Consider two firms which differ with respect to asset risk and financial leverage. Firm 1 owns assets worth $10,000,000, and has issued zero coupon bonds with a face value of $4,500,000. On the other hand, Firm 2 owns assets worth $25,000,000, and has issued zero coupon bonds with a face value of $15,000,000. The standard deviation of the return on firm 1’s assets is 40%, whereas the standard deviation of the return on firm 2’s assets is 50%. Assume that both firms will be liquidated one year from today and that the rate of interest is 3%. 1. What is the fair market value for the bonds issued by Firm 1? What is the dollar value of Firm 1’s limited liability put option? What is the yield to maturity, credit risk premium, and (risk neutral) probability of default for Firm 1’s bonds?

A simple random sample generated 12 male and 18 female adults identified by their primary care physicians as being over-weight. These adults were fed a special high protein diet for a month and had a sample mean weight loss of 10 pounds with a sample standard deviation of 3.2 pounds. We would like to conduct a test to determine whether the average weight loss for all adults is less than 11 pounds at a 1% level of significance.

What would be the appropriate test statistic?

Select one:

a. confidence interval using z

b. confidence interval using t      

c. one-sample t-test   

d. one-sample z-test

e. matched paired test

A sprinter runs the 100 yard dash on four separate occasions. The times (in seconds) are:

11.0 10.8 10.9 11.3

What is the value of the standard error of the mean for the runners time (in seconds)?

Select one:

a. 0.05

b. 0.25

c. 0.11

d. 0.23

e. 0.19

Assume that you are conducting a test with the following hypothesis

Ho: μ = 11 vs Ha: μ < 11. The test statistic for the test is t = -2.96 with a sample size of 30.

What is the p-value for this test?

Select one:

a. between 0.02 and 0.01

b. between 0.05 and 0.025        

c. between 0.005 and 0.01  

d. between 0.0025 and 0.005

e. between 0.100 and 0.050.

We would like to test the claim that less than 8% of Winnipeg driver receive a ticket for not stopping at a red light. A simple random sample of 300 drivers contained 15 who received a red light ticket. The value of the test statistic is:

Select one:

a. -1.92

b. 1.93

c. 2.38

d. 2.91

e. 1.56

The proportion of right-handed students in a university population is 0.20, the probability of obtaining exactly 2 right handed people in a random sample of 4 is

Select one:

a. 0.154

b. 0.051

c. 0.432

d. 0.381

e. 0.563

Darlene and Jacob Snell own 800 acres of farmland titled as "joint tenants with rights of survivorship, not as tenants in common". Currently the land is appraised at $5,000 per acre. In addition, Mr. Snell holds a $200,000 CD in his name only, and Mrs. Snell holds a $200,000 CD in her name only. Mr. and Mrs. Snell have no debts. Mrs. Snell's last will and testament provides that "all of my assets at my death shall be divided in three equal portions among my two children and my husband." Mrs. Snell dies unexpectedly, leaving her husband and two children as her sole heirs. Which of the following statements is true?

CASE 4: SHORT-TERM SCHEDULING

Stan's Furniture Refinishers has 7 items of furniture to sand first and then varnish using the sending and varnishing machines, respectively. The items and their times on these two machines are shown in the table:

                                Item                       Sanding time, hrs.               Varnishing time, hrs.

                                A                                             8                                              7

                                B                                             6                                              4  

                                C                                             5                                              8

                                D                                             8                                              12

                                E                                             10                                           14  

                                F                                             12                                            8             

                                G                                             4                                              6

Questions.

1. Using the Johnson’s rule, identify the optimal sequencing of these jobs. The jobs must go through the machines in the same order starting with the sanding machine.

2. Identify the cumulative flow time for the initial sequencing and for the sequencing based on the Johnson’s rule. Provide the existing sequence chart and Johnson’s rule charts.

3. Compare and explain your results.

Question 12 (1 point)

The coefficient of determination for the above bivariate data is:

Question 12 options:

1. An annuity pays $10 per month for 50 years. What is the future value (FV) of this annuity at the end of that 50 years given that the interest rate is 5%?

2. Since your first birthday, your grandparents have been depositing $1000 into a savings account on every one of your birthdays. The account pays 4% interest annually. Immediately after your grandparents make the deposit on your 18th birthday, what will be the amount of money in your savings account?

