Abe Forrester and three of his friends from college have interested a group of venture capitalists in backing their business idea. The proposed operation would consist of a series of retail outlets to distribute and service a full line of vacuum cleaners and accessories. These stores would be located in Dallas, Houston, and San Antonio. To finance the new venture two plans have been proposed:

Plan A is an all-common-equity structure in which $2.0 million dollars would be raised by selling 80,000 shares of common stock.

Plan B would involve issuing $1.0 million in long-term bonds with an effective interest rate of 12.0 percent plus another $ 1.0 million would be raised by selling 40,000 shares of common stock. The debt funds raised under Plan B have no fixed maturity date, in that this amount of financial leverage is considered a permanent part of the firm's capital structure.

Abe and his partners plan to use a 40 percent tax rate in their analysis, and they have hired you on a consulting basis to do the following:

a. Find the EBIT indifference level associated with the two financing plans.

b. Prepare a pro forma income statement for the EBIT level solved for in part a that shows that EPS will be the same regardless whether Plan A or B is chosen.

The emitting antenna of a 100-kW radio station radiates equally in all directions.

Part A

What is the magnitude Emax 600 m from the antenna?

Express your answer to two significant digits and include the appropriate units.

Emax =

Part B

What is the magnitude Bmax 600 m from the antenna?

Express your answer to two significant digits and include the appropriate units.

Bmax =

Part C

For the distance of 600 m from the antenna, calculate the maximum potential difference caused between the ends of a receiving antenna that is 1.0 m long, assuming the antenna is aligned perfectly with the electric field of the radio wave.

Express your answer to two significant digits and include the appropriate units

V =

Part D

What is the magnitude Emax 50 km from the antenna?

Express your answer with the appropriate units.

Emax =

Part E

What is the magnitude Bmax 50 km from the antenna?

Express your answer with the appropriate units.

Bmax =

Part F

For the distance of 50 km from the antenna, calculate the maximum potential difference caused between the ends of a receiving antenna that is 1.0 m long, assuming the antenna is aligned perfectly with the electric field of the radio wave.

Express your answer with the appropriate units.

V =

Discussion Questions:

1. Discuss the different types of unemployment that exist in the economy.
2. Explain what is participation rate in the labor force?
3. How much does the labor force participation rate affect the unemployment rate?
4. Do you think one type of unemployment is worse than others and why?
5. What can governments do to assist in reducing this type of unemployment?

Calculations:

1. Table 1.0 below provides nominal GDP, real GDP and GDP deflator data.

(a)            Complete Table 1.0

(b)             What is the base year for the GDP deflator?

(c)             Calculate the percentage change in nominal GDP, real GDP, and the GDP deflator between 2014 and 2015.

(d)            Was the increase in nominal GDP due mostly to an increase in real GDP or to an increase in the price level?            

TABLE 1.0

2. Consider the following data on Canadian GDP:

                                NOMINAL GDP                             GDP DEFLATOR

YEAR             (IN BILLIONS)                (BASE YEAR 2010)

2011                              $725                                         101.2                                          

2012                               $762                                             102.4

a.            What was the growth rate of nominal income between 2011 and 2012? (Note: The growth rate is the percentage change from one period to the next.)

b.            What was the growth rate of the GDP deflator between 2011 and 2012?

c.            What was real income in 2011 measured in 2010 prices?

d.            What was real income in 2012 measured in 2010 prices?

e.            What was the growth rate of real income between 2011 and 2012?

f.            Was the growth rate of nominal income higher or lower than the growth rate of real income? Explain.

3. Suppose that the residents of Wolfgang spend all of their income on cauliflower, broccoli, and carrots. In 2014 they buy 100 heads of cauliflower for $200, 50 bunches of broccoli for $75, and 500 carrots for $50. In 2015 they buy 75 heads of cauliflower for $225, 80 bunches of broccoli for $120, and 500 carrots for $100. If the base year is 2014, what is the CPI in both years? What is the inflation rate in 2015?

1 Risk(s) of diversifying an investment portfolio internationally may include each of the

                                                                following EXCEPT

1. possible fluctuations in the currency exchange rates.
2. political risk associated with actions the governments in other countries may take.
3. an increase in the number and variety of holdings within the investor’s portfolio.
4. the possibility that a foreign government may be overthrown.

2 Each of the following is a “systematic” risk factor that cannot be eliminated by

                                                                diversifying a portfolio EXCEPT

1. the level of interest rates in the economy.
2. a labor strike at the General Motors’ production facilities.
3. the unemployment level.
4. the annual inflation rate.

3. With regard to beta in the Security Market Line (SML) equation,

1. the beta coefficient for the entire market equals 1.0.
2. beta values higher than 1.0 are more risky than the market average.
3. beta values less than 1.0 are less risky than the market average.
4. A and B and C.
5. B and C.

