A Farmer Stores His Fall Harvest of Corn and Sells

question 94

Multiple Choice

A farmer stores his fall harvest of corn and sells corn futures for March delivery at $7.50 per bushel. In March the spot price of corn is $7.20 per bushel. Which of the following is correct?

• A) The farmer is obligated to deliver corn to the futures buyer at $7.20.
• B) The farmer has locked in an effective price of $7.50 per bushel.
• C) The farmer would have been better off without the futures contract.
• D)The farmer will receive $7.35 per bushel which is the average of the spot and futures prices.

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Definitions:

Operating Cash Inflow

Cash generated from a company's primary business activities, excluding financing or investment related transactions.

Straight-Line Depreciation

A method of allocating the cost of an asset evenly over its useful life, used for calculating depreciation expenses on the income statement.

Capital Budgeting

The process of planning and evaluating investments in long-term assets to determine which projects will generate the most profitable returns.

Straight-Line Depreciation

A method of allocating the cost of a tangible asset over its useful life in equal annual amounts, making the expense predictable and consistent.