Maxwell Electronics, a consumer electronics company, plans to expand its operations in the Asia‐Pacific region. The company has debt of $4 million and assets worth $14 million. Cuprum Electricals Inc., the market leader, has similar revenue, net income, and business risk.

The information of the two companies is as follows:

Debt of Cuprum Electricals Inc. $7 million Equity of Cuprum Electricals Inc. $35 million Levered beta of Cuprum Electricals Inc. 0.8 Marginal tax rate 40% Risk‐free rate 5% Market risk premium 10% Based on the information provided, calculate the cost of equity of Maxwell Electronics.

Group of answer choices

10.76%.

13.86%.

13.37%.

Part I (investigating patterns)

         Assume that you are trying to achieve a certain goal and the probability of your success P(S) is only 20% and that your capabilities are not increasing over time, that is your probability of success is constant.

         1.       Show that the probability of unsuccessful attempt P(U) is 0.8.

          Given that you did not succeed the first time, find the probability that you succeed the second time.

          Given that you did not succeed in the first two attempts, find the probability that you succeed the third time.

          Given that you did not succeed in the first (n – 1) attempts, find the probability that you succeed in the nth attempt.

          What is the relation between the events S and U that lead to the results above?

Pick any two variables that you feel may be related and estimate what you think the strength of the correlation coefficient would be for those two variables. In your response, estimate the value of r. For example, specify a strong (.7 to .9), medium (.4 to .6), or low (0 to .3) value for r. The value of the coefficient can be positive or negative. For example, consider an increase in police patrols in a neighborhood and the number of burglaries that occur in that neighborhood. I would say that would be a strong inverse relationship with an R-value of -0.8; as one (patrols) increases, the other (burglary rate) goes down. Describe the factors that you think would contribute to why the variables would have the relationship that you estimate it to be.

Assuming we are using the CAPM to assess risk. There exists a security A with expected return of 13.1%, a stock beta of 1.5. Another security B has expected return of 9.25%, a stock beta of 0.8. The risk-free rate of return is 4.85%.

1. What is the difference between systematic risk and unsystematic risk? What does beta measure, systematic risk or unsystematic risk?                                                                  

2. Using the data above do determine the expected market return?                                     

c.   Suppose that among the firm A and B, one belongs to the industry of pharmaceutical (drug) research and development, while the other belongs to utilities industry equipment (such as electricity supply). Which firm is more likely to be in each industry, why did you make this choice?     

In a​ study, researchers wanted to measure the effect of alcohol on the hippocampal​ region, the portion of the brain responsible for​ long-term memory​ storage, in adolescents. The researchers randomly selected

23

adolescents with alcohol use disorders to determine whether the hippocampal volumes in the alcoholic adolescents were less than the normal volume of

9.02

cm cubedcm3.

An analysis of the sample data revealed that the hippocampal volume is approximately normal with no outliers and

x overbarxequals=8.12

cm cubedcm3

and

sequals=0.8

cm cubedcm3.

Conduct the appropriate test at the

alphaαequals=0.01

level of significance.

State the null and alternative hypotheses.

a). State the null and alternative hypotheses.

b). Identify the t-statistic.

c). Identify the P-value.

d). Make a conclusion

Suppose that the term structure of interest rates is flat in the US and UK. The USD interest rate is 2.5% per annum and the GBP rate is 2.9% p.a. Under the terms of a swap agreement, a financial institution pays 3% p.a. in GBP and receives 2.6% p.a. in USD. The principals in the two currencies are GBP20 million and USD32 million. Payments are exchanged every year, with one exchange having just taken place. The swap will last 3 more years NOTE: 1 USD = 0.8 GBP

i) Write out the formula for the valuation of a currency swap in terms of bond prices. From this formula, explain what prices and rates you need to calculate the value of a swap.

1. A bicycle shop plans to offer 2 specially priced children’s models at a sidewalk sale. The basic model will return a profit of $120 and the deluxe model $150. Past experience indicates that sales of the basic model will have a mean of 5.4 bikes with a standard deviation of 1.2, and sales of the deluxe model will have a mean of 3.2 bikes with a standard deviation of 0.8 bikes. The cost of setting up for the sidewalk sale is $200.

   1. Define the random variables and use them to express the bicycle shop’s net profit.

   2. What’s the mean of the net profit?

   3. What’s the standard deviation of the net profit?

   4. Do you need to make any assumptions in calculating the mean? How about the standard deviation?

In 2007, baseball players made on average $1.8 million. Using these randomly sample 12 players (All in Millions of Dollars) from 2011 , Is there evidence that salaries are now different? Assume a 5% significance level

$2.7, 2.9, 1.5, 2.2, 2.5, 2.0, 1.7, 2.9, 2.8, 2.6, 0.8, 2.7

Provide the following in your final analyses: the distribution to be used and why; all assumptions required for this study and if each assumption is met or not (if an assumption is not met, explain what you would do to correct the assumption violation); null and alternate hypotheses; the test statistic (rounded to four decimal places); the p-value (rounded to 4 decimal places); the decision to reject the hypothesis or not; and a conclusion in context of the study.

ABC and XYZ are two identical firms except for their capital structure. The share price for both of firms is $10. ABC is an all equity firm. XYZ has D/E of 0.8. Investor A bought 100 shares of XYZ with his own money since he believes the levered firm will provide better return. If you decide to use homemade leverage to show him that leverage doesn’t matter, what would be your trading strategy? Please be specific (i.e. how much money of your own will be used, how much money you will borrow, and which firm’s share you are going to buy, etc.) Assume all assumptions hold for homemade leverage.