Part OneAlternative 1The company has to have a contingency reserve to deal with the anticipated law suit and the subsequent settlement. The bond has to give the returns that will be used for settlement of the claim. Return on bond is 4% p. a.One customer complaint settlement is $50001000 customer complaint settlement is $(5000×1000) = $5000, 000Duration of time is one yearThe coupon rate will be (100-4) % of $5000000Coupon rate = 96% of 5000000 = $4,800,000The face value will be $5000, 000 while coupon amount will be 4,800,000The bond amount to be purchased today should be $4,800,000Alternative 2The present value of $5000, 000 before it is paid after a year.
It is important to find the present value of the money by discounting it. The interest rate to be used will be 10% as stated in the cost of capital. Present value = Amount of settlement/(1.1)1Present value = 5,000,000 ÷ 1.1Present value = $4,545,454.If the complaints are paid $4,545,454 they will be indifferent to waiting for the court case since they would have received the same value of money that should have been paid after one year.
Alternative 3Using delaying tactics will give the company enough time to complete daily objectives and settle the claim when it deems ok. The city lawyer can only succeed in delaying the case for one more year. The outcome of the law suit is however not likely to change. The cost of capital for looking good is 10%. The lawyer has to be paid to use delaying tactics. The amount to be paid should not exceed the interest earned. The interest should be used to pay the lawyer.
The future value of 5Milion dollar after two years = 5000000(1.1)2 = 6,050,000Interest = 6,050,000 -5000000 = $1,050,000. The lawyer has to be paid the maximum amount of $1,050,000Alternative two is suitable for the company since the lowest amount of money will be used for settlement. The company will only use $4,545,454. To settle the debt completely. In the first option $4,800,000 coupon rate of a bond has to be purchased in order to yield the required $5,000,000 after two years. The third option is expensive since the company does not only pay the settlement of 5million but also the salary of the lawyer.
The second alternative remains to be the most cost efficient among the three. The third option of delaying tactics is viable since the company will invest the money into the company to yield more profits. However, investors and the public image of the company will suffer as the company continues with the legal battle which may end up costing the sales of the company. The company has to bear in the mind that any action done to the potential customers affects its market share.
Ignoring ethical issues may affect the public perception of the company. Delaying tactics may portray the company as malicious in selling products that him the consumers (Shim & Siegel, 2008). Part TwoThe optimal order quantity/economic order quantity = Square root of (2CD ÷IP)D-Annual demand for the product -1500KGC-Delivery cost per batch-$75P-Cost price per item-$30/KGI-Stock holding cost-$2.50Optimal Order Quantity = (2×75×1500÷2.5×30)1/2Optimal Order Quantity = (225000÷75)1/2