r = (378) - (39)(85) / 8 = -36.375 √[211 - (39)^2 / 8] * √[983 - (85)^2 / 8] r= -.8908
r^2= .7935
Since r is negative there would be a negative correlation.

9) Pennsylvania Refining Company is studying the relationship between the pump price of gasoline and the number of gallons sold. For a sample of 20 stations last Tuesday, the correlation was .78. At the .01 significance level, is the correlation in the population greater than zero? Significance = .01

11) The Airline Passenger Association studied the relationship between the number of passengers on a particular flight and the cost of the flight. It seems logical that more passengers on the flight will result in more weight and more luggage, which in turn will result in higher fuel costs. For a sample of 15 flights, the correlation between the number of passengers and total fuel cost was .667. Is it reasonable to conclude that there is positive association in the population between the two variables? Use the .01 significance level. Significance= .01

t= (0.667√15- 2)/(√1- 〖0.667〗^2 )
t= 3.228
CV = 2.650
Reject null
The problem shows a positive correlation between the two variables passengers, and fuel costs.

14) The following sample observations were randomly selected. Y A) Determine the regression equation.
B) Determine the value of Ŷ when X is 7.
X Y x^2 xy

...population mean? What is the best estimate of this value?
The value of population mean is unknown. The best estimate of this value is the sample mean of 60 pounds.
b. Explain why we need to use the t distribution. What assumption do you need to make?
According to Lind, et al. (2005), when population standard deviation is unknown, and the sample is smaller than 30, a t distribution should be used. We need to assume that the sample is from a normal population (pp. 291-293).
c. For a 90 percent confidence interval, what is the value of t?
For a 90 percent confidence interval, and df = 15, t= 1.753
d. Develop the 90 percent confidence interval for the population mean.
Xbar = 60; s = 20; n = 16
Xbar ±t(s/√n) = 60 ± 1.753 (20/√16) = 60± 1.753 (5) = 60± 8.765 = [51.24, 68.77]
e. Would it be reasonable to conclude that the population mean is 63 pounds?
Yes because 63 pounds is among the confidence intervals.
Lind Chapter 9; Exercise 28
A processor of carrots cuts the green top off each carrot, washes the carrots, and inserts six to a package. Twenty packages are inserted in a box for shipment. To test the weight of the boxes, a few were checked. The mean weight was 20.4 pounds, the standard deviation 0.5 pounds. How many boxes must the processor sample to be 95 percent confident that the sample mean does not differ from the population mean by more than 0.2 pounds?
Xbar = 20.4; s = 0.5; E= 0.2; 95% confidence level
At 95% confidence level, z = 1.96...

...Chapter 17, Problem B1
A. To remain comfortably within the ‘A’ range, the firm should avoid the lower of each scale.
Fixed Charge Coverage = 3.40 – 4.30 (Scale 3.00 – 4.30)
Total Debt = 55 – 65 (45 - 65)
Long-Term Debt = 25 – 32 (22 – 32)
B. Other factors to consider include net present value (NPV), foreign tax credits, and the price of stock.
C. Bixton must resolve the research and development, and foreign tax credits. The target ranges listed are suitable only for a debt shield. Lenders monitor long-term debt. If R&D spending increases and foreign tax credits remain balanced, then this may fall out of the 22-32 range which indicates the capital structure is losing leverage.
Chapter 18, A10
DPS1 – DPS0 = ADJ [POR(EPS1) – DPS0]
YEAR 1 = 0.75 [0.25 X $8.00 - $1.00] + $1.00 = $1.75
YEAR 2 = 0.75 [0.25 X $8.00 - $1.75] + $1.75 = $1.94
YEAR 3 = 0.75 [0.25 X $8.00 - $1.94] + $1.94 = $1.985
YEAR 4 = 0.75 [0.25 X $8.00 - $1.98] + $1.98 = $2.00
YEAR 5 = 0.75 [0.25 X $8.00 - $2.00] + $2.00 = $2.00
Chapter 18, B2
A.
(A) TOTAL DISCRETIONARY CASH FLOW (B) TOTAL EARNINGS
$ 50.00 $ 100.00
$ 70.00 $ 125.00
$ 60.00 $ 150.00
$ 20.00 $ 120.00
$ 15.00 $ 140.00
$ 215.00 $ 635.00
Maximum Payout Ratio = $215/$635 = 33.86%
B. Current...

...Practice Problems
Ch. 7, Practice Problem: 14
Evolutionary theories often emphasize that humans have adapted to their physical environment. One such theory hypothesizes that people should spontaneously follow a 24-hour cycle of sleeping and waking—even if they are not exposed to the usual pattern of sunlight. To test this notion, eight paid volunteers were placed (individually) in a room in which there was no light from the outside and no clocks or other indications of time. They could turn the lights on and off as they wished. After a month in the room, each individual tended to develop a steady cycle. Their cycles at the end of the study were as follows: 25, 27, 25, 23, 24, 25, 26, and 25.
Using the .05 level of significance, what should we conclude about the theory that 24 hours is the natural cycle? (That is, does the average cycle length under these conditions differ significantly from 24 hours?) (a) Use the steps of hypothesis testing. (b) Sketch the distributions involved, (c) Explain your answer to someone who has never taken a course in statistics.
Answer
Null hypothesis H0: = 24 hours Alternative hypothesis: H1: ≠ 24 hours
Df = 7 Critical t value = ±2.36 Sample Mean = 25
Standard deviation = 1.195 The test statistic used is
P-value = 0.049867231
Since calculated p-value 0.049867231 is slightly less than 0.05(significance level) therefore we reject the null hypothesis.
Because there is enough evidence to support the...

