You are considering two different stirring machines for your goat cheese factory. Both meet your performance requirements but differ as tabled below. If you anticipate remaining in business for at least 15 years, and your discount rate is 4%, which machine should you select? Assume no taxes. Machine A Machine B Acquisition cost $40,000 $65,000 Yearly operating cost $10,000 $9,000 Useful Life 3 years 5 years

ABC is considering a leasing arrangement to finance some special manufacturing tools that is needed for production during the next four years. A planned change in the firm’s production technology will make the tool obsolete after 4 years. The firm will depreciate the cost of the tools on a straight-line basis. The firm can borrow $5,000,000, the purchase price, at 12% to buy the tools or make four equal end of the year lease payments of $2,500,000. The firm’s tax rate is 30% and the firm’s before-tax cost of debt is 10%. Annual maintenance costs associated with ownership are estimated at $250,000. Should the firm lease or buy?

The foreign exchange quotes are given below:

Braggart Bank 100.80 yen/$

Thrifty Bank 100.55 yen/$

• If we assume no transaction costs, there is evidently an opportunity for arbitrage here.

• If an arbitrageur started with $10,000, exactly how would she make profits and how much profit would she make?

• As many traders engage in arbitrage what do you expect to see in the above quotes at these two banks?

• If there is a 12.5 basis points transaction fee for each exchange is there still an opportunity for arbitrage?

Duke Corporation is analyzing two machines to determine which one it should purchase. Whichever machine is purchased will be replaced at the end of its useful life. The company requires a 12 percent rate of return and uses straight-line depreciation to a zero book value over the life of the machine. Machine A has a cost of $405,000, annual operating costs of $21,000, and a 3-year life. Machine B costs $276,000, has annual operating costs of $33,000, and a 2-year life. The firm currently pays no taxes. Which machine should be purchased and why?

You have just turned twenty-six years of age and feel it is necessary to upgrade your qualifications. After some consideration, you feel that undertaking full-time study for an MPA degree at the Fletcher School is one alternative. For the two years of full-time study, tuition and living expenses will be $55,000 per year. In addition, you will have to give up your current job with a salary of $75,000 per year. Assume all cash flows occur at the end of the year. Assume a real interest rate of 3% per year, ignoring taxes. Also assume that the salary increase is a fixed real amount that starts after you complete your degree (at the end of the year following graduation) and lasts until retirement at age sixty-five. In order to justify the investment, by how much does your salary have to increase as a result of getting the MPA degree?

A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond fund, and the third is a T-bill money market fund that yields a rate of 5.5%. The probability distribution of the risky funds is as follows:

The correlation between the fund returns is 0.15.

Solve numerically for the proportions of each asset and for the expected return and standard deviation of the optimal risky portfolio.

Portfolio invested in stock? %

Portfolio invested in bond? %

Expected Return? %

Standard Deviation? %

A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond fund, and the third is a T-bill money market fund that yields a sure rate of 5.5%. The probability distributions of the risky funds are:

The correlation between the fund returns is 0.15.

Suppose now that your portfolio must yield an expected return of 12% and be efficient, that is, on the best feasible CAL.

a. What is the standard deviation of your portfolio?

b-1. What is the proportion invested in the T-bill fund?

b-2. What is the proportion invested in each of the two risky funds?

A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond fund, and the third is a T-bill money market fund that yields a sure rate of 5.2%. The probability distributions of the risky funds are:

The correlation between the fund returns is 0.0222.

What is the expected return and standard deviation for the minimum-variance portfolio of the two risky funds?

Expected Return=?

Standard Deviation=?

What would be the net annual cost of the following checking accounts?

a. Monthly fee, $3.75; processing fee, .35 cents per check. Checks written, an average of 14 a month.

b. Interest earnings of 4 percent with a $550 minimum balance; average monthly balance, $650; monthly service charge of $12 for falling below the minimum balance, which occurs three times a year (no interest earned in these months)

Assume a machine costs $404,000 and lasts four years before it is replaced. The operating cost is $47,000 a year. Ignore taxes. What is the equivalent annual cost if the required rate of return is 12.5 percent? (Hint: the EAC should account for both initial investment and annual operating costs)

A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond fund, and the third is a T-bill money market fund that yields a sure rate of 3.0%. The probability distributions of the risky funds are:   

The correlation between the fund returns is .0667.

Suppose now that your portfolio must yield an expected return of 9% and be efficient, that is, on the best feasible CAL.

a. What is the standard deviation of your portfolio? %

b-1. What is the proportion invested in the T-bill fund? %

b-2. What is the proportion invested in each of the two risky funds?

stocks? %

bonds? %

Greta, an elderly investor, has a degree of risk aversion of A = 3 when applied to return on wealth over a one-year horizon. She is pondering two portfolios, the S&P 500 and a hedge fund, as well as a number of one-year strategies. (All rates are annual and continuously compounded.) The S&P 500 risk premium is estimated at 9% per year, with a SD of 24%. The hedge fund risk premium is estimated at 14% with a SD of 39%. The returns on both of these portfolios in any particular year are uncorrelated with its own returns in other years. They are also uncorrelated with the returns of the other portfolio in other years. The hedge fund claims the correlation coefficient between the annual returns on the S&P 500 and the hedge fund in the same year is zero, but Greta is not fully convinced by this claim.

What should be Greta’s capital allocation? (Do not round your intermediate calculations. Round your answers to 2 decimal places.)