4 In the Security Market Line (SML) equation, the return on the ________________

                                                                can be used as an approximation of the risk-free rate of return (R_F).

1. U.S. Treasury Bill (T-Bill).
2. Dow Jones’ Industrial Average.
3. Standard & Poor’s 500 Index.
4. Moody’s Bond Index.

5. Assume that inflation is expected to increase by 2% during the coming year. This will

1. cause the entire Security Market Line (SML) equation, when graphed, to shift downward

by 2%.

2. cause the entire Security Market Line (SML) equation, when graphed, to shift upward by 2%.
3. have no impact on the graph of the Security Market Line (SML) equation.

6. Assume that investor risk aversion decreases due to the very favorable economy. This will

1. have no impact on the graph of the Security Market Line (SML) equation.
2. cause the Y-axis intercept of the Security Market Line (SML) equation to remain constant,

when graphed, but increase the slope of the SML.

3. cause the Y-axis intercept of the SML equation to remain constant, when graphed, but

decrease the slope of the SML.

4. cause the entire SML, when graphed, to shift downward, parallel to the original SML graph.

You are evaluating the performance of two portfolio managers, and you have gathered annual return data for the past decade:

1. For each manager, calculate (1) the average annual return, (2) the standard deviation of returns, and (3) the semi-deviation of returns. Do not round intermediate calculations. Round your answers to two decimal places.

   	Average annual return	Standard deviation of returns	Semi-deviation of returns
   Manager X	%	%	%
   Manager Y	%	%	%

2. Assuming that the average annual risk-free rate during the 10-year sample period was 3.0%, calculate the Sharpe ratio for each portfolio. Based on these computations, which manager appears to have performed the best? Do not round intermediate calculations. Round your answers to three decimal places.

   Sharpe ratio (Manager X):

   Sharpe ratio (Manager Y):

   Based on Sharpe ratio -Select-Manager XManager Y has performed the best.

3. Calculate the Sortino ratio for each portfolio, using the average risk-free rate as the minimum acceptable return threshold. Based on these computations, which manager appears to have performed the best? Do not round intermediate calculations. Round your answers to three decimal places.

   Sortino ratio (Manager X):

   Sortino ratio (Manager Y):

   Based on Sortino ratio -Select-Manager XManager Y has performed the best.

4. When would you expect the Sharpe and Sortino measures to provide (1) the same performance ranking, or (2) different performance rankings?

   The Sharpe and Sortino measures should provide the same performance ranking when the return distributions are -Select-symmetricalasymmetric for the funds or managers under consideration. The performance rankings should differ when the return distributions are -Select-symmetricalasymmetric .

​Persimmon, Inc. is considering a 3 year project. Your boss said to you​ “We owe these consultants​ $1.2 million for this report. Before we spend​ $15 million on new equipment needed for this​ project, look it over and give me your​ opinion.” Here are the​ report’s estimates​ (in millions of​ dollars):

​[BE SURE TO SCROLL DOWN TO SEE THE ENTIRE​ QUESTION.]

   1 2 3

Sales revenue 25.0    25.0                                                       25.0

​- Cost of goods sold 13.0         13.0              13.0

Gross profit                                       12.0     12.0                12.0

​-Selling, general and
administrative expenses 3.0 3.0    3.0

​-Depreciation                                    5.0 5.0 5.0

Net operating income 4.0 4.0 4.0

​- Income tax 1.0 1.0 1.0

Net Income                                       3.0 3.0 3.0

Everything that the consultants have calculated is​ correct, as far as it goes. This is the incremental net income for this project. Do not change the use of straight line depreciation over three years​ (this is a simplified​ problem). Your job is to determine if there are any further adjustments we need to get the correct incremental FCFs to used in calculating the NPV.

This project will require​ $17 million in working capital upfront​ (year 0), which will be fully recovered in the last year of the project​ (year 3).   

What are the correct free cash flows​ (FCFs) for evaluating this​ project?  

​(a) Start from the correct Net Income which has already been given​ (you do NOT need to recopy the calculations before​ NI).

​(b) Make any additional adjustments needed for each of the​ periods, in order to get the entire final set of FCFs. Show each of the adjustments.

​(c) Do not calculate the NPV​ – just give the final FCF stream.  

​[Note for online​ version: ​ Don't worry too much about​ formatting, but type out your answer and try to make it clear what you are​ doing, by labelling everything. ​ Explain/label well enough that I can give you partial credit if you​ don't get the exact answer. And note that this will show as you having gotten zero points​ initially, because it will be graded by hand​ later.]

