Diversification is the most effectivewhen the correlation coefficient between two assets’ return is _________ .

     A) positive

     B) negative

     C) +1

     D) 0

     E) -1

Based on investors’ relative degrees of risk aversion,

     A) investors will hold varying amounts of the risky asset in their portfolios.

     B) all investors will have the same portfolio asset allocations.

     C) investors will hold varying amounts of the risk-free asset in their portfolios.

     D) A and C.

     E) none of the above.

Consider a 5.00 percent TIPS with an issue CPI reference of 203.6. The bond is purchased at the beginning of the year (after the interest payment) when the CPI was 211.5. For the interest payment in the middle of the year, the CPI was 213.1. Now, at the end of the year, the CPI is 217.6 and the interest payment has been made.

What is the total return of the TIPS in dollars? Round your final answer to 2 decimal places

What is the total return of the TIPS in percentage? Round your final answer to 2 decimal places.

One year​ ago, your company purchased a machine used in manufacturing for $ 105,000. You have learned that a new machine is available that offers many advantages and you can purchase it for $ 165,000 today. It will be depreciated on a​ straight-line basis over 10 years and has no salvage value. You expect that the new machine will produce a gross margin​ (revenues minus operating expenses other than​ depreciation) of $ 55,000 per year for the next 10 years. The current machine is expected to produce a gross margin of $ 24,000 per year. The current machine is being depreciated on a​ straight-line basis over a useful life of 11​ years, and has no salvage​ value, so depreciation expense for the current machine is $ 9,545 per year. The market value today of the current machine is $ 45,000. Your​ company's tax rate is 40 %​, and the opportunity cost of capital for this type of equipment is 12 %.

Should your company replace its​ year-old machine?

The NPV of replacing the​ year-old machine is ​$_____. ​(Round to the nearest​ dollar.) Should your company replace its​ year-old machine?  ​(Select the best choice​ below.)

Yes, there is a profit OR No, there is a loss

Question:

A corporate bond with a coupon rate of 6.8 percent has 14 years left to maturity. It has had a credit rating of BBB and a yield to maturity of 7.5 percent. The firm has recently gotten into some trouble and the rating agency is downgrading the bonds to BB. The new appropriate discount rate will be 8.8 percent. (Assume interest payments are semiannual.)

What will be the change in the bond's price in dollars? Round your final answer to 2 decimal places.

What will be the change in the percentage? Round your final answer to 2 decimal places.

Scenario: As the administrator of a small privately owned not-for-profit hospital that has been seeing a significant increase in patient volume, it has been determined that another wing should be added to accommodate the increase in volume. However, there is not enough cash in reserves to finance the project.

You have been tasked with planning how the capital required for the project can be raised. address the following prompts, citing four to six scholarly sources to support your claims: Capital needs can be met either through equity or debt financing.

Explain the difference between the two and which financing would be appropriate and why, considering that this is a private, not-for-profit hospital.

Explain the term working capital and how it is related to debt financing for capital expenditures.

Discuss the importance of a cash budget and how it can be used to assess the financial viability of this capital expenditure.

Problem 6-07

The following are monthly percentage price changes for four market indexes.

Compute the following.

1. Average monthly rate of return for each index. Round your answers to five decimal places.

   DJIA:

   S&P 500:

   Russell 2000:

   Nikkei:

2. Standard deviation for each index. Do not round intermediate calculations. Round your answers to four decimal places.

   DJIA:

   S&P 500:

   Russell 2000:

   Nikkei:

3. Covariance between the rates of return for the following indexes. Use a minus sign to enter negative values, if any. Do not round intermediate calculations. Round your answers to six decimal places.

   Covariance (DJIA, S&P 500):

   Covariance (S&P 500, Russell 2000):

   Covariance (S&P 500, Nikkei):

   Covariance (Russell 2000, Nikkei):

4. The correlation coefficients for the same four combinations. Use a minus sign to enter negative values, if any. Do not round intermediate calculations. Round your answers to four decimal places.

