You have observed Mr. Jones's ownership style and you predict that Elkplain's share price will rise. You have $3,390 to invest and you are considering either buying shares of Elkplain or purchasing call options on the shares. The stock price is currently $17. The call option expires in three months, has a strike price of $17, and has a premium of $3.39 (per share). Assume that the stock price rises to $19.55. What is the rate of return on each investment? (Assume that you can buy a fractional quantity of shares.)

A) *15%; -25%

B) 15%; 20%

C) -5%; 15%

D) 20%; 5%

Looking for the process work to understand why the solution is A) 15%; -25%.

Consider the following information:
  

  
a. Calculate the expected return for the two stocks. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

  
b. Calculate the standard deviation for the two stocks. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Please show work

There are two types of decision-making models, one is Compensatory choice models and Non-Compensatory choice model, provide some of the advantages and disadvantages of those various decision-making models. Also, describe a specific example of a situation requiring a decision, and explain which of the models would be best to use to make a decision and why.

Linda Jones is deciding between two investment projects.

Choice 1

Linda can invest into a young biotech firm. She expects that she will need to pay this firm $35,000 at the end of each year for the next two years. After that, she expects to receive back from the firm $90,000 at the end of each year for 18 years.

Choice 2

Linda can invest $200,000 today into an AI firm. She expects to be paid $42,000 at the end of the year, and expects cash flows from the AI firm to increase by 5% every year, paid at the end of each year in perpetuity

1. “Draw” timelines (tables), showing cash flows of each investment.
2. Suppose Linda’s discount rate is 12%. Which project should she choose?
3. At which discount rate would Linda be indifferent between her two choices?

Holmes Manufacturing is considering a new machine that costs $270,000 and would reduce pretax manufacturing costs by $90,000 annually. The new machine will be fully depreciated at the time of purchase. Management thinks the machine would have a value of $23,000 at the end of its 5-year operating life. Net operating working capital would increase by $25,000 initially, but it would be recovered at the end of the project's 5-year life. Holmes's marginal tax rate is 25%, and an 11% WACC is appropriate for the project.

1. Calculate the project's NPV. Negative value, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to the nearest cent.
   $   
   
   Calculate the project's IRR. Do not round intermediate calculations. Round your answer to two decimal places.
     %
   
   Calculate the project's MIRR. Do not round intermediate calculations. Round your answer to two decimal places.
     %
   
   Calculate the project's payback. Do not round intermediate calculations. Round your answer to two decimal places.
     years
2. 
   
3. Assume management is unsure about the $90,000 cost savings-this figure could deviate by as much as plus or minus 20%. What would the NPV be under each of these situations? Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest cent.
   20% savings increase: $   
   20% savings decrease: $   
   
4. Suppose the CFO wants you to do a scenario analysis with different values for the cost savings, the machine's salvage value, and the net operating working capital (NOWC) requirement. She asks you to use the following probabilities and values in the scenario analysis:

   Scenario	Probability	Cost Savings	Salvage Value	NOWC
   Worst case	0.35	$72,000	$18,000	$30,000
   Base case	0.35	$90,000	$23,000	$25,000
   Best case	0.30	$108,000	$28,000	$20,000

   
   Calculate the project's expected NPV, its standard deviation, and its coefficient of variation. Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer for expected NPV and for standard deviation to the nearest cent and for coefficient of variation to two decimal places.
   

   E(NPV):	$
   σNPV:	$
   CV:

   
   Would you recommend that the project be accepted?

Consider a $2 million, 8%, 30-year mortgage with monthly payments. Compute the first three payments and the loan balance after the third payment for each of the following loan types: a) Interest Only B) CAM, C) CPM

Consider futures, forwards, options and swaps. Which derivative is the least risky choice for a risk averse public company? Why?

Clarion Enterprises is considering two potential investments with differing cash flow periods. This is the first potential investment. It has the following cash flows:

Given the above cash flows and investor's required rate of return, what is the Annualized Net Present Value for this proposed investment? Express your answers as XXXX.XX. (Note: Be sure you noticed that this is asking for an annualized Net Present Value, not the Net Present Value. This would be used in comparing potential investments with differing investment cash flow periods.)

You work for a company that has outsourced its internal audit function for several years. Yesterday, the company’s chief financial officer (CFO) called you into her office and told you that the audit committee has decided that, following the practice guidelines set forth in the Standards, the company needs a chief audit executive (CAE). She asks you to assume this role in addition to your duties as director of taxation for the company.

A. Describe what your primary role will be as the company’s CAE of an outsourced internal audit function.

B. To whom should you, as the company’s CAE, report?

C. List the specific responsibilities you will have if you carry out your role as CAE in accordance with the Standards.

D. Explain how you will handle the potential conflict your role as director of taxation might have with your new role as CAE.

For a project with normal cash flows, if IRR = the required return (discount rate), then NPV = 0, and the profitability index = 1.0.

Group of answer choices

True

False

8.06

EXPECTED RETURNS

Stocks A and B have the following probability distributions of expected future returns:

1. Calculate the expected rate of return, r_B, for Stock B (r_A = 15.10%.) Do not round intermediate calculations. Round your answer to two decimal places.
   %

2. Calculate the standard deviation of expected returns, σ_A, for Stock A (σ_B = 18.51%.) Do not round intermediate calculations. Round your answer to two decimal places.
   %

3. Now calculate the coefficient of variation for Stock B. Round your answer to two decimal places.

4. Is it possible that most investors might regard Stock B as being less risky than Stock A?

   1. If Stock B is more highly correlated with the market than A, then it might have a higher beta than Stock A, and hence be less risky in a portfolio sense.
   2. If Stock B is more highly correlated with the market than A, then it might have a lower beta than Stock A, and hence be less risky in a portfolio sense.
   3. If Stock B is more highly correlated with the market than A, then it might have the same beta as Stock A, and hence be just as risky in a portfolio sense.
   4. If Stock B is less highly correlated with the market than A, then it might have a lower beta than Stock A, and hence be less risky in a portfolio sense.
   5. If Stock B is less highly correlated with the market than A, then it might have a higher beta than Stock A, and hence be more risky in a portfolio sense.

1.Which of the following portfolios can not be on the Markowitz efficient frontier?

Portfolio Expected Return Standard Deviation
Q 15%    22.5%
R 15.75%    24.75%
S 17.25% 27.75%
T 18.75%    30%

2.You need to invest $20M in two assets: a risk-free asset with an expected return of 5% and a risky asset with an expected return of 15% and a standard deviation of 45%. You face a cap of 35% on the portfolio’s standard deviation. What is the maximum expected return you can achieve on your portfolio? Explain your reasoning. Whatis the corresponding Sharpe ratio of the portfolio with the maximum expected return? Explain your reasoning.

The Lubin’s Investment Team is considering investing in two securities, A and B, and the relevant information is given below:

What should the team do if they wish to earn 10% expected return on their portfolio?

What is the standard deviation of the team’s portfolio?