 year. The current spot rate is S = $1.80/C£ and the 1-year forward rate is F1 = $1.8857/C£. a) What is the present value of Mia Caruso’s C£4 million inflow computed by first discounting the cash flow at the appropriate Cypriot pound discount rate of 5%, and then converting the result into dollars? b) What is......

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...FIN 516 Advanced Managerial Finance http://homeworkregency.com/downloads/fin-516-advanced-managerial-finance/ FIN 516 Week 1 Homework FIN 516 Week 2 Homework FIN 516 Week 3 Homework FIN 516 Week 4 Homework FIN 516 Week 5 Homework FIN 516 Week 6 Homework FIN 516 Week 7 Homework FIN516 WEEK 2 MINI CASE ASSIGNMENT (3 Different Papers) FIN516 WEEK 2 MINI CASE ASSIGNMENT- Ford Motors FIN516 WEEK 2 MINI CASE ASSIGNMENT -General Electric FIN516 WEEK 2 MINI CASE ASSIGNMENT -Microsoft Corporation FIN 516 Week 4 Quiz FIN 516 Week 5 IPO Paper FIN 516 Week 8 Final Exam FIN 516 Week 1 Homework Problem 17-7 on Ex-dividend Price Based on Chapter 17 Payout Policy Natsam Corporation has $250 million of excess cash. The firm has no debt and 500 million shares outstanding with a current market price of $15 per share. Natsam’s board has decided to pay out this cash as a one-time dividend. Problem 17-15 on Distribution to Shareholders Based on Chapter 17 Payout Policy Suppose that all capital gains are taxed at a 25% rate and that the dividend tax rate is 50%. Arbuckle Corporation is currently trading for $30 and is about to pay a $6 special dividend. Problem 17-19 on Dividend Capture Strategy Based on Chapter 17 Payout Policy Que Corporation pays a regular dividend of $1 per share. Typically, the stock price drops by $0.80 per share when the stock goes ex-dividend. Suppose the capital gains tax rate is 20%, but investors pay different tax rates on dividends. Absent...

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...FIN 516 Advanced Managerial Finance To Buy this Class Copy & paste below link in your Brower http://homeworkregency.com/downloads/fin-516-advanced-managerial-finance/ Or Visit Our Website Visit : http://www.homeworkregency.com Email Us : homeworkregency@gmail.com FIN 516 Advanced Managerial Finance FIN 516 Week 1 Homework FIN 516 Week 2 Homework FIN 516 Week 3 Homework FIN 516 Week 4 Homework FIN 516 Week 5 Homework FIN 516 Week 6 Homework FIN 516 Week 7 Homework FIN516 WEEK 2 MINI CASE ASSIGNMENT (3 Different Papers) FIN516 WEEK 2 MINI CASE ASSIGNMENT- Ford Motors FIN516 WEEK 2 MINI CASE ASSIGNMENT -General Electric FIN516 WEEK 2 MINI CASE ASSIGNMENT -Microsoft Corporation FIN 516 Week 4 Quiz FIN 516 Week 5 IPO Paper FIN 516 Week 8 Final Exam FIN 516 Week 1 Homework Problem 17-7 on Ex-dividend Price Based on Chapter 17 Payout Policy Natsam Corporation has $250 million of excess cash. The firm has no debt and 500 million shares outstanding with a current market price of $15 per share. Natsam’s board has decided to pay out this cash as a one-time dividend. Problem 17-15 on Distribution to Shareholders Based on Chapter 17 Payout Policy Suppose that all capital gains are taxed at a 25% rate and that the dividend tax rate is 50%. Arbuckle Corporation is currently trading for $30 and is about to pay a $6 special dividend. Problem 17-19 on Dividend Capture Strategy Based on Chapter 17 Payout Policy Que Corporation pays a regular dividend......

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...FIN-516 – WEEK 1 HOMEWORK ANSWER KEY PROBLEM BASED ON CHAPTER 14 – RESIDUAL DIVIDENDS 1. Cash Dividends in 2012 will be: 3.0 Million X ( 1 + .08) = $3.24 Million 2. Dividend Payout Ratio in 2012: 3.24 / (15.0 X 1.08) = 20.0% 3. Net Income in 2012 is: (15.0 X 1.08) = $ 16.20 Capital Budget in 2012: $12.0 X 65% = $ 7.8 Million financed from Retained Earnings. Residual Dividends in 2012: $16.2 Million - $7.8 Million = $8.4 Million. Residual Dividends Payout Ratio: $8.4 / $16.2 = 51.85% 4. Project requires a total investment of $12.0 Million. The company can fund from Retained Earnings $7.8 Million, and it can borrow $4.2 Million Long Term Debt from external sources. 5. The company should continue to increase its cash dividends at 8% in 2012, and maintain its 20% Dividend Payout Ratio. It should maintain the remaining cash as Retained Earnings. Paying out 52% Residual Dividends can force the company to cut back dividends in future years if cash flows and earnings decline. Maintaining the 20% dividend payout rate gives the company both stability and flexibility in its future dividend policies. PROBLEM 19-3 - SOLUTION a. Expiration value = Current price - Strike price. Current Strike Expiration Price Price Value $ 20 $25 Max[-$5,0] = 0 25 25 0 30 25 5 100 25 75 b. VPackage = $1,000 = ......

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