Assume that you recently graduated with a major in finance, and you just landed a job in the trust department of a large regional bank. Your first assignment is to invest $100,000 from an estate for which the bank is trustee. Because the estate is expected to be distributed to the heirs in approximately one year, you have been instructed to plan for a 1year holding period. Furthermore, your boss has restricted you to the following investment alternatives, shown with their probabilities and associated outcomes. (For now, disregard the items at the bottom of the data; you will fill in the blanks later.) Estimated Returns on Alternative Investments
The bank’s economic forecasting staff has developed probability estimates for the state of the economy, and the trust department has a sophisticated computer program that was used to estimate the rate of return on each alternative under each state of the economy. High Tech, Inc., is an electronics firm; Collections, Inc., collects past due debts; and U.S. Rubber manufactures tires and various other rubber and plastics products. The bank also maintains an “index fund” that includes a marketweighted fraction of all publicly traded stocks; by investing in that fund, you can obtain average stock market results. Given the situation as described, answer the following questions. a. (1) Why is the riskfree return independent of the state of the economy? Do Tbills promise a completely riskfree return? (2) Why are High Tech’s returns expected...
...ECO 550 WEEK 4 CHAPTER 7 AND CHAPTER8PROBLEMS
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Chapter 7
In the deep creek mining company described in this chapter table 7.1 suppose again that labor is the variable input and capital is the fixed input. Specifically, assume that the firm owns a piece of equipment having a 500bhp rating. A. Complete the following tableLabor input L(#of workers
Total production TPL (=Q)
Marginal Product (MPL)
Average Product APL
1
2
3
4
5
6
7
8
9
10
`
B. Plot the (i) total product, (ii) marginal product, (iii) average product functions.
C. Determine the boundaries of these three stages of production.
6. Consider the following shortRun production function (where input, ):
A. Determine the marginal product
B. Determine the average product function
C. Find the value of L that maximizes Q
D. Find the value of L at which the marginal product function takes on its maximum value
E. Find the value of L at which the average product function takes on its maximum value.
8. Based on the production function parameter estimates reported in Table 7.4:
A. Which industry (or industries) appears to exhibit decreasing returns to scale? (Ignore the issue of statistical significance.)
B. Which industry comes closest to exhibiting constant returns to scale?
C. In which will a given percentage increase in capital result in the largest percentage increase in...
...Problems:
8.1: Data for Newark General Hospital (In Millions of Dollar):
 Static Budget Flexible Budget Actual Result 
Revenues 4.7 4.8 4.5 
Costs 4.1 4.1 4.2 
Profits 0.6 0.7 0.3 
A. Calculate and interpret the profit variance.
Profit Variance = Actual Profit – Static Profit
= 0.3 – 0.6
= 0.3
In words Newark General hospital was $300,000 below standard, and made less profit than their expectations.
B. Calculate and interpret the Revenue variance.
Revenue Variance = Actual Revenues – Static Revenues
= 4.5 – 4.7
= 0.2
In words Newark General Hospital was $200,000 below standard, and generated less revenues than their expectations.
C. Calculate and interpret the Cost variance.
Cost Variance = Static Costs – Actual Costs
= 4.1 – 4.2
=  0.1
In words Newark General Hospital’s $100,000 cost...
...Chapter8 1,4,5
1. Cray Research sold a super computer to the Max Planck Institute in Germany on credit and invoiced €10 million payable in six months. Currently, the sixmonth forward exchange rate is $1.10/€ and the foreign exchange advisor for Cray Research predicts that the spot rate is likely to be $1.05/€ in six months.
(a) What is the expected gain/loss from the forward hedging?
The expected gain from this sale can be figured by using this equation:
10,000,000(1.101.05)=10,000,000(.05)=$500,000 expected gain
(b) If you were the financial manager of Cray Research, would you recommend hedging his euro receivable? Why or why not?
Cray Research should hedge in this situation. Hedging will allow them to possibly increase the expected dollar by $500,000 and eliminate exchange risk.
(c) Suppose the foreign exchange advisor predicts that the future spot rate will be the same as the forward exchange rate quoted today. Would you recommend hedging in this case? Why or why not?
I think hedging would still be a good option to help eliminate any risk that could come from exchange risk.
4. Boeing just signed a contract to sell a Boeing 737 aircraft to Air France. Air France will be billed €20 million which is payable in one year. The current spot exchange rate is $1.05/€ and the oneyear forward rate is $1.10/€. The annual interest rate is 6.0% in the U.S. and 5.0% in France. Boeing...
...activities of regulated banks, but do not operate in the same regulatory environment.The shadow banking system funneled a great deal of money into the U.S. residential mortgage market during the bubble. Insurance companies would buy mortgage bonds from investment banks, which would then use the proceeds to buy more mortgages, so that they could issue more mortgage bonds. The banks would use the money obtained from selling mortgages to write still more mortgages.Many estimates of the size of the shadow banking system suggest that it had grown to match the size of the traditional U.S. banking system by 2008.Apart from the absence of regulation and reporting requirements, the nature of the operations within the shadow banking system created several problems. Specifically, many of these institutions "borrowed short" to "lend long." In other words, they financed longterm commitments with shortterm debt. This left these institutions very vulnerable to increases in shortterm rates and when those rates rose, it forced many institutions to rush to liquidate investments and make margin calls. Moreover, as these institutions were not part of the formal banking system, they did not have access to the same emergency funding facilities. (Learn more in The Rise And Fall Of The Shadow Banking System.)Next, let's learn about the types of financial markets in which these financial institutions operate.
