Question A2 A company requires N = 5,000 units per year of raw material. The company orders this raw material from its supplier in batches of fixed size Q and consumes it at a uniform rate. Orders are...

Question A2 A company requires N = 5,000 units per year of raw material. The company orders this raw material from its supplier in batches of fixed size Q and consumes it at a uniform rate. Orders are delivered without delay. Each time it places an order, the company incurs a fixed re-ordering cost R = £25, irrespective of the size of the order. The unit cost of holding raw materials in inventory equals S = £0.25 per unit per year. Define the Economic Order Quantity (EOQ) and calculate its value. [Note you do not need derive the formula for the EOQ from first principles.] Calculate the company’s annual storage costs, annual re-ordering costs and annual total costs associated with raw materials, assuming the batch size equals the EOQ. (6 marks) IB1140 Page 5 of 13 continued … Question A3 How does the market value of a firm with a fixed investment policy change with the market value of the firm’s debt in a Modigliani & Miller (1963) world? Explain why. What is the implication for a firm’s optimal capital structure? Explain one reason why this does not hold in practice. (8 marks) Question A4 The spot exchange rate between X$ and Z$ is currently XS$2.10 per Z$1 and the one-year forward exchange rate is X$2.20 per Z$1. The Z$ riskless nominal interest rate is 5% per year. Suppose you currently have X$ 200,000. How much is this worth in Z$? State Covered Interest Rate Parity and use this to calculate the nominal riskless interest rate in X$. (7 marks)