The residents of nnn spend all of their income on cauliflower, broccoli, and carrots. In 2020, they spend a total of $250 for 100 heads of cauliflower, $100 for 50 bunches of broccoli, and $250 for 500 carrots. In 2021, they spend a total of $210 for 60 heads of cauliflower, $180 for 90 bunches of broccoli, and $270 for 450 carrots.

Complete the following table by calculating the price of one unit of each vegetable in each year.

Using 2020 as the base year, the CPI for 2020 is   , and the CPI for 2021 is   .

The inflation rate in 2021 is    % using the CPI.

Clearvoice is a wireless telephone monopolist in a rural area. There are 100 consumers in the market, each of whom has a monthly demand curve for wireless minutes of Qd= 100 -100P, where P is the per-minute price in dollars. The marginal cost of providing wireless service is 10 cent per minute. If Clearvoice charges 40 cents per minute, how large a fixed fee can it charge and still persuade consumers to buy? What is its profit from each consumer? Its total profit? What if the firm charges 10,20,30 cents per minute?

Clearvoice is a wireless telephone monopolist in a rural area. There are 100 consumers in the market, each of whom has a monthly demand curve for wireless minutes of Qd=100-100P, where P is the per-minute price in dollars. The marginal cost of providing wireless service is 10 cents per minute. If Clearvoice charges 40 cents per minute, how large a fixed fee can it charge and still persuade consumers to buy? What is it’s profit from each consumer? It’s total profit? What if the firm charges 10,20,30 cents per minute?

2. Suppose two firms are competing in prices (Bertrand) in an industry where demand is P=300-10Q. Assume neither firm faces any fixed costs.

(a) If both firms have MC=100, what is the equilibrium price? Profits?

(b) Suppose one firm has MC=200 and one has MC=0. Approximately how much profit does each firm make?

(c) Suppose one firm has MC=150 and one has MC=100. Approximately how much profit does each firm make?

Q3. You collected 10 years of daily data. Based on that you find first trading day of each month 's average return is 50 bps. Mean return for all days is 4 bps. Stdev across all days is 100 bps. Stdev for first day of each month only is 125 bps.

Q3a. What is the mean return for trading days other than first day of the month?

Q3b. Take the difference in sample mean for first day vs. other days. This is your point estimate for the difference b/w two types of days. What is that point estimate? What is stdev for the point estimate?

Q3c. What is the probability of observing the point estimate above under the null hypothesis that the true difference is zero (this is known as p-value)?  

Q3d. What is the 95% Confidence interval for the point estimate? At 95% confidence, should you reject or accept that first days’ mean return is not different from other days of the month?

You collected 10 years of daily data. Based on that you find first trading day of each month 's average return is 50 bps. Mean return for all days is 4 bps. Stdev across all days is 100 bps. Stdev for first day of each month only is 125 bps.

a. What is the mean return for trading days other than first day of the month?

b. the difference in sample mean for first day vs. other days. This is your point estimate for the
difference b/w two types of days. What is that point estimate? What is stdev for the point estimate?

c. What is the probability of observing the point estimate above under the null hypothesis that the true
difference is zero (this is known as p-value)?

d. What is the 95% Confidence interval for the point estimate? At 95% confidence, should you reject
or accept that first days’ mean return is not different from other days of the month?

SmartDeal Inc. has just paid dividend of $5. The dividend is expected to increase at 16% for the first 15 years, -6% for the next 10 years and then 2% forever. The required rate of return is 12% for the first 8 years and 20% thereafter. Find its share price today. (Please show your work, and do NOT use Excel to solve)

Today is 1 July 2020. Joan has a portfolio which consists of two different types of financial instruments (henceforth referred to as instrument A and instrument B). Joan purchased all instruments on 1 July 2011 to create this portfolio and this portfolio is composed of 31 units of instrument A and 33 units of instrument B.

• Instrument A is a zero-coupon bond with a face value of 100. This bond matures at par. The maturity date is 1 January 2030.
• Instrument B is a Treasury bond with a coupon rate of j₂ = 2.20% p.a. and face value of 100. This bond matures at par. The maturity date is 1 January 2023.

