The firm Lando expects cash flows in one year’s time of $90 million if the economy is in a good state or $40 million if it is in a bad state. Both states are equally likely. The firm also has debt with face value $65 million due in one year.

Lando is considering a new project that would require an investment of $30 million today and would result in a cash flow in one year’s time of $47 million in the good state of the economy or $32 million in the bad state.

Investors are all risk neutral and the risk free rate is zero.

(a) What are the expected values of the firm's equity and debt without the new project?

Lando can finance the project by issuing new debt of $30 million. If the firm goes bankrupt the new debt will have a lower priority for repayment than the firm’s existing debt.

(b) If the new project is accepted, what will be the value of the firm’s cash flow in each state after paying the original debtholders? What payment must Lando promise to the new debtholders in the good state of the economy?

(c) What will be the expected value of Lando’s equity? Will Lando’s managers choose to accept the project? Why/why not?

Alternatively, Lando can issue new equity of $30 million to finance the project.

(d)What proportion of its equity must Lando give to the new equityholders?

Will Lando’s managers choose to accept the project now? Why/why not?

(e) Briefly discuss the agency problem of debt overhang with reference to your answers to the previous parts of the question. (120 words)

The firm Kito expects cash flows in one year’s time of $90 million if the economy is in a good state or $40 million if it is in a bad state. Both states are equally likely. The firm also has a debt with face value $65 million due in one year. Kito is considering a new project that would require an investment of $30 million today and would result in cash flow in one year’s time of $47 million in the good state of the economy or $32 million in the bad state. Investors are all risk-neutral and the risk free rate is zero.

(a) What are the expected values of the firm's equity and debt without the new project?

Kito can finance the project by issuing new debt of $30 million. If the firm goes bankrupt the new debt will have a lower priority for repayment than the firm’s existing debt.

(b) If the new project is accepted, what will be the value of the firm’s cash flow in each state after paying the original debtholders? What payment must Kito promise to the new debtholders in the good state of the economy?

(c) What will be the expected value of Kito's equity? Will Kito's managers choose to accept the project? Why/why not?

Alternatively, Kito can issue new equity of $30 million to finance the project.

(d) What proportion of its equity must Kito give to the new equity holders? Will Kito's managers choose to accept the project now? Why/why not?

(e) Briefly discuss the agency problem of debt overhang with reference to your answers to the previous parts of the question. (120 words)

The firm Lando expects cash flows in one year’s time of $90 million if the economy is in a good state or $40 million if it is in a bad state. Both states are equally likely.
The firm also has debt with face value $65 million due in one year.

Lando is considering a new project that would require an investment of $30 million today and would result in a cash flow in one year’s time of $47 million in the good state of the economy or $32 million in the bad state.

Investors are all risk neutral and the risk free rate is zero.
(a) What are the expected values of the firm's equity and debt without the new

project?

Lando can finance the project by issuing new debt of $30 million. If the firm goes bankrupt the new debt will have a lower priority for repayment than the firm’s existing debt.

(b) If the new project is accepted, what will be the value of the firm’s cash flow in each state after paying the original debtholders? What payment must Lando promise to the new debtholders in the good state of the economy?

(c) What will be the expected value of Lando’s equity? Will Lando’s managers choose to accept the project? Why/why not?

Alternatively, Lando can issue new equity of $30 million to finance the project.

(d) What proportion of its equity must Lando give to the new equityholders? Will Lando’s managers choose to accept the project now? Why/why not?

(e) Briefly discuss the agency problem of debt overhang with reference to answers to the previous parts of the question.

The firm Lando expects cash flows in one year’s time of $90 million if the economy is in a good state or $40 million if it is in a bad state. Both states are equally likely. The firm also has debt with face value $65 million due in one year.

Lando is considering a new project that would require an investment of $30 million today and would result in a cash flow in one year’s time of $47 million in the good state of the economy or $32 million in the bad state.

