The following table contains the historic returns from a portfolio consisting of large stocks and a portfolio consisting of long-term Treasury bonds over the last 20 years. T-bills returns represent risk-free returns. Analyze the risk-return trade-off that would have characterized these portfolios. The following dataset is also available in Excel format in Module 3 Resources on Canvas. Returns in the dataset are in percents. For example, 31.33 means 31.33% per year.

a. Estimate the annual risk premium of large stocks, and T-bonds?. (Round your answers to 2 decimal places.)

b. Estimate the annual volatility of large stocks and long-term T-bonds, respectively. (Round your answers to 2 decimal places.)

c. Estimate the Sharpe ratio of large stocks and long-term T-bonds, respectively. (Round your answers to 2 decimal places.)

d. Now assume that you have always invested half of your wealth in the stock and the other half in the T-bonds. Estimate the Sharpe ratio of your portfolio. (Round your answers to 2 decimal places.)

FOR1. Open file Nuclear Power. Select data for Canada. Address the following questions.

a. Provide a plot of the data over time in the space below. (2 pts)

[plot here]

b. Choose an appropriate forecasting model and forecast for the next 3 periods (provide forecast in the table below). Explain model selection approach. (8 pts)

c. Using the same data, forecast the next 3 periods in the time series using the 5-period moving average and indicate the values below. (3 pts)

d. Using the same data, forecast for the next 3 periods in the time series using the single exponential smoothing technique with a smoothing constant of 0.3 and indicate the values below. (3 pts)

e. Compare results from models b, c and d. Which forecast model do you recommend to use for the next 3 periods? Justify your recommendation (6 pts)

DATA:

A credit union is evaluating their staffing schedule to assure they have sufficient staff for their drive-up window during the lunch hour (12:00 pm to 1:00 pm). Assume the number of people who arrive at their drive-up window in a 15-minute time period during the lunch hour has a Poisson distribution with λ = 2.6.

a. What is the probability no customers will arrive between 12:15 and 12:30?

b. What is the probability fewer than 2 people will arrive between 12:15 and 12:45?

A, B, and C each contribute $20,000 to form the ABC general partnership. The partnership agreement satisfies the primary test for economic effect under Internal Revenue Code Section 704(b). Partnership profits and losses are allocated 40% to A, 40% to B and 20% to C. The partnership uses its $60,000 cash and borrows an additional $40,000 on a recourse basis and purchases land for $100,000.

(a) How will the $40,000 liability be allocated and what will be each partner’s outside basis?

(b) What result in (a), above, if A, B and C had contributed $10,000, $20,000 and $30,000, respectively, to the ABC partnership?

(c) What result in (a), above, if A and B are limited partners who are not obligated to restore a capital account deficit but the partnership agreement includes a qualified income offset?

(d) What result in (c), above, if A contributes $15,000 of stock to the partnership as security for the liability and all income, gain or loss on the stock is allocated to A? What result if A contributes his $15,000 note as security for the liability?

(e) What result in (c), above, if A personally guarantees the $40,000 liability?

McDonald’s: Comeback in The U.S. Burger Maker

McDonald’s, one of the world’s most iconic brands and companies, faced a crossroad in its comeback path. When Steve Easterbrook was appointed CEO in 2015, the company had lost an astonishing 500,000 U.S. customers in the previous four years. In 2015, for the first time, McDonald’s closed more restaurants than it opened. Same-store domestic sales fell 1.3 percent in 2016, and the number of customers visiting McDonald’s fell 2.1 percent that year, the fourth straight year for a decline in customers. Reflecting this trend, many younger people had never dined at McDonald’s. As indicated by its recent declines in revenue and profit, McDonald’s faced a variety of challenges. Prices in groceries fell at the same time that the minimum wage was increasing and increasing dramatically in some cities and states. Given that labor was the largest component