   Correlation (DJIA, S&P 500):

   Correlation (S&P 500, Russell 2000):

   Correlation (S&P 500, Nikkei):

   Correlation (Russell 2000, Nikkei):

5. Using the unrounded answers from parts (a), (b), and (d), calculate the expected return and standard deviation of a portfolio consisting of equal parts of (1) the S&P and the Russell 2000 and (2) the S&P and the Nikkei. Do not round intermediate calculations. Round your answers to five decimal places.

   Expected return (S&P 500 and Russell 2000):

   Standard deviation (S&P 500 and Russell 2000):

   Expected return (S&P 500 and Nikkei):

   Standard deviation (S&P 500 and Nikkei):

   Since S&P 500 and Russell 2000 have a strong (Select-negative, positive) correlation, meaningful reduction in risk (Select-is not observed, is observed) if they are combined.

   Since S&P 500 and Nikkei have a strong (Select-negative, positive) correlation, meaningful reduction in risk (Select-is not observed, is observed) if they are combined.

​(Cost of​ short-term bank loan​) On July​ 1, 2015, the Southwest Forging Corporation arranged for a line of credit with the First National Bank​ (FNB) of Dallas. The terms of the agreement call for a ​$110 comma 000 maximum loan with interest set at 2 percent over prime. In​ addition, the firm has to maintain a 20 percent compensating balance in its demand deposit account throughout the year. The prime rate is currently 12 percent. Note​: Interest is not paid in advance​ (discounted).
a. If Southwest normally maintains a ​$22 comma 000 to ​$33 comma 000 balance in its checking account with FNB of​ Dallas, what is the effective cost of credit under the​ line-of-credit agreement when the maximum loan amount is used for a full​ year?
b. Compute the effective cost of credit if the firm borrows the compensating balance and the maximum possible amount under the loan agreement.​ Again, assume the full amount of the loan is outstanding for a whole year.

Cash conversion cycle​) Historical data for the​ firm's sales, accounts​ receivable, inventories, and accounts payable for the Crimson Mfg. Company​ follow: LOADING.... a. Calculate​ Crimson's days of sales​ outstanding, days of payables​ outstanding, and days of sales in inventory for each of the 5 years. ​(Assume a​ 365-day year. Hint​: Assume that the​ firm's cost of goods sold equals​ 70% of​ sales.) What has Crimson accomplished in its atempts to better manage its investments in account receivable and​ inventory? b. Calculate​ Crimson's cash conversion cycle for each of the 5 years. Evaluate the​ firm's overall management of its working capital. Assume a​ 365-day year.   

2011   2012   2013   2014   2015
Sales   2,861   3,487   5,264   7,705   12,326
Receivables   410   527   728   901   1,425
Acounts payable   270   454   475   1,045   1,606
Inventories   220   315   414   249   257

1. Tables below shows the standard deviations over the last five years and the correlations between the returns of the stocks and the market.

1. Calculate the CAPM beta for each stock. b. Which stock had the greater total risk? Explain. c. Which stock had the greater market risk? Explain. d. Which stock had the greater idiosyncratic (non-market) risk? Explain

8-8

Cash Budgeting

Dorothy Koehl recently leased space in the Southside Mall and opened a new business, Koehl's Doll Shop. Business has been good, but Koehl frequently run out of cash. This has necessitated late payment on certain orders, which is beginning to cause a problem with suppliers. Koehl plans to borrow from the bank to have cash ready as needed, but first she needs a forecast of how much she should borrow. Accordingly, she has asked you to prepare a cash budget for the critical period around Christmas, when needs will be especially high.

