A large pharmaceutical company invites you to take an expert position in their new pot growing division. The division will be financed with $1 million in debt and $4 million in equity. The tax rate is 30% for all firms. The risk-free rate is 3% and market portfolio return is 9%. The yield on the division’s debt is 6%. The information on the relevant established pot growing companies is given below:

a) What is the average of the project betas of the pure play firms?

b) What is the beta of the new pot growing division of the pharmaceutical company?

c) What is the cost of equity of the division?

d) What is the division’s WACC?

1. Find the SSE for the given data and linear models, and indicate which model gives the better fit.

(2,4) (6,8) (8,12) (10,0)

1. Y = - 0.1 x + 7                        SSE = ________
2. Y = - 0.2 x + 6                        SSE = ________
3. The better fit is          Y = __________________

2. The following table shows the average price of a two-bedroom apartment in downtown New York City from 1994 to 2004 (x=0 represents 1994)

find:

x = ______              y = ______             xysum of = ______          

x2 = ______            y2 = _______       

Regression line: ___________________________

Correlation Coefficient (2 decimal places): ____________

Using the regression line, what would be the price for 2007? ________

Consider an economy that initially has a labor force of 2000 workers. Of these workers, 1900 are employed and each works 40 hours per week. 10 units of output are produced by each hour of labor. There are another 1500 adults in the economy who are not in the labor force.

A) What is the labor force participation rate?

The economy then enters a recession. Employment falls by 4%, and the number of hours per week worked by each employed worker falls by 2.5%. In addition, 0.2% of the labor force becomes discouraged at the prospect of finding a job and leaves the labor force.

B) After all of these changes, what is the new size of the labor force?

C) How many workers are unemployed now?

D) What is the new unemployment rate?

Tastee Mart sells Frostee Flakes. Demand for Frostee Flakes is 500 boxes per week. Tastee
Mart has a holding cost of 30 percent and incurs a fixed cost of $100 for each replenishment
order it places for Frostee Flakes. Given that cost is $2 per box of Frostee Flakes, i) how
much should Tastee Mart order in each replenishment lot? ii) If a trade promotion lowers the
price of Frostee Flakes to $1.80 (d=$0.2) for one month, how much should Tastee Mart order
given the short-term price reduction? iii) What will be the forward buy? iv) For how many
periods will the forward buy be enough? V) What will be the cycle inventory over these
periods?

Sales Tax

Far and Wide Broadband provides Internet connection services to customers living in remote areas. During February 2020, it billed a customer a total of $295,000 before taxes. Weston also must pay the following taxes on these charges:

1. State of Kansas sales tax of 6%
2. Federal excise tax of 0.2%
3. State of Kansas excise tax of 0.4%

Required:

Assuming Far and Wide collects these taxes from the customer, what journal entry would Far and Wide make when the customer pays their bill? If an amount box does not require an entry, leave it blank.

3. All else being equal, one would expect the energy consumption to be related to the amount of CO₂ emissions. The energy consumption of buildings per unit area per unit time is measured as energy use intensity given in MJ/ft²/year. The CO2 emissions are measured in metric tons per capita per year (T/person/year). The data on the building energy consumption and CO₂ emissions values for a sample of 15 zip-codes is shown in the table below

          a.    Find the 95% confidence interval for the correlation between emissions and energy consumption.

          b.    Find the p-value for testing ?₀: ? ≤ 0.2 versus ?₁: ? > 0.2.

          c.    If the units for energy consumption were changed from MJ/ft²/year to BTU/m²/year, what is

                 the new 95% confidence interval? Note that 1 MJ is approximately 947.8 BTU and 1 foot is

         approximately equal to 0.3048 m.

          d.    Compute the least-squares line for predicting the emissions from energy consumption.

                 What are the units of the estimated slope? What are the units of the estimated intercept?

          e.    Which point has the largest magnitude of the residual?

          f.    Report the Total Sum of Squares (TSS), error sum of squares (ESS), and regression sum of

                squares (RSS). What proportion of the variation in emissions is explained by energy

                consumption?

          g.   If the energy consumption increases by 1 MJ/ft²/year, by how much would you predict the

                emissions to increase or decrease?

Assume that you recently graduated and you just landed a job as a financial planner with the Cleveland Clinic. Your first assignment is to invest $100,000. Because the funds are to be invested at the end of one year, you have been instructed to plan for a one-year holding period. Further, your boss has restricted you to the following investment alternatives, shown with their probabilities and associated outcomes.          

Barney Smith Investment Advisors recently issued estimates for the state of the economy and the rate of return on each state of the economy. Alta Industries, Inc. is an electronics firm; Repo Men Inc. collects past due debts; and American Foam manufactures mattresses and various other foam products. Barney Smith also maintains an "index fund" which owns a market-weighted fraction of all publicly traded stocks; you can invest in that fund and thus obtain average stock market results. Given the situation as described, answer the following questions.