of cost for restaurant chains, the cost gap between dining out and eating in was at its largest since the 1980s. Efforts to add more products for health-conscious customers such as salads and oatmeal had failed to attract enough new customers to stem the decline. The all-day breakfast menu, introduced in 2015, was a hit, but by 2017, it was losing steam as an engine of growth. A particularly salient threat was the rise of fast, casual burger chains that focused on better-tasting burgers. Chains such as Five Guy’s, The Habit Burger Grill, SmashBurger, and In-N-Out among others were expanding at a rapid rate. Such chains typically started as regional enter-prises, but each was expanding geographically. Five Guys, particularly, had clearly broken out as a national competitor. To combat the various threats it faced, McDonald’s was implementing digital kiosks for ordering. The company was also experimenting with home delivery and table ser-vice. Perhaps most importantly, McDonald’s was consider-ing changes in the way it prepared its burgers to improve taste. Such changes had the potential to significantly alter McDonald’s strategic position with respect to cost and differentiation. With McDonald’s stock price lagging behind both the S&P 500 and Dow Jones Industrial Average, the company needed to figure the right path to a more sustain-able turnaround.

McDonald’s Model

McDonald’s employed the franchise business model for the vast majority of its restaurants. The franchise model was credited with McDonald’s sustained growth and global expansion.

In many instances, McDonald’s acquired and developed prime real estate locations that it then leased back to franchisees. Some observers argued that McDonald’s restaurants often enjoyed locational advantages com-pared to other burger chains. McDonald’s set a goal of going from 83% to 95% franchise ownership of its restaurants. This would follow several other chains in what some termed the asset-light business model. Burger King, Carl’s Jr., Hardee’s, Dunkin Donuts, and Subway were all either 100-percent or nearly - 100-percent franchised owned. The franchise model posed some challenges.

Getting franchisees to upgrade locations, adopt new technologies, and change the standard McDonald’s menu often took considerable time and effort. Such changes could take several months at a minimum and, in some cases, several years. Though there was some regional variability such as the Mc Lobster in Maine, McDonald’s offered a high degree of standardization in its menu across the U.S. McDonald’s offered a breakfast menu, which in 2015, was extended from only morning hours to an all-day offering. McDonald’s was best known for its hamburgers, but offered other items including Chicken Mc Nuggets and a variety of sandwiches. McDonald’s had emphasized with some success a McCafé line of items such as coffee, latte, shakes and smoothies.

From time to time, McDonald’s had offered special items for a limited time and had incrementally changed its menu from time to time. Many observers argued that, because of McDonald’s immense scale, menu changes often occurred slowly both in formulation and implementation. For exam-ple, it did not expect to complete its plan to switch to free range eggs until 2025.

Despite the extent of its franchising, McDonald’s was renowned for the uniformity of experience and consistency in quality that it offered customers. McDonald’s typically served food within minutes of a customer’s order. It was not unusual for customers to receive their food within one PC 2–3 minute of ordering. While downtown McDonald’s locations in the largest cities were an exception, most U.S. McDonald’s locations offered drive-through service. Some estimates put the percentage of revenue from drive-through customers at 70 percent of revenue for the typical McDonald’s. McDonald’s had optimized its food production over several decades to deliver food of consistent quality with the short waits that customers expected. McDonald’s supply chain could procure, process, and deliver frozen beef and potatoes to its stores with both high reliability and scale. This system helped McDonald’s both reduce costs and ensure a high degree of consistency. McDonald’s hamburgers were generally cooked and then warmed before delivery to a customer. This allowed McDonald’s to serve customers much faster than waiting for orders before cooking the burgers.

Trends in Hamburgers

The market for premium burgers made with fresh beef had increased dramatically in the previous decade and was expected to double over the next five years. As recently as 2001, Five Guys had consisted of five stores in the Washington D.C. area. By 2016, it had more than 1,400 locations. Though much smaller than Five Guys, Shake Shack was founded in 2004, and Smash-burger in 2007, while The Habit Burger Grill expanded from 23 restaurants in 2007 to 145 by 2016. Even In-N-Out, a California-based chain that had traditionally eschewed growth and geographic expansion, had grown from 89 locations in California and Las Vegas in 1999 to over 300 locations in the western United States and Texas.