Investors are all risk neutral and the risk free rate is zero.

(a) What are the expected values of the firm's equity and debt without the new project?

Lando can finance the project by issuing new debt of $30 million. If the firm goes bankrupt the new debt will have a lower priority for repayment than the firm’s existing debt.

(b) If the new project is accepted, what will be the value of the firm’s cash flow in each state after paying the original debtholders? What payment must Lando promise to the new debtholders in the good state of the economy?

(c) What will be the expected value of Lando’s equity? Will Lando’s managers choose to accept the project? Why/why not?

Alternatively, Lando can issue new equity of $30 million to finance the project.

(d)What proportion of its equity must Lando give to the new equityholders? Will Lando’s managers choose to accept the project now? Why/why not?

(e) Briefly discuss the agency problem of debt overhang with reference to your answers to the previous parts of the question. (120 words)

(Total = 25 marks)

The firm Lando expects cash flows in one year’s time of $90 million if the economy is in a good state or $40 million if it is in a bad state. Both states are equally likely. The firm also has debt with face value $65 million due in one year. Lando is considering a new project that would require an investment of $30 million today and would result in a cash flow in one year’s time of $47 million in the good state of the economy or $32 million in the bad state.

Investors are all risk neutral and the risk free rate is zero.

(a) What are the expected values of the firm's equity and debt without the new project?

Lando can finance the project by issuing new debt of $30 million. If the firm goes bankrupt the new debt will have a lower priority for repayment than the firm’s existing debt.

(b) If the new project is accepted, what will be the value of the firm’s cash flow in each state after paying the original debtholders? What payment must Lando promise to the new debt holders in the good state of the economy?

(c) What will be the expected value of Lando’s equity? Will Lando’s managers choose to accept the project? Why/why not?

Alternatively, Lando can issue new equity of $30 million to finance the project.

(d)What proportion of its equity must Lando give to the new equity holders?
Will Lando’s managers choose to accept the project now? Why/why not?

(e) Briefly discuss the agency problem of debt overhang with reference to your answers to the previous parts of the question. (120 words)

An assembly operation requires a 1-month training period for a new employee to reach max efficiency. A new method of training was suggested and a test conducted to compare the new method with the standard procedure. Two groups of nine new employees were trained for a period of 3 weeks, one group using the new method and the other following standard training procedure. The length of time in minutes required for each employee to assemble the device was recorded at the end of the 3-week period. The measurements are given in the table.

Assume the population variances are equal. Do the data present sufficient evidence to indicate that the mean time to assemble at the end of the 3-week training period is less for the new training procedure? Follow the steps (a) to (e) using a = .05.

1. What is the null hypothesis?

      H0: μx-μy=0

2. What is the alternative hypothesis?

      H1: μx-μy>0

3. What is the test statistic? Evaluate it.

DF= nx+ny-2=9+9-2=16

sp=4.72

P-Value = P(t > 1.65) = ?

4. What is the rejection region?

?

5. State your conclusion appropriately.

Given that the P-Value is small, it can be concluded that the null hypothesis is rejected and that the mean time to assemble at the end of the 3-week training period is less for the new training procedure?

Decide and state whether a one-sample z test, a two- sample z test, or a t test is appropriate. Whichever test you choose, state your null hypothesis, then obtain a P -value and formulate a valid conclusion.

1a.) 20 subjects who do not speak German are asked to participate in a trial for a new type of crash course in the German language. 10 subjects are randomly placed in Group A, to test the new teaching method, while the other 10 are placed in group B and given a more traditional crash course in German (though they are not told this is not the new approach). After both courses have ended, evaluators (who don’t know which course each subject took) determine that 50% of subjects in Group A are competent speakers of German, compared to 40% of subjects in Group B. Based on this, does the new method work better, or is the 10% difference due to chance?

