rev: 09_12_2014_QC_53420

Passenger miles flown on Northeast Airlines, a commuter firm serving the Boston hub, are as

follows for the past 12 weeks:

WEEK ACTUAL PASSENGER MILES (1,000S)

1            17

2            21

3            19

4            23

5            18

6            16

7            20

8            18

9            22

10         20

11         15

12         22

Assuming an initial forecast for week 1 of 17,000 miles, use exponential smoothing to

compute miles for weeks 2 through 12. Use α = 0.2.

What is the MAD for this model?

Compute the RSFE and tracking signals. Are they within acceptable limits?

PLEASE ANSWER THE RSFE question Thank you

Food processing:

Yield corresponding to bond rating of BBB = 4.1%

After Tax Cost of Debt = Rd = (1 - Tax Rate) x Yield

= (1-0.37) x 4.1 = 2.583%

Average Beta= (0.55 + 0.6 + 0.7 + 0.75 + 0.5 + 0.55 + 0.65 + 0.6 + 0.7 + 0.8) / 10

= 0.64

Rf = 2.8

Rm = 6%

Cost of Equity = Re = Rf + Average Beta x Rm

= 2.8 + 0.64 x 6 = 6.64%

We = 0.8, Wd = 0.2

Risk Adjusted Cost of Capital = We x Re + Wd x Rd

= 0.8 x 6.64 + 0.2 x 2.583 = 5.8286 %

Instruments:

Yield corresponding to bond rating of BBB- = 4.6%

After Tax Cost of Debt =(1 - Tax Rate) x Yield corresponding to BBB bond = (1 - 0.37) x 4.6 = 2.898%

Average Beta of Comparable Company's

= (1.06 + 1.4 + 1.3 + 1.25 + 1.15 + 1.35 + 1.10 + 0.52) / 8

= 1.14125

Rf = 2.8 %,    Rm = 6%

Cost of Equity = Re = Rf + Average Beta x Rm = 2.8 + 1.14125 x 6 = 9.6475%

We = 0.8 and Wd = 0.2

Risk Adjusted Cost of Capital = We x Re + Wd x Rd

= 0.8 x 9.6475 + 0.2 x 2.898 = 8.2976 %

Give two reasons to support the use of one discount rate and two reasons to support different discount rates for each division.   

Amy Lloyd is interested in leasing a new Honda and has contacted three automobile dealers for pricing information. Each dealer offered Amy a closed-end 36-month lease with no down payment due at the time of signing. Each lease includes a monthly charge and a mileage allowance. Additional miles receive a surcharge on a per-mile basis. The monthly lease cost, the mileage allowance, and the cost for additional miles follow:

Amy decided to choose the lease option that will minimize her total 36-month cost. The difficulty is that Amy is not sure how many miles she will drive over the next three years. For purposes of this decision, she believes it is reasonable to assume that she will drive 12,000 miles per year, 15,000 miles per year, or 18,000 miles per year. With this assumption Amy estimated her total costs for the three lease options. For example, she figures that the Hepburn Honda lease will cost her $10,764 if she drives 12,000 miles per year, $12,114 if she drives 15,000 miles per year, or $13,464 if she drives 18,000 miles per year.

a. What is the decision, and what is the chance event?

b. Construct a payoff table for Amy’s problem.

c. If Amy has no idea which of the three mileage assumptions is most appropriate, what is the recommended decision (leasing option) using the optimistic, conservative, and minimax regret approaches?

d. Suppose that the probabilities that Amy drives 12,000, 15,000, and 18,000 miles per year are 0.5, 0.4, and 0.1, respectively. What option should Amy choose using the expected value approach?

e. Develop a risk profile for the decision selected in part (d). What is the most likely cost, and what is its probability?

f. Suppose that after further consideration Amy concludes that the probabilities that she will drive 12,000, 15,000, and 18,000 miles per year are 0.3, 0.4, and 0.3, respectively. What decision should Amy make using the expected value approach?

We have:

                    P(A) = 0.75

                    P(B|A) = 0.9

                    P(B|A′) = 0.8

                    P(C|A ∩ B) = 0.8

                    P(C|A ∩ B′) = 0.6

                    P(C|A′ ∩ B) = 0.7

                    P(C|A′ ∩ B′) = 0.3     

Compute:

              a) ?(?′| ?′)

              b) P (?′ ∪ ?′)

              c) ?(? ∩ ? ∩ ?)

              d) P(C)

              e) ?(? ∩ ? ∩ ?)’

              f) P(B)

              g) P(AUBUC)

Given the monthly returns that follow, find the R², alpha, and beta of the portfolio. Compute the average return differential with and without sign. Do not round intermediate calculations. Round your answers to two decimal places.

R²:   

Alpha:   %

Beta:   

Average return difference (with signs):   %

Average return difference (without signs)   %

A fire chief wants to relate the amount of fire damage in major residential fires to the distance between the residence and the nearest fire station in order to get approval to add a fire station. The chief performs a study using a sample of fifteen recent fires in the town. The following table shows the result of the study.

a. Is there a strong or weak correlation between distance and dollar loss? What is the correlation between the two?
b. What is the estimated dollar loss if the distance of the fire station was 10 miles, 5 miles, and 2.5 miles.

Using R:

1. Generate AR(1), AR(2), MA(1), MA(2), and ARMA(1,1) processes with different parameter values, and draw ACF and PACF. Discuss the characteristics of ACF snd PACF for these processes.

2. Generate AR(1) process {X_t}. Compute the first difference Y_t = X_t - X_(t-1). Draw ACF and PACF of {Y_t}. What can you say about this process? Is it again a AR(1) process? What can you say in general?

3.For the AR(2) processes with the following parameters, determine if AR(2) processes are stationary. Without drawing the graphs, what can you say about ACFs.
(a) ϕ1=1.2, ϕ2=−0.2

(b) ϕ1=0.6, ϕ2=0.3

(c) ϕ1=1.2, ϕ2=−0.7

(d) ϕ1=−0.8, ϕ2=−0.7

4. For the process Xt = ϕXt−2+Zt, determine the range of ϕ for which the process is stationary.

1)
a)
You are considering acquiring shares of common stock in the Madison Beer Corp.
Your rate of return expectations are as follows:
Possible rate of return       Possibility
-0.1               0.3
0.00               0.1
0.1               0.3
0.25               0.3
Compute the expected return on your investment

b)
You are considering acquiring shares of common stock in the Lauren computer Corp.
Your rate of return expectations are as follows:
Possible rate of return       Possibility
-0.6               0.05
-0.3               0.2
-0.1               0.1
0.20               0.3
0.4               0.2
0.8               0.15
Compute the expected return on your investment

C) Without any formal computations, do you consider which one A or B presents greater risk? Why?