All of these chains featured menus with significantly fewer items than McDonald’s and were, arguably, much more focused on burgers. All featured burgers made from fresh beef that were cooked upon order. This necessarily involved longer wait times. Most did not offer drive-through service. In-N-Out was the exception in that much of its business was drive-through and its hamburgers were not offered at a premium price. In addition to the several fast-growing chains that had emerged, there were many smaller chains that operated in various cit-ies across the U.S. Multiple polls had shown consumers preferred the taste of burgers from chains such as Habit, Smashburger, In-N-Out, Five Guys, and Shake Shack among others to those of McDonald’s. Many were limited to specific metropolitan areas while others had a larger geographic footprint. McDonald’s also faced competition from its larger traditional competitors such as Burger King, Wendy’s, Jack in the Box, as well as Carl’s Jr. and its sister chain, Hardee’s. Unlike the upstarts in the premium segment, the traditional competitors had not experienced significant growth in previous years. At one point after 2010, Burger King experienced same-store sales declines for 11 consecutive quarters. The number of Wendy’s locations had declined from approximately 6,500 to 5,722 in the U.S. since 2011.

McDonald’s Strategy

The growth in premium burgers made from fresh beef was not lost on McDonald’s as consumer ratings showed the company lagging behind competitors on burger taste. The company initially responded by experimenting with the removal of artificial preservatives and replacing margarine with butter among other similar changes. McDonald’s then used Dallas as a test market for hamburgers made from fresh beef. The fresh-beef burgers were well-received by customers who rated them higher in taste than McDonald’s traditional burgers. McDonald’s announced in March 2017 that, by mid-2018, Quarter Pounders would be prepared with fresh beef in a majority of its restaurants. Quarter Pounders would also be cooked when ordered rather than cooked previously and stored in warmers.

A shift to fresh beef was not without risks. Industry insiders suggested that employing fresh beef in burgers could extend the time between the order and the serving of a burger. Using fresh beef would likely increase the cost of burgers. Price sensitive customers might be less inclined to purchase McDonald’s burgers. The use of fresh beef increased health risks as well. Fresh beef was much more susceptible to viruses than frozen beef. Chipotle’s had still not fully recovered its customer base from problems with bacterial contamination more than two years earlier. A change to fresh beef would also dramatically change McDonald’s supply chain and logistics for delivering beef to its stores. roll out mobile ordering to all of its U.S. locations. Pizza chains had successfully used mobile ordering for years. In another action that followed long-standing practice by pizza chains, McDonald’s also announced that it would dramatically accelerate and scale food delivery. The company had long experimented with delivery and already offered it in markets other than the U.S., particularly Asia and the Middle East.

It was not clear how McDonald’s planned to rapidly scale delivery, but there was considerable industry speculation that the company might enter an alliance with a delivery service firm such as GrubHub, Inc. McDonald’s vast superiority in the number of its restaurants was seen as an advantage in delivery. Many more potential customers lived or worked close to a McDonald’s compared to rivals in burgers and fast food generally. In addition to delivery and mobile ordering, the company also planned to spend approximately $1 billion renovating its existing stores. As part of McDonald’s turnaround strategy, the company planned to emphasize the McCafe drinks. In February of 2017, the company announced that McCafe drinks would sell for $2. More generally, McDonald’s had placed a global emphasis on serving high quality coffee at a price consider-ably less than coffee houses.

Most of McDonald’s strategic moves—such as the emphases on mobile ordering and store renovation—were seen as either low-risk or catch-up strategies. A shift to fresh beef would potentially have a more profound effect on the company.

Question

Would McDonald’s traditional price-sensitive customers pay a premium for more costly burgers? Would they tolerate longer waits both in restaurants and drive-through

1.Marginal profit is equal to marginal revenue plus marginal cost.

True or false

Spacely Sprockets' short-run cost curve is C(q,K)=25q2K+15KC(q,K)=25q2K+15K, where q is the number of Sprockets produced and K is the number of robot hours Spacely hires. Currently, Spacely 2.hires 10 robot hours per period. The short-run marginal cost curve is MC(q,K)=50qKMC(q,K)=50qK. If Spacely receives $250 for every sprocket he produces, his profit maximizing output level is 50.