Sales are made on a cash basis only. Koehl's purchases must be paid for during the following month. Koehl pays herself a salary of $4,000 per month, and the rent is $1,800 per month. In addition, she must make a tax payment of $13,000 in December. The current cash on hand (on December 1) is $300, but Koehl has agreed to maintain an average bank balance of $7,000 - this is her target cash balance. (Disregard the amount in the cash register, which is insignificant because Koehl keeps only a small amount on hand in order to lessen the chances of robbery.)

The estimated sales and purchases for December, January, and February are shown below. Purchases during November amounted to $160,000.

1. Prepare a cash budget for December, January, and February.

   I. Collections and Purchases:
   	December	January	February
   Sales	$	$	$
   Purchases	$	$	$
   Payments for purchases	$	$	$
   Salaries	$	$	$
   Rent	$	$	$
   Taxes	$	---	---
   Total payments	$	$	$
   Cash at start of forecast	$	---	---
   Net cash flow	$	$	$
   Cumulative NCF	$	$	$
   Target cash balance	$	$	$
   Surplus cash or loans needed	$	$	$

   
   
2. Suppose Koehl starts selling on a credit basis on December 1, giving customers 30 days to pay. All customers accept these terms, and all other facts in the problem are unchanged. What would the company's loan requirements be at the end of December in this case? (Hint: The calculations required to answer this part are minimal.)
   $

A wine lover has decided to start a winery. The initial investment will be $5 million on Day 1. The winery will require an additional $1 million dollars investment at very beginning Year 1. The vines will mature over five years. Beginning at the end of year 6, the winery is expected to produce net cash inflows of $2 million, 4 mil in year 7, 6 mil in year 8, 8 mil in year 9 and 10 mil in year 10. What is the NPV, IRR, and Payback (nondiscounted and discounted) assuming a discount rate of 15 percent? Please give IRR, NNPV, Payback Period, Discount Payback Period (show formulas please)

Problem 13-20 Jensen's Alpha (LO1, CFA7)

You have been given the following return information for a mutual fund, the market index, and the risk-free rate. You also know that the return correlation between the fund and the market is 0.95.

Calculate Jensen’s alpha for the fund, as well as its information ratio. (Do not round intermediate calculations. Enter the alpha as a percent rounded to 2 decimal places. Round the ratio to 4 decimal places.)

Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 –$261,103 –$15,350 1 26,600 5,181 2 51,000 8,059 3 51,000 13,055 4 392,000 8,690 Whichever project you choose, if any, you require a 6 percent return on your investment. a. What is the payback period for Project A? b. What is the payback period for Project B? c. What is the discounted payback period for Project A? d. What is the discounted payback period for Project B? e. What is the NPV for Project A? f. What is the NPV for Project B ? g. What is the IRR for Project A? h. What is the IRR for Project B? i. What is the profitability index for Project A? j. What is the profitability index for Project B?

1. You have just landed a job with a prestigious venture capital firm and will be making a great salary in the Spring. Your recent ambition to own a nice Rolex Watch will now be possible. You find that the watch is currently priced at $50,000 for a limited time and you won’t have access to your huge $100,000 signing bonus until 4 months from now. Although you do not have the cash to buy the watch, the dealer doesn’t want to lose a sure sale. He is therefore willing to quote you a guaranteed price for the watch 4 months from now if agree to purchase the watch today.   The reason he is willing to do that is because he can book the sale for accounting purposes today as long as the deal is signed and both parties are obligated to the transaction.
2. 1. a. If the dealer quotes you a price of $54,000 (and is willing to buy or sell forward at this price), is there an opportunity to make a zero investment profit and if so how would you specifically do so and how much would the profit would you make? Assume that you could borrow or lend from a bank at the 12% mentioned in part a) above.
   2. b. If the appropriate borrowing rate for a Rolex loan is 12%, what price does he quote today to transact 4 months from now? Assume that any borrowing or investing associated with the Rolex transaction must be related to the 12% loan rather than at the risk-free rate. Also assume that the dealer’s spot and forward prices are good for buying or selling at those prices.