...
...students from this population, the probability that
exactly 2 students have experienced math anxiety is
(a) 0.3020
(b) 0.2634
(c) 0.20 13
(d) 0.5
(4 1
(f) None of the above
2. Refer to the previous problem. The standard deviation of the number of students in the sample
who have experienced math anxiety is
(a) 0.0160
(b) 1.265
(c) 0.2530
(d) 1
(e) .2070
3. In a certain large population, 40% of households have a total annual income of $70,000. A
simple random sample of 4 of these households is selected. What is the probability that 2 or
more of the households in the survey have an annual income of over $70,000?
(a) 0.3456
(b) 0.4000
(c) 0.5000
(d) 0.5248
(e) The answer cannot be computed from the information given.
4. A factory makes silicon chips for use in computers. It is known that about 90% of the chips
meet specifications. Every hour a sample of 18 chips is selected at random for testing. Assume
a binomial distribution is valid. Suppose we collect a large number of these samples of 18 chips
and determine the number meeting specifications in each sample. What is the approximate
mean of the number of chips meeting specifications?
(a) 16.20
(b) 1.62
(c) 4.02
(d) 16.00
(e) The answer cannot be computed from the information given.
Chapter8
Test 8A

5. Which of the following are true statements?
I. The expected value of a geometric random variable is determined by the formula (1...
...Questions and Problems
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Corporate Finance eBook
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Chapter8: Interest Rates and Bond Valuation
Questions and Problems
1. Valuing Bonds What is the price of a 10year, zero coupon bond paying $1,000 at maturity if the YTM is: BASIC (Questions 1– 12) a. 5 percent? b. 10 percent? c. 15 percent? 2. Valuing Bonds Microhard has issued a bond with the following characteristics: Par: $1,000 Time to maturity: 25 years Coupon rate: 7 percent Semiannual payments Calculate the price of this bond if the YTM is: a. 7 percent b. 9 percent c. 5 percent 3. Bond Yields Watters Umbrella Corp. issued 12year bonds 2 years ago at a coupon rate of 7.8 percent. The bonds make semiannual payments. If these bonds currently sell for 105 percent of par value, what is the YTM? 4. Coupon Rates Rhiannon Corporation has bonds on the market with 13.5 years to maturity, a YTM of 7.6 percent, and a current price of $1,175. The bonds make semiannual payments. What must the coupon rate be on these bonds? 5. Valuing Bonds Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company issues a bond with a par value of €1,000, 15 years to maturity, and a coupon rate of 8.4 percent paid annually. If the yield to maturity is 7.6 percent, what is the current price of the bond? 6. Bond Yields A Japanese company has a bond outstanding...
...ECO 550 WEEK 6 CHAPTER 11 AND CHAPTER 12 PROBLEMS
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Chapter 11
2. Ajax Cleaning Products is a mediumsized firm operating in an industry dominated by one large firm Tile King. Ajax produces a multiheaded tunnel wall scrubber that is similar to a model produced by Tile King. Ajax decides to charge the same price as Tile King to avoid the possibility of a price war. The price charged by Tile King is $20,000.
Ajax has the following shortrun cost curve:
,000  5,000Q + 100Q2.
A. Computer the marginal cost curve for Ajax.
B. Given Ajax’s pricing strategy, what is the marginal revenue function for Ajax?
4. Unique Creations holds a monopoly position in the production and sale of manometers. The cost function facing Unique is estimated to be
TC = $100,000 + 20Q
A. What is the marginal cost for Unique?
C. What is the marginal revenue at the price computed in Part (b)?
6. Wyandotte Chemical Company sells various chemicals to the automobile industry. Wyandotte currently sells 30,000 gallons of polyol per year at an average price of $15 per gallon. Fixed costs of manufacturing polyol are $90,000 per year and total variable costs equal $180,000. The operations research department has estimated that a 15 percent increase in output would not affect fixed costs but would reduce average variable costs by 60 cents per gallon. The marketing department has estimated the arc elasticity of demand for polyol to be...
...Question 1
The rapid growth in the international trade has also increased the risk of exchange rate uncertainty for the various firms, specially involved in the international business. As compared to other macroeconomic factors like interest rate and inflation rate, foreign exchange rate exposure is four times and ten times as volatile as interest rate and inflation rate respectively (Jorion, 1990). This type of risk has forced the firms to pay more attention to the effect of exchange rate exposure on the firm transactions and its value. Exchange rate exposure can affect the value of firm’s assets and liabilities that are denominated in the foreign currencies. Therefore, exchange rate movement also affects the stock price of the firm (Chen, Naylor and Lu, 2004). Transaction based exchange rate exposure affect the competitive position, the inputs and outputs, the supply and demand chains of the international firms.
Transaction based exposure is the type of exchange rate risk that exists when firms engaged in the financial obligations due to be settled in foreign currencies. For example, a company that conduct import and export business may be due to be paid foreign currency in next 3 months for some goods exported. When they will receive the payment, they have to convert the foreign currency into their local currency. If during these three months, the value of local currency becomes stronger against the foreign currency, then the firm will receive fewer amounts as...