You plan to invest in the Kish Hedge Fund, which has total capital of $500 million invested in five stocks: Stock Investment Stock's Beta Coefficient A $160 million 0.4 B 120 million 1.6 C 80 million 1.8 D 80 million 1.0 E 60 million 1.6

Kish's beta coefficient can be found as a weighted average of its stocks' betas. The risk-free rate is 6%, and you believe the following probability distribution for future market returns is realistic: Probability Market Return 0.1 -29% 0.2 0 0.4 13 0.2 28 0.1 49

What is the equation for the Security Market Line (SML)? (Hint: First determine the expected market return.) ri = 9.7% + (6.8%)bi ri = 9.7% + (7.1%)bi ri = 6.0% + (6.8%)bi ri = 9.8% + (7.0%)bi ri = 6.0% + (7.1%)bi

Calculate Kish's required rate of return. Do not round intermediate calculations. Round your answer to two decimal places. % Suppose Rick Kish, the president, receives a proposal from a company seeking new capital. The amount needed to take a position in the stock is $50 million, it has an expected return of 14%, and its estimated beta is 1.4. Should Kish invest in the new company? The new stock be purchased.

At what expected rate of return should Kish be indifferent to purchasing the stock? Round your answer to two decimal places. %

Most developed countries have some form of a national health plan. A number of possible plans have been proposed in the U.S. recently with price tags of upwards of $200 billion per year (depending on the extent of coverage). An important question in choosing among such plans is how their adoption will affect demand (moral hazard). The empirical question is how large the increase in demand might be.

Estimates of the price elasticity of demand for medical services vary with –0.2 to –0.40 being a representative range. A figure in this range might be a starting point in predicting the effect of health insurance on medical demand. Of course, the above figures apply to all medical services and as we know some price elasticities are likely to differ (such as demand for hospital stays v. office visits to physicians). On the other hand, estimates of price elasticities for more discretionary services (dental care, ophthalmologic care, and psychiatric counseling) tend to be higher.

1. Interpret a price elasticity coefficient of –0.2.
2. Does the relatively high price elasticity of demand for some medical services imply that these services are not really "necessary?" Should health care planners use such elasticity estimates as a guide for the kinds of services people really need, or are there important drawbacks to basing such a judgment on people's responses to prices? How would you judge what medical services are really necessary for a person's wellbeing?
3. Isn't the use of demand concepts in the health care field inappropriate since physicians, not by the patient, determine a great deal of medical demand? Is there any reason for physicians to take the price of a service into account when deciding what to prescribe?

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

1. Calculate the expected rate of return, r_B, for Stock B (r_A = 12.10%.) 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 = 18.79%.) Do not round intermediate calculations. Round your answer to two decimal places.
   %

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

4. 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 the same beta as Stock A, and hence be just as risky in a portfolio sense.
   2. 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. 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. 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.
   5. 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.

SECURITY MARKET LINE

You plan to invest in the Kish Hedge Fund, which has total capital of $500 million invested in five stocks:

Kish's beta coefficient can be found as a weighted average of its stocks' betas. The risk-free rate is 4%, and you believe the following probability distribution for future market returns is realistic:

1. What is the equation for the Security Market Line (SML)? (Hint: First determine the expected market return.)
   
   1. r_i = 2.9% + (5.9%)b_i
   2. r_i = 2.9% + (5.0%)b_i
   3. r_i = 4.0% + (5.9%)b_i
   4. r_i = 1.6% + (7.1%)b_i
   5. r_i = 4.0% + (5.0%)b_i

• 
  
• Calculate Kish's required rate of return. Do not round intermediate calculations. Round your answer to two decimal places.
  %
  
• Suppose Rick Kish, the president, receives a proposal from a company seeking new capital. The amount needed to take a position in the stock is $50 million, it has an expected return of 15%, and its estimated beta is 1.5. Should Kish invest in the new company?
  The new stock

3. be purchased.
   
   At what expected rate of return should Kish be indifferent to purchasing the stock? Round your answer to two decimal places.
   %

Problem 8-6 Expected returns Stocks A and B have the following probability distributions of expected future returns: Probability A B 0.1 -10% -29% 0.2 6 0 0.4 10 24 0.2 18 28 0.1 30 37 Calculate the expected rate of return, rB, for Stock B (rA = 10.80%.) Do not round intermediate calculations. Round your answer to two decimal places. % Calculate the standard deviation of expected returns, σA, for Stock A (σB = 18.77%.) 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? 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. 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. 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. 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. 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.

Acquisitions Inc is a brick and mortar retail company. Acquisition’s management believes that the company needs to establish an on-line presence in order to remain viable. For that reason, Acquisition would like to purchase Target Company, an on-line company in a similar line of business. Acquisition believes that Target would also benefit from the merger by gaining access to a brick and mortar outlet.

Some basic information about Acquisition and Target follows:

Analysts hired by Acquisition to value the merger estimate that if the two companies merge, their combined revenues will increase by 5 percent for 3 years and for 3% thereafter. Cost of Goods Sold for the combined firms will be permanently reduced by 2%. assume the market risk premium is 5.5%, the risk free interest rate is 2% and the corporate tax rate is 0.20.

Please find:

1. The status-quo values of Acquisition and Target, using each firm’s WACC to value its assets.
2. The WACC for the combined firm
3. The value of the combined firm with potential synergies considered.
4. Should the merger take place?

Martin Chuzzlewit purchased a vacant lot outside of London for £1,350,000 because he heard that a shopping mall was going to be built on the other side of the road. He figured that he could make a bundle by putting in a fast-food outlet on the site. As it turned out, the rumor was false. A sanitary landfill was located on the other side of the road, and Martin’s land was worthless. (£ denotes the British monetary unit, pounds sterling.)

Required:
With respect to the economic characteristics of costs, what type of cost is the £1,350,000 that Chuzzlewit paid for the vacant lot?

Multiple Choice

• Opportunity cost

• Administrative cost

• Sunk cost

• Selling cost

• Differential cost

1. 1. A supermarket chain wanted to obtain information on the length of time (in minutes) required to service customers. They need to decide on the number of service counters needed for stores to be built in the future. To find the distribution of customer service times, a sample of 60 customers’ service times were recorded and are shown here:      

3.6        1.9        2.1        .3          .8         .2         1.0        1.4        1.8        1.6

1.4        .2         1.3        3.1        .4         2.3        1.8        4.5        .9         .7

1.6        1.9        5.2        .5          1.8        .3          1.1         .6         .7          .6

Find the mode and the 20^th percentile of the above data set.