4. A nursery is willing to supply 75 plants when the price per plant is $18 and 100 plants when the price per plant is $20.  The price elasticity of supply in this case using the mid-point method would be

a. 2.71 which indicates that the supply is elastic

b. 2.71 which indicates that the supply is inelastic

c. 0.27 which indicates that the supply is elastic

d. 0.27 which indicates that the supply is inelastic

5. Assuming that the price elasticity for a good is 0.3 therefore, a 20% decrease in the price of that good would

a. result in a 0.15 percent increase in the quantity demanded

b. result in a 6 percent increase in the quantity demanded

c. result in a 66 percent increase in the quantity demanded

d. result in a 0.06 percent increase in the quantity demanded

7. In the market of purses a 15 percent change in price causes 20 percent change in quantity supplied. In this situation the price elasticity of supply is

a. 0.74, and supply is inelastic

b. 1.33, and supply is elastic

c. 0.74, and supply is elastic

d. 1.33, and supply is inelastic

A fund manager has a Hong Kong stock portfolio worth $100 million with a beta of 1.15. The manager is concerned about the performance of the market over the next 2 months due to the recent coronavirus outbreak and plans to hedge the risk using Hang Seng Index futures. The 2- month futures price is 22,500. One contract is on $50 times the index. The initial margin is $150,000 per contract and the maintenance margin is $120,000 per contract.

(a) Determine the number of futures contracts required by the hedge and whether the fund manager should long or short futures.

(b) What price of the Hang Seng Index futures will lead to a margin call after entering into the transaction?

(c) At the horizon date, the portfolio value falls 9%, and the Hang Seng Index futures falls to 20,800. Determine the overall profit or loss of the hedging position and comment the hedging effectiveness.

(d) As an alternative strategy, what should the fund manager do if he wants to reduce the portfolio sensitivity to market risk, that is to say lowering the beta to 0.3?

Question No 01:                                                                                                                                

Dr Rex joined Venus University as an Assistant Professor in August 2019, and he was teaching an introductory course on probability theory and random variables to the undergraduate students of ECE department when the pandemic COVID-19 broke out in the city of Mars. Prior to the announcement of online classes for university students, he owned two email accounts (official and a personal) but he signed up for another email account to better manage and ensure that he doesn’t miss any student emails/queries. On any weekday, the likelihood that he receives an email on his official, newly signed up and personal email account is 0.5, 0.3, and 0.2 respectively. Moreover, the likelihood of receiving spam emails on these email accounts is 0.10, 0.30 and 0.80 respectively. Determine the following probabilities:

1. Given an email is received on his personal account, what is the likelihood that it isn’t a spam?
2. The likelihood of receiving a non-spam (important) email on any weekday?
3. Given it’s not a spam email, what is the likelihood it is received on his personal email account?

Consider a 2-period binomial non-recombining model. Let r = 0.05 be the discrete interest rate for each of the periods, S(0) = 100 and suppose that the stock price follow four possible scenarios:

It is known that the risk-neutral probability for each scenario ?i , i = 1, 2, 3, 4 satisty P ? (?1) = 0.2, P? (?2) = 0.4, P? (?3) = 0.3, P? (?4) = 0.1.

(a) Draw the tree of the stock prices using S^u , S^uu, and S^du, and find the risk-neutral probability for each route on the tree.

(b) Find the prices S^u , S^uu, and S^du

(c) Find today’s price of a European call option with strike price K = $100 maturing after two steps.

(d) Find today’s price of an American put option with strike price $110 and expiration date in two steps. Should the American option be exercised early? If so, when?

Project A: This is a project for the use of commercial land the financier already owns. There are three mutually exclusive alternatives.

A1: Sell the land for $500,000

A2: Lease the property for a car-washing business. An annual income, after all costs (property taxes, etc.) of $98,700 would be received at the end of each year for 20 years. At the end of the 20 years, it is believed that the property could be sold for $750,000.