True or False

3.Consider a competitive market in which the market demand for the product is expressed as P = 75 - 1.5Q, and the supply of the product is expressed as P = 25 + 0.5Q. Price, P, is in dollars per unit sold, and Q represents the rate of production and sales in hundreds of units per day. The typical firm in this market has a marginal cost of MC=2.5+10qMC=2.5+10q.

In this case, the typical firm will maximize its profit at the point where MC = P =

True or False

4. Revenue is equal to price times quantity.

True or false

5. The table below lists the short-run costs for One Guy's Pizza. If One Guy's can sell all the output it produces for $12 per unit, One Guy's should produce 58 pizzas to maximize profits.

True or false

6. Producer surplus in a perfectly competitive industry is the difference between revenue and variable cost. True or false

7. he following table contains information for a price-taking competitive firm. The maximum profit is $13.

True or false

8. Average total cost for the firm in the following table is U-shaped.

True or false

9. Consider the following diagram, where a perfectly competitive firm faces a price of $40. At the profit-maximizing level of output, total revenue is $2,400.

True or false

In an​ experiment, college students were given either four quarters or a​ $1 bill and they could either keep the money or spend it on gum. The results are summarized in the table. Complete parts​ (a) through​ (c) below. Purchased Gum Kept the Money Students Given Four Quarters 27 13 Students Given a​ $1 Bill 18 26 a. Find the probability of randomly selecting a student who spent the​ money, given that the student was given four quarters. The probability is nothing . ​(Round to three decimal places as​ needed.) b. Find the probability of randomly selecting a student who kept the​ money, given that the student was given four quarters. The probability is nothing . ​(Round to three decimal places as​ needed.) c. What do the preceding results​ suggest?

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM

You expect the risk-free rate (RFR) to be 3 percent and the market return to be 8 percent. You also have the following information about three stocks.

Refer to Exhibit 7.2. What is your investment strategy concerning the three stocks?

ABC Ltd is a wholesaler of furniture which has been in operation for ten years. It buys furniture from five major manufacturers and sells them to a range of customers. The company currently has a customer base of over 500 customers most of which are credit customers. The receivables balance comprises customers owing up to $2,000,000 to smaller balances of about $10,000, all with many different due dates for payments and credit limits. The level of receivables is considerably higher than last year and there are concerns about the creditworthiness of some customers.

The company has only recently computerised its operations including its accounting system. Manual invoices, receipts and cheques have been replaced with computer-generated documents. The sub-ledgers are now maintained in the accounting software which have facilitated more timely generation of statements much to the delight of customers. The sales process is initiated by a Purchase Order from the customer which is used to raise a system generated Sales Invoice and Delivery Slip. A copy of the Delivery Slip is given to the Security at the gate for logging and check off to allow passage of goods through the gate; another copy of the Delivery Slip is given for the customer to sign and then returned to the Sales Dept. All information is stored on ABC Ltd’s computer systems. There is no backup of data off site. The client’s staff are helpful although they cannot confirm completeness of documentation for the system.

You are the audit senior in charge assigned for ABC Ltd’s audit and you are in the process of planning the current year’s audit. You are contemplating the changes in the client’s audit environment and the impact that these changes will have on the audit risk and the audit methodology. Your audit assistant is curious why it is necessary to plan the audit from one year to the next. Why not just copy the previous year’s workpapers?

3. (a) Your audit plan notes that you will be testing the system of internal controls for the ‘three Es’. Explain the ‘three Es’ and the impact these will have on the audit if positive and if negative.

(b) State the audit procedure you will be using for the following:

i) To test the control over completeness of sales

ii) To test the accuracy and existence of receivables balances

(c) List the set of management assertions for “Sales” and “Accounts Receivable” which you will be testing.

distinction between active and real power?

distinction between complex and apparent power?

distinction between effective and rms value of a voltage or current?

what are three applications of transformer?