(a) Calculate the current price of instrument A per $100 face value. Round your answer to four decimal places. Assume the yield rate is j₂ =3.59% p.a.

Select one:

a. 50.8622

b. 51.1636

c. 51.7752

d. 71.3177

(b) Calculate the current price of instrument B per $100 face value. Round your answer to four decimal places. Assume the yield rate is j₂ = 3.59% p.a. and Joan has just received the coupon payment.

Select one:

a. 96.0799

b. 86.9978

c. 97.8046

d. 96.7046

(c) What is the duration of instrument B? Express your answer in terms of years and round your answer to three decimal places. Assume the yield rate is j₂ = 3.59% p.a.

Select one:

a. 4.890

b. 5.835

c. 2.918

d. 2.445

(d) Based on the price in part a and part b, and the duration value in part c, calculate the current duration of Joan’s portfolio. Express your answer in terms of years and round your answer to two decimal places.

Select one:

a. 5.33

b. 5.25

c. 6.44

d. 7.04

Today is 1 July 2020. Joan has a portfolio which consists of two different types of financial instruments (henceforth referred to as instrument A and instrument B). Joan purchased all instruments on 1 July 2013 to make(Create) this portfolio and this portfolio is composed of 26 units of instrument A and 41 units of instrument B.

Instrument A is a zero-coupon bond with a face value of 100. This bond matures at par. The maturity date is 1 January 2030.

Instrument B is a Treasury bond with a coupon rate of j2 = 3.27% p.a. and face value of 100. This bond matures at par. The maturity date is 1 January 2023.

(a) Calculate the current price of instrument A per $100 face value. Round your answer to four decimal places. Assume the yield rate is j2 =2.59% p.a.

Select one:

a. 64.5666

b. 78.3119

c. 61.5183

d. 65.4027

b) Calculate the current price of instrument B per $100 face value. Round your answer to four decimal places. Assume the yield rate is j2 = 2.59% p.a. and Joan has just received the coupon payment.

Select one:

a. 101.6359

b. 103.2709

c. 105.6942

d. 101.9506

(c) What is the duration of instrument B? Express your answer in terms of years and round your answer to three decimal places. Assume the yield rate is j2 = 2.59% p.a.

Select one:

a. 2.422

b. 5.767

c. 4.843

d. 2.883

(d) Based on the price in part a and part b, and the duration value in part c, calculate the current duration of Joan's portfolio. Express your answer in terms of years and round your answer to two decimal places.

Select one:

a. 6.79

b. 4.74

c. 4.73

d. 6.19

Mini Cases

Shrieves Casting Company is considering adding a new line to its product mix, and the capital budgeting analysis is being conducted by Sidney Johnson, a recently graduated MBA. The production line would be set up in unused space in Shrieves’s main plant. The machinery’s invoice price would be approximately $200,000, another $10,000 in shipping charges would be required, and it would cost an additional $30,000 to install the equipment. The machinery has an economic life of 4 years, and Shrieves has obtained a special tax ruling that places the equipment in the MACRS 3-year class. The machinery is expected to have a salvage value of $25,000 after 4 years of use. The new line would generate incremental sales of 1,250 units per year for 4 years at an incremental cost of $100 per unit in the first year, excluding depreciation. Each unit can be sold for $200 in the first year. The sales price and cost are both expected to increase by 3 percent per year due to inflation. Further, to handle the new line, the firm’s net operating working capital would have to increase by an amount equal to 12 percent of sales revenues. The firm’s tax rate is 40 percent, and its overall weighted average cost of capital is 10 percent.

e. Estimate the required net operating working capital NOWC for each year and the cash flow due to changes in NOWC.

f. Calculate the after-tax salvage cash flow.

g. Calculate the project cash flows for each year. Based on these cash flows and the average project cost of capital, what are the project’s NPV, IRR, MIRR, PI and payback and discounted payback? Do these indicators suggest that the project should be undertaken?