The Economic Ordering Quantity (EOQ) model is a concise method for maximizing the value of a company’s inventory. It allows managers to quickly assess the overall costs of their inventory by specifying the costs of both ordering and carrying inventory. While there are other, more in-depth methods of inventory evaluation, this model provides a solid overview of inventory-related costs. This Mini Case activity allows you to use the EOQ model to evaluate the inventory of a company and make recommendations based on your findings.

MINI CASE

Assume you have just been hired as a financial analyst by Tennessee Sunshine Inc., a mid-sized Tennessee company that specializes in creating exotic sauces from imported fruits and vegetables. The firm's CEO, Bill Stooksbury, recently returned from an industry corporate executive conference in San Francisco, and one of the sessions he attended was on the pressing need for smaller companies to institute corporate risk management programs. Since no one at Tennessee Sunshine is familiar with the basics of derivatives and corporate risk management, Stooksbury has asked you to prepare a brief report that the firm's executives could use to gain at least a cursory understanding of the topics.

To begin, you gathered some outside materials on derivatives and corporate risk management and used these materials to draft a list of pertinent questions that need to be answered. In fact, one possible approach to the paper is to use a question-and-answer format. Now that the questions have been drafted, you have to develop the answers. Please answer all questions h thru i as correctly and accurate as possible. Please!

h. Describe how commodity futures markets can be used to reduce input price risk.

i. It is January, and Tennessee Sunshine is considering issuing $5 million in bonds in June to raise capital for an expansion. Currently, the firm can issue 20-year bonds with a 7% coupon (with interest paid semiannually), but interest rates are on the rise and Stooksbury is concerned that long-term interest rates might rise by as much as 1% before June. You looked online and found that June T-bond futures are trading at 111'25. What are the risks of not hedging, and how might TS hedge this exposure? In your analysis, consider what would happen if interest rates all increased by 1%.

Answer rating: 100% (QA)

Answer h Describe how commodity futures markets can be used to reduce input price risk Answer IEssentially the purchase of a commodity futures contrac... View the full answer