Exercise 3

Step 1:

When you read Storing Data Using Sets, you learned that Python's set type allows us to create mutable collections of unordered distinct items. The items stored in a set must be immutable, so sets can contain values of type int, float or str, but we can't store lists or sets in sets. Tuples are immutable, so we can store tuples in sets. Try this experiment, which creates a set containing the points (1.0, 2.0), (4.0, 6.0) and (10.0, -2.0). What is displayed when points is evaluated? Write the question and the answer in lab11.py using python comments. >>> points = {(1.0, 2.0), (4.0, 6.0), (10.0, -2.0)} >>> points We can also initialize the set this way. Try this experiment. What is displayed when points is evaluated? Write the question and the answer in lab11.py using python comments. >>> point1 = (1.0, 2.0) >>> point2 = (4.0, 6.0) >>> point3 = (10.0, -2.0) >>> points = {point1, point2, point3} >>> points We could instead start with an empty set, and call the add method to initialize it, one point at a time. Try this experiment. What is displayed when points is evaluated? Write the question and the answer in lab11.py using python comments. >>> points = set() >>> points.add(point1) >>> points.add(point2) >>> points.add(point3) >>> points

Step 2:

What happens if we try to insert a point that is already in the set? Try this experiment: >>> points.add(point2) >>> points How many copies of point (4.0, 6.0) are in the set? Write the question and the answer in lab11.py using python comments.

Step 3:

Can individual points in the set be retrieved by specifying an index (position)? Try this experiment. What is displayed when points[0] is evaluated? Write the question and the answer in lab11.py using python comments. >>> points[0]

Step 4:

We can use a for loop to iterate over all the points in the set. What is displayed when this loop is executed? Write the question and the answer in lab11.py using python comments. >>> for point in points: ... print(point) ...

A stock's returns have the following distribution:

Assume the risk-free rate is 2%. Calculate the stock's expected return, standard deviation, coefficient of variation, and Sharpe ratio. Do not round intermediate calculations. Round your answers to two decimal places.

Stock's expected return:   %

Standard deviation:   %

Coefficient of variation:  

Sharpe ratio:  

Stocks A and B have the following probability distributions of expected future returns:

1. Calculate the expected rate of return, , for Stock B ( = 10.70%.) Do not round intermediate calculations. Round your answer to two decimal places.
     %

2. Calculate the standard deviation of expected returns, σ_A, for Stock A (σ_B = 24.85%.) Do not round intermediate calculations. Round your answer to two decimal places.
     %

   Now calculate the coefficient of variation for Stock B. Round your answer to two decimal places.
   

   Is it possible that most investors might regard Stock B as being less risky than Stock A?

   1. If Stock B is more highly correlated with the market than A, then it might have a lower beta than Stock A, and hence be less risky in a portfolio sense.
   2. If Stock B is more highly correlated with the market than A, then it might have the same beta as Stock A, and hence be just as risky in a portfolio sense.
   3. If Stock B is less highly correlated with the market than A, then it might have a lower beta than Stock A, and hence be less risky in a portfolio sense.
   4. If Stock B is less highly correlated with the market than A, then it might have a higher beta than Stock A, and hence be more risky in a portfolio sense.
   5. If Stock B is more highly correlated with the market than A, then it might have a higher beta than Stock A, and hence be less risky in a portfolio sense.
   
   
   -Select-IIIIIIIVVItem 4

3. Assume the risk-free rate is 2.5%. What are the Sharpe ratios for Stocks A and B? Do not round intermediate calculations. Round your answers to two decimal places.

   Stock A:  

   Stock B:  

   Are these calculations consistent with the information obtained from the coefficient of variation calculations in Part b?

   1. In a stand-alone risk sense A is less risky than B. If Stock B is more highly correlated with the market than A, then it might have the same beta as Stock A, and hence be just as risky in a portfolio sense.
   2. In a stand-alone risk sense A is less risky than B. If Stock B is less highly correlated with the market than A, then it might have a lower beta than Stock A, and hence be less risky in a portfolio sense.
   3. In a stand-alone risk sense A is less risky than B. If Stock B is less highly correlated with the market than A, then it might have a higher beta than Stock A, and hence be more risky in a portfolio sense.
   4. In a stand-alone risk sense A is more risky than B. If Stock B is less highly correlated with the market than A, then it might have a lower beta than Stock A, and hence be less risky in a portfolio sense.
   5. In a stand-alone risk sense A is more risky than B. If Stock B is less highly correlated with the market than A, then it might have a higher beta than Stock A, and hence be more risky in a portfolio sense.
   
   
   -Select-IIIIIIIVVItem 7

C&A makes two types of products using four machines from 9 a.m. to 5 p.m. each day. Product A visits machines 1, 2, and 4. Product B only visits machines 1 and 3. The capacity is 0.4 unit per minute at machine 1, 0.12 unit per minute at machine 2, 0.2 unit per minute at machine 3, and 0.3 unit per minute at machine 4. The demand per day is 40 units for Product A and 160 units for Product B. Which is the implied utilization for the bottleneck resource?

• 0.69
• 1.04
• 0.28
• 1.67