1b.) 200 subjects who do not speak German participate in a trial for a new type of crash course in the German language. 100 subjects are randomly placed in Group A, to experience the new teaching method, while the other 100 are placed in group B and given a more traditional crash course in German (though they are not told this is not the new approach). After both courses have ended, evaluators (who don’t know which course each subject took) determine that 42% of subjects in Group A are competent speakers of German, compared to 38% of subjects in Group B. Based on this, does the new method work better, or is the 4% difference merely due to chance?

Exercise 13-3 Internal Rate of Return [LO13-3]

Wendell’s Donut Shoppe is investigating the purchase of a new $31,300 donut-making machine. The new machine would permit the company to reduce the amount of part-time help needed, at a cost savings of $5,300 per year. In addition, the new machine would allow the company to produce one new style of donut, resulting in the sale of 1,300 dozen more donuts each year. The company realizes a contribution margin of $3.00 per dozen donuts sold. The new machine would have a six-year useful life.

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

Required:

1. What would be the total annual cash inflows associated with the new machine for capital budgeting purposes?

2. What discount factor should be used to compute the new machine’s internal rate of return? (Round your answers to 3 decimal places.)

3. What is the new machine’s internal rate of return? (Round your final answer to nearest whole percentage.)

4. In addition to the data given previously, assume that the machine will have a $12,820 salvage value at the end of six years. Under these conditions, what is the internal rate of return? (Hint: You may find it helpful to use the net present value approach; find the discount rate that will cause the net present value to be closest to zero.) (Round your final answer to nearest whole percentage.)

1. [7 – 3] In terms of acting, Betty White is known for starring on 3 different long running television shows (The Mary Tyler Moore Show, The Golden Girls and Hot In Cleveland). Those three shows averaged 23.7 shows per season. However, it seems that shows are producing few episodes per season, and Betty decides to put that to the test. She takes a random sample of long running television programs and determined the number of episodes in their most recent season below:

13, 26, 23, 18, 24, 18, 19, 13, 13, 15, 16, 21, 20, 16, 26

You may assume that the data comes from a normal distribution.

1. Construct a 95% confidence interval for the average number of episodes per season for a television program

2. Based on your answer to (a), can we say that the average number of episodes per season is lower than the value 23.7, the average number of episodes for the shows that Betty starred in? Explain.

2. [5] Between 2006 and 2009, Betty appeared in 23 episodes of The Bold and The Beautiful. The work was quite different from her time on sitcoms. This led her to think about the following hypotheses:

H₀: Soap opera acting is the same difficulty as sitcom acting

H_a: Soap opera acting is harder than sitcom acting

Describe what a Type I error would look like in the context of this scenario.

3. [10] While playing the role of Catherine Piper on Boston Legal, Betty White “killed” the character of Bernard Ferrion (played by Leslie Jordan). Catherine ended being found not guilty, but it led Betty to wonder: are men and women treated differently when convicted of murder? As a result, Betty took two random samples of convicted murderers, given below, and determined how long the sentences were.

Men: 25, 30, 50, 25, 20, 30, 40, 25, 30, 25, 75, 25, 15

Women: 25, 15, 20, 15, 20, 25, 15, 30, 25, 40

You may assume the data comes from normal distributions. At the .05 level of significance, is there evidence to show that men get longer sentences for murder than women?

4. [10] Betty is a common diminutive of the name Elizabeth. As a result, many people think Betty White’s real first name is Elizabeth – but how large a proportion? Betty took a random sample of 265 people and found that 147 of them believe that Betty White’s real first name is Elizabeth. At the .05 level of significance, is there evidence that a majority (more than 50%) of all people think Betty White’s real first name is Elizabeth?

(Side note: Betty White’s real first name is… Betty – she says that it isn’t “short” for anything)

5. [10] In 1995, Betty White received a star on the Hollywood Walk of Fame – and her star is right near the star of her late husband, Allen Ludden. There are many couples that both have stars on the Hollywood Walk of Fame. This led Betty to wonder – is there a difference in the age between the husband and wife when they get their Hollywood star? As a result, Betty took a random sample of heterosexual couples that both have stars on the Hollywood Walk of Fame and recorded the age at which they received their star, given below.