A3: Construct an office building on the land. The building will cost $4.5 million to construct and will not produce any net income for the first 2 years. The probabilities of various levels of rental income, after all expenses, for the subsequent 18 years are as follows:

The property (building and land) probably can be sold for $3 million at the end of 20 years.

Analyze investment, if there is $4 million available for investment now (or $4.5 million if the Project A land is sold). What is the MARR in this situation?

Analyze investment, if there is $9 million available for investment now (or $9.5 million if the Project A land is sold).

A fund manager has a Hong Kong stock portfolio worth $100 million with a beta of 1.15. The manager is concerned about the performance of the market over the next 2 months due to the recent coronavirus outbreak and plans to hedge the risk using Hang Seng Index futures. The 2- month futures price is 22,500. One contract is on $50 times the index. The initial margin is $150,000 per contract and the maintenance margin is $120,000 per contract. (a) Determine the number of futures contracts required by the hedge and whether the fund manager should long or short futures. (b) What price of the Hang Seng Index futures will lead to a margin call after entering into the transaction? (c) At the horizon date, the portfolio value falls 9%, and the Hang Seng Index futures falls to 20,800. Determine the overall profit or loss of the hedging position and comment the hedging effectiveness. (d) As an alternative strategy, what should the fund manager do if he wants to reduce the portfolio sensitivity to market risk, that is to say lowering the beta to 0.3?

The Neal Company wants to estimate next year's return on equity (ROE) under different financial leverage ratios. Neal's total capital is $18 million, it currently uses only common equity, it has no future plans to use preferred stock in its capital structure, and its federal-plus-state tax rate is 40%. The CFO has estimated next year's EBIT for three possible states of the world: $5 million with a 0.2 probability, $2 million with a 0.5 probability, and $0.9 million with a 0.3 probability. Calculate Neal's expected ROE, standard deviation, and coefficient of variation for each of the following debt-to-capital ratios. Do not round intermediate calculations. Round your answers to two decimal places at the end of the calculations.

Debt/Capital ratio is 0.

Debt/Capital ratio is 10%, interest rate is 9%.

Debt/Capital ratio is 50%, interest rate is 11%.

Debt/Capital ratio is 60%, interest rate is 14%.

You are now ready to play the part of the manager of the public transit system. Your finance officer has just advised you that the system faces a deficit. Your board does not want you to cut service, which means that you cannot cut costs. Your only hope is to increase revenue. Would a fare increase boost revenue? You consult the economist on your staff who has researched studies on public transportation elasticities. She reports that the estimated price elasticity of demand for the first few months after a price change is about −0.3, but that after several years, it will be about −1.5. Explain why the estimated values for price elasticity of demand differ. Compute what will happen to ridership and revenue over the next few months if you decide to raise fares by 5%. Compute what will happen to ridership and revenue over the next few years if you decide to raise fares by 5%. What happens to total revenue now and after several years if you choose to raise fares?

5- The Neal Company wants to estimate next year's return on equity (ROE) under different financial leverage ratios. Neal's total capital is $10 million, it currently uses only common equity, it has no future plans to use preferred stock in its capital structure, and its federal-plus-state tax rate is 40%. The CFO has estimated next year's EBIT for three possible states of the world: $4.3 million with a 0.2 probability, $2.4 million with a 0.5 probability, and $0.7 million with a 0.3 probability. Calculate Neal's expected ROE, standard deviation, and coefficient of variation for each of the following debt-to-capital ratios. Do not round intermediate calculations. Round your answers to two decimal places at the end of the calculations. Debt/Capital ratio is 0

RÔE = %

σ = %

CV =

Debt/Capital ratio is 10%, interest rate is 9%.

RÔE = %

σ = %

CV =

Debt/Capital ratio is 50%, interest rate is 11%.

RÔE = %

σ = %

CV =

Debt/Capital ratio is 60%, interest rate is 14%

RÔE = %

σ = %

CV =