Hershey's Chocolate Is Concerned About Cocoa Prices Prior to Building

question 99

Multiple Choice

Hershey's Chocolate is concerned about cocoa prices prior to building inventory for Halloween sales.Analysts project that price per ton could vary from $1,250 to $1,500.A September call option can be purchased with a $1,300 strike price for a premium of $145.What is Hershey's worst-case scenario if it purchases these options?

• A) Cocoa prices will rise to $1,500 and Hershey is protected only to a price of $1,300.
• B) Cocoa prices will decline to $1,250 and Hershey must pay an extra $50 per ton.
• C) Cocoa prices will not rise above Hershey's break-even price of $1,445, which equals the sum of the strike price plus the option premium.
• D) Cocoa prices will remain below $1,300 and Hershey will lose $145 per option contract.

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Definitions:

Net Present Value

The gap between cash inflows' present value and cash outflows' present value during a certain period.

Accumulated Depreciation

The total amount of depreciation expense that has been recorded over time for a fixed asset, reflecting its decrease in value.

Income Tax Rate

The percentage at which an individual or corporation is taxed. The tax rate may increase as taxable income increases (progressive tax rates).

Profitability Index

A financial metric used to assess the desirability of an investment, calculated as the present value of future cash flows divided by the initial investment cost.