Suppose you create a two-stock portfolio by investing $50,000 in Alta Industries and $50,000 in Repo Men. Calculate the expected return, standard deviation, coefficient of variation, and beta for this portfolio. How does the risk of this two-stock portfolio compare with the risk of the individual stocks if they were held in isolation? **Please show all calculations and formulas used to derive the answers**

Stock X has an expected return of 11% and the standard deviation of the expected return is 12%. Stock Z has an expected return of 9% and the standard deviation of the expected return is 18%. The correlation between the returns of the two stocks is +0.2. These are the only two stocks in a hypothetical world.

A.What is the expected return and the standard deviation of a portfolio consisting of 90% Stock X and 10% Stock Z? Will any rational investor hold this portfolio (in this hypothetical two stock world)? Explain why or why not.

B.What is the expected return and the standard deviation of a portfolio consisting of 10% Stock X and 90% Stock Z? Will any rational investor hold this portfolio (in this hypothetical two stock world)? Explain why or why not. (You might want to do Part C first).

C.What is the maximum amount of Stock Z a rational investor will hold in his or her portfolio? What is the expected return and the standard deviation of this portfolio? The maximum amount is a percentage between 0% and 100%, and to receive full credit your answer should be within 0.2 percentage points of the correct answer. (Hint: Set up Excel to calculate the portfolio expected return and standard deviation as a function of the portfolio weights, which must sum to 100%. You can find the correct answer to this part by manually changing the portfolio weights, or by using the Solver function on Excel).

D.Explain why different rational investors might hold different portfolios of these two stocks. Identify the range of portfolios a rational investor might hold. Your answer should take this form: A rational investor will hold a maximum of ___% in Stock X (with ___% in Z), or a minimum of _____% in Stock X (with _____ in Z). The set of feasible portfolios will fall within the range defined by these two end points.

Assume that you recently graduated and you just landed a job as a financial planner with the Cleveland Clinic. Your first assignment is to invest $100,000. Because the funds are to be invested at the end of one year, you have been instructed to plan for a one-year holding period. Further, your boss has restricted you to the following investment alternatives, shown with their probabilities and associated outcomes.

Barney Smith Investment Advisors recently issued estimates for the state of the economy and the rate of return on each state of the economy. Alta Industries, Inc. is an electronics firm; Repo Men Inc. collects past due debts; and American Foam manufactures mattresses and various other foam products. Barney Smith also maintains an "index fund" which owns a market-weighted fraction of all publicly traded stocks; you can invest in that fund and thus obtain average stock market results. Given the situation as described, answer the following questions using Excel (Please Show Excel Formulas).   

a. Calculate the expected rate of return on each alternative.

b. Calculate the standard deviation of returns on each alternative.                                               

c. Calculate the coefficient of variation on each alternative.                        

d. Calculate the beta on each alternative.                                                                                            

e. Do the SD, CV, and beta produce the same risk ranking? Why or why not?

Problem 1. Stocks offer an expected rate of return of 18%, with a standard deviation of 22%. Gold offers an expected return of 10% with a standard deviation of 30%.

a) In light of the apparent inferiority of gold with respect to both mean return and volatility, would anyone hold gold? If so, demonstrate graphically why one would do so.

b) Given the data above, reanswer a) with the additional assumption that the correlation coefficient between gold and stocks equals 1. Draw a graph illustrating why one would or would not hold gold in one’s portfolio. Could this set of assumptions for expected returns, standard deviations, and correlation represent an equilibrium for the security market?

Problem 2. Consider the following properties of the returns of stock 1, the returns of stock 2 and the returns of the market portfolio (m):

Standard deviation of stock 1                                                                         σ1 = 0.30

Standard deviation of stock 2                                                                         σ2 = 0.30

Correlation between stock 1 and the market portfolio                                   ρ1, m = 0.2

Correlation between stock 2 and the market portfolio                                   ρ2, m = 0.5

Standard deviation of the market portfolio                                                     σm = 0.2

Expected return of stock 1                                                                  E (r1) = 0.08

Suppose further that the risk-free rate is 5%.

a) According to the Capital Asset Pricing Model, what should be the expected return on the market portfolio and the expected return of stock 2?

b) Suppose that the correlation between the return of stock 1 and the return of stock 2 is 0.5. What is the expected return, the beta, and the standard deviation of the return of a portfolio that has a 50% investment in stock 1 and a 50% investment in stock 2?

c) Is the portfolio you constructed in part b) an efficient portfolio? Assuming the CAPM is true, could you build a combination of the market portfolio and the portfolio of part b) to increase the expected return of the market portfolio without changing the variance of the combined portfolio.