Question

You have finally saved​ $10,000 and are ready to make your first investment. You have the three following alternatives for investing that​ money:

A Microsoft bond with a par value of ​$1000 that pays 8.75 percent on its par value in​ interest, sells for ​$1235.11​, and matures in 9 years.

Southwest Bancorp preferred stock paying a dividend of ​$2.59 and selling for ​$22.63.

Emerson Electric common stock selling for ​$56.03​, with a par value of​ $5. The stock recently paid a ​$1.38 ​dividend, and the​ firm's earnings per share has increased from ​$2.39 to ​$3.85 in the past 5 years. The firm expects to grow at the same rate for the foreseeable future.

Your required rates of return for these investments are 5.50 percent for the​ bond, 12.00 percent for the preferred​ stock, and 13.00 percent for the common stock. Using this​ information, answer the following questions.

a. Calculate the value of each investment based on your required rate of return.

b. Which investment would you​ select? Why?

c. Assume Emerson​ Electric's managers expect an earnings to grew at 3 percent above the historical growth rate. How does this affect your answers to parts ​(a​) and ​(b​)?

d. What required rates of return would make you indifferent to all three​ options?

If your required rate of return on the bonds is 5.50​%, what is the value of Microsoft​ bond?

Answer 1

To solve this question just input those variables which are to be used in logistic regression, as the question talks about using two variables only that is total loans and leases to total assets & total expenses/ total assets, so we will not input total cap/assets as an input variable in our excel, here we go

As one can see, we have taken only two variables , total exp/assets and total lns & leases/ assets in calculation, follwing steps have been followed to construct the above table

1. Assume logit= b0+ b1* independent variable1+ b2* independent variable 2 , take values of b0=0.1, b1=0.1, b2=0.1, note that these values of b0, b1 and b2 are just taken for calculation, one could assume any values here for bo , b1 and b2

2. Calculate exponential of logit in the next column by using exp (value in previous column)

3. Calculate probability by using formula, probability= exp (logit)/ { 1+ exp(logit)} in the next column

4. In next column, calculate log likelihood by using formula : financial condition value (i.e. 1 or 0) * LN( probability calculated in previous column) + (1- financial condition value)* LN( 1- probability calculated in previous column)

5. take the total of the column values of log likelihood

6. use solver function in excel to change this total by putting max value of 0 and changing the variable cells containing assumed values of b0, b1 and b2 , by clicking on solve, you will get actual values of b0, b1 and b2

which comes out to be b0=-14.72, b1=89.83, b2= 8.37

therefore you will get logit as

-14.72+ 89.83* Total exp/assets+8.37*Total lns & lsses/ assets

With values given in the question as total exp/ assets= 0.11 and total loans & leases/ assets= 0.6 , we get

logit as -14.72+ 89.83* 0.11+ 8.37*0.6= 0.1833

exp (logit) = 1.20

Probability= 0.546

Loglikelihood= 1*LN(0.546)+0*LN(1-0.546)= LN(0.546)= -0.605