Chapter 5

# 9 savings mart a chain of discount department stores

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9. Savings-Mart (a chain of discount department stores) sells patio and lawn furniture. Sales are seasonal, with higher sales during the spring and summer quarters and lower sales during the fall and winter quarters. The company developed the following quarterly sales forecasting model: Ŷt = 8.25 + 0.125t − 2.75D1t + 0.25D2t + 3.50D3t where Ŷt = predicted sales ð\$millionÞ in quarter t8:25 = quarterly sales ð\$millionÞ when t = 0 t = time period ðquarterÞ where the fourth quarter of 2002 = 0, firstquarter of 2003 = 1, second quarter of 2003 = 2,. .. D1t = 1 for first-quarter observations 0 otherwise D2t = 1 for second-quarter observations 0 otherwise D3t = 1 for third-quarter observations 0 otherwise Forecast Savings-Mart’s sales of patio and lawn furniture for each quarter of 2010. Quarter 1, 2010: t =32: D 11 =1 D 21 = 0 D 31 =0 Y' 1 = 8.25 + .125(32)  2.75(1) + .25(0) + 3.50(0) = \$9.5 (million) Quarter 2, 2010: t = 33: D 12 =0 D 22 =1 D 32 =0 Y' 2 = 8.25 + .125(33)  2.75(0) + .25(1) + 3.50(0) = \$12.625 (million) Quarter 3, 2010: t = 34: D 13 =0 D 23 =0 D 33 =1 Y' 3 = 8.25 + .125(34)  2.75(0) + 2.25(0) + 3.50(1) = \$16 (million) Quarter 4, 2010: t = 35 D 14 =0 D 24 =0 D 34 =0 Y' 4 = 8.25 + .125(35) 2.75(0) + 2.25(0) + 3.50(0) = \$12.625 (million) chapter 6: Problems 2. If the U.S. dollar were to appreciate substantially, what steps could a domestic manufacturer like Cummins Engine Co. of Columbus, Indiana, take in advance to reduce the effect of the exchange

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rate fluctuation on company profitability? Cummins could have created internal hedges by setting up offsetting payables in foreign currencies that become cheaper as the dollar appreciates. As the dollar appreciated, rising prices overseas in the export country currencies and the resulting decline in sales and revenue would be offset by falling dollar costs for the payables owed in those currencies. In addition, Cummins could have established a short position in currency futures or option markets to hedge the declining cash flow from their export sales receipts. An appreciating
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