3. You are considering purchasing a new home. You will need to borrow $250,000 to purchase the home. A mortgage company offers you a 15-year fixed rate mortgage (180 months) at 9% annual rate. If you borrow the money from this mortgage company, what will be your monthly mortgage payment? Make the amortization plan for this loan.

4. You have just agreed to work for PriceWaterhouseCoopers as an external consultant for the next 6 years. In your contract you specified that in one year time Price will pay you $36,000 for your consultant services. For your services in the following three years you will receive $50,000 each year. Compensation for the last two years of your contract will be $60,000 per year. The opportunity cost of capital is 8%.

1. How much is your contract worth today?
2. If you decide to save the proceeds from your contract, how much will you have at the end of the 6^th year?

5. You are borrowing money to buy a car. If you can make payments of $300 per month starting one month from now at an interest rate of 4%, how much will you be able to borrow for the car today if you finance the amount over four years?

6. You are planning to borrow $100,000 on a 5-year to invest in your start-up firm. Interest rate stated by the bank is 9%. You plan to make payments quarterly. What will be your quarterly payment? Make an amortization plan for this loan.

  Ashcroft Airlines flies a six-passenger commuter flight once a day to Gainesville, Florida.         A non-refundable one-way fare with a reservation costs $129. The daily demand for this         flight is given in the table below, along with the probability distribution of no-shows. A         no-show has a reservation but does not arrive on time at the gate and forfeits the fare.         Ashcroft currently overbooks at most three passengers per flight. If there are not         enough seats for all the passengers at the gate, each passenger that cannot board the         flight is refunded the passenger’s fare and also $150 voucher good on any other trip.         The fixed cost for a flight is $450.

        i) Set up a flow chart showing the logical sequence of events for simulating Ashcroft’s              expected profit for this flight. Provide all the details of the formulas used for relevant         calculations.                                                                                         [20%]

        ii) Using the two-digit random numbers below (in the order as they appear),                         calculate Ashcroft’s profit per flight and replicate your calculations 10 times.                     Organise all your calculation in a table. Calculate the expected profit, the                           occupancy rate of the plane and the probability that Ashcroft profit per flight is                  higher than $400? Briefly comment on the reliability of your results.             [50%]

           Random number sequence: 69 56 30 32 66 79 55 24 80 35 10 98 92 92 88            82 13 04 86 31 12 23 40 93 13 42 51 16 17 29 62 08 59 41 47 72 25            96 58 14 68 15 18 99 13 05 03 83 34 78 50 89 98 93 70 11

        iii) Explain how you could use this model to investigate Ashroft’s overbooking strategy             (no calculations required).                                                                    [15%]

1. Discuss why companies decide to issue bonds as a source of finance. (1 mark)
2. Explain why bond prices have an inverse relationship with interest rate movements. ( 1 mark)

Albert Page purchased one of Extra-large Shirt Company’s bonds last year when the market interest rate on similar-risk bonds was 6 percent.   When he purchased the bond, it had seven years remaining until maturity. The bond’s coupon rate of interest (paid semi-annually) is 5 percent and its maturity value is $1000. Today, the market rate on similar risk bonds as the one Albert purchased one year ago is 4 percent.

3. If he were to sell the bond today, what price he can sell it for?

Optimal Capital Structure with Hamada

Beckman Engineering and Associates (BEA) is considering a change in its capital structure. BEA currently has $20 million in debt carrying a rate of 8%, and its stock price is $40 per share with 2 million shares outstanding. BEA is a zero growth firm and pays out all of its earnings as dividends. The firm's EBIT is $14.264 million, and it faces a 40% federal-plus-state tax rate. The market risk premium is 5%, and the risk-free rate is 6%. BEA is considering increasing its debt level to a capital structure with 40% debt, based on market values, and repurchasing shares with the extra money that it borrows. BEA will have to retire the old debt in order to issue new debt, and the rate on the new debt will be 11%. BEA has a beta of 1.2.

What is the total value of the firm with 40% debt? Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round your answer to three decimal places.
$   million

1. What is BEA's unlevered beta? Use market value D/S (which is the same as w_d/w_s) when unlevering. Do not round intermediate calculations. Round your answer to two decimal places.
2. What are BEA's new beta and cost of equity if it has 40% debt? Do not round intermediate calculations. Round your answers to two decimal places.
   Beta:
   Cost of equity:   %
3. What are BEA’s WACC and total value of the firm with 40% debt? Do not round intermediate calculations. Round your answer to two decimal places.
     %