At the .05 level of significance, is there evidence that there is a difference in the ages when husbands and wives get their Hollywood Walk of Fame star?

6. [10] For 19 years, Betty was hostess of the Tournament of Roses Parade (which is every year before the Rose Bowl). Of all the parades on television that exist, which is the favorite? A random sample of people was taken, with the results summarized below:

At the .05 level of significance, is there an association between gender and favorite parade on television?

7. [7 – 3] Betty starred on a great number of game shows – and perhaps my favorite was Match Game. While Betty was a great player, did she do better with some contestants than others? Betty took a random sample of Match Game episodes and found that she matched the male contestants 264 out of 385 times and matched the female contestants 294 out of 377 times.

1. Construct a 95% confidence interval for the difference in the proportion of the time Betty would match male contestants and the proportion of the time Betty would match female contestants.

2. Based on your answer to (a), can we conclude that Betty matched one group of contestants better than the other?

8. [12] There is a Facebook group devoted to The Golden Girls. On a regular basis, the group poses the question: Which Golden Girl was your favorite? A recent random sample of members of the Facebook group answered the question, given in the table below.

At the .05 level of significance, is there evidence to show that the distribution of favorite Golden Girls character is not uniform? (meaning, not an equal distribution)

9. [3 – 5 – 3 – 2 – 2] In 2010, Betty White (at age 88!) hosted an episode of Saturday Night Live, becoming the oldest host the show has ever had. Most people know that she was the oldest. However, what about the second oldest? Do people have an idea how old the second oldest guest host was? A random sample of people was taken; these people were asked two questions: what is your age (x) and what do you believe is the age of the second oldest SNL host?

Note: the second oldest SNL guest host was Miskel Spillman at age 80 (in 1977) who won a contest and is the only non-celebrity to host the show.

1. Draw a scatterplot for this set of data

2. Find the linear correlation coefficient. Based on that value, is there evidence of a linear relationship between the variables? Explain.

3. Find the line of best fit.

4. Predict the value of y given the value of x = 40

5. Find the residual for x = 40.

10. [5] Suppose that it can be shown that there is evidence of the following: There is a strong association between Betty White being a star on a show and Professor Simpson watching that show religiously.

Claim: By having Betty White star on a television show will guarantee Professor Simpson watches the show religiously.

What is the issue with this claim?

11. [6] While on Hot In Cleveland, Betty White was part of 2 live episodes. Not surprisingly, this increased her stress level. What about other actors? Stress scores follow a normal distribution with a mean of 3 and a standard deviation of 1.15. If a sample of 25 actors are taken, what is the probability that their average stress score is above 3.1?

1.Reducing scrap of 4-foot planks of hardwood is an important factor in reducing cost at a wood-flooring manufacturing company. Accordingly, engineers at Lumberworks are investigating a potential new cutting method involving lateral sawing that may reduce the scrap rate. To examine its viability, samples of 500 and 400 planks, respectively, were examined under the old and new methods. Sixty-two of the 500 planks were scrapped under the old method, whereas 33 of the 400 planks were scrapped under the new method.

1a. Construct the 90% confidence interval for the difference between the population scrap rates between the old and new methods, respectively.

1b. Select the null and alternative hypotheses to test for differences in the population scrap rates between the old and new cutting methods, respectively.

• H₀: p₁ − p₂ = 0; H_A: p₁ − p₂ ≠ 0

• H₀: p₁ − p₂ ≤ 0; H_A: p₁ − p₂ > 0

• H₀: p₁ − p₂ ≥ 0; H_A: p₁ − p₂ < 0

1c. Using the part a results, can we conclude at the 10% significance level that the scrap rate of the new method is different than the old method?

we____ H0. At the 10% significance level, we _____ conclude the proportions are different between the old and the new methods.