...each for $1 million, that it expects will be repaid today. Each loan has a 5% probability of default, in which case the bank is not repaid anything. The chance of default is independent across all the loans. Bank B has only one loan of $100 million outstanding, which it also expects will be repaid today. It also has a 5% probability of not being repaid. Explain the difference between the type of risk each bank faces. Which bank faces less risk? Why?
The expected payoffs are the same, but bank A is less risky. (See solution to Problem 10–21 for full explanation of the banks’ relative risk levels.)
10-22. Consider the following two, completely separate, economies. The expected return and volatility of all stocks in both economies is the same. In the first economy, all stocks move together—in good times all prices rise together and in bad times they all fall together. In the second economy, stock returns are independent—one stock increasing in price has no effect on the prices of other stocks. Assuming you are risk-averse and you could choose one of the two economies in which to invest, which one would you choose? Explain.
A risk-averse investor would choose the economy in which stock returns are independent because this risk can be diversified away in a large portfolio.
10-30. What does the beta of a stock measure?
Beta measures the amount of systemic risk in a stock
10-35. Suppose the market risk premium is 5% and the...

...Complete the problemsets and show all steps in your work:
• Ch. 17: Problem B1
• Ch. 18: Problems A10 & B2
• Ch. 20: Problem A2
• Ch. 21: Problem C2
Chapter 17 (p. 500)
B1:
A. The goal is for Bixton to remain comfortably in the “A” range. For this to work properly, the firm must avoid ratings on the low end of the scale.
Fixed Charge Coverage = 3.40 – 4.30
Total Debt = 55 – 65
Long-Term Debt = 25 – 30
B. Other considerable factors before settling on the target range includes: net present value (NPV), foreign tax credits, and the price of stock. In addition, the firm has a larger-than-average research and development department. Meaning if Bixton could show control over the spending in this area (funds from operations), any rating above 45% and below 65% would increase the lenders’ willingness to loan.
C. Again, the key specific issues Bixton must resolve are the R&D and foreign tax credits. The target ranges listed in this case are only appropriate as a debt shield. More importantly, lenders will monitor for long-term debt to determine if R&D spending increase, and foreign tax credits remain balanced. That means any increase or decrease outside of the “A” range (22 – 32) indicates the capital structure is losing leverage.
Chapter 18 (p. 542)
A10. DPS1 – DPS0 = ADJ[POR(EPS1) – DPS0]
YR1 = 0.75 [0.25 X $8.00 - $1.00] + $1.00 = $1.75
YR2 = 0.75 [0.25 X $8.00...

...C: 2-8 What items are considered to be property for purposes of Sec. 351(a)? What items are not considered to be property?
Items that are considered property include all types of property, such as cash, accounts receivable, inventories, patents, installment obligations, equipment, and buildings. Services, certain debt of the corporation, and certain accrued interest on debt are not treated as property.
C: 2-43 Liabilities in Excess of Basis.
Barbara transfers $10,000 cash and machinery having a $15,000 basis and a $35,000 FMV to Moore Corporation in exchange for 50 shares of Moore stock. The machinery was used in Barbara’s business, originally cost Barbara $50,000, and is subject to a $28,000 liability, which Moore assumes. Sam exchanges $17,000 cash for the remaining 50 shares of Moore stock.
a. What are the amounts and character of Barbara’s recognized gain or loss?
According to section 351, the exchange is tax-free and no gain or loss can be recognized. Also, any property transferred to a corporation in exchange for stock cannot be recognized.
b. What is Barbara’s basis in the Moore stock?
($13,000)
c. What is Moore’s basis in the machinery?
$7,000
d. What are the amounts and character of Sam’s recognized gain or loss?
Sam recognizes a gain of $17,000 as this is now the Fair Market Value of his shares in Moore stock.
e. What is Sam’s basis in the Moore stock?
$17,000
f. When do Barbara and Sam’s holding periods for their stock begin?
The holding period...

...MBAC 512
Prof. Silke Forbes
Fall 2013
ProblemSet5
DUE DATE: November 6, 2013
Question 1:
At the Portland Fish Exchange, each day some amount of cod is brought to market. Supply is
perfectly inelastic at that amount. How much cod is caught and brought to market varies day to
day. Assuming the demand curve does not vary over time, use a supply and demand diagram to
illustrate how the price is determined on different days. Explain how this process allows us to
identify different points on the demand curve.
Question 2:
Consider the CEO compensation regression results on p.68 of the Brander-Perloff reading (on
Blackboard under Required Readings). What is the estimated effect of experience on CEO
compensation? Is it statistically significant? Is it economically significant? Explain briefly.
Question 3:
Some companies, such as Heinz (which gets most of its revenue from sales of ketchup and
packaged foods), can reliably forecast their revenues based on extrapolation of past data,
adjusting for seasonal effects. Other firms, such as FedEx or Sony, have found that they cannot
simply extrapolate from the past. They need to use theory-based models, accounting for demand
shifters such as income in their forecasting models. Briefly explain why they are different from
Heinz.
1
Question 4:
Please answer Memo 13 of the Time-Warner case in the Baye-Prince textbook. This requires the
use of the file Output.xls,...

...Econ 214
ProblemSet5
1. What impact will an unanticipated increase in the money supply have on the real interest rate, real output, and employment in the short run? How will expansionary monetary policy affect these factors in the long run? Explain.
The money supply in an economy is the benchmark by which interest rates are determined. The supply of money is directly tied into the amount of money that can be loaned and borrowed in various capacities. The more money there is to loan, the less “expensive” it is to borrow that money. This is because when there is an increase in the money supply, the demand for that money fluctuates as well. This causes an increase in the overall amount of money being exchanged, and in turn, also causes a decrease in the real interest rate. The decrease in the interest rate also affects the economic appeal of domestically produced goods and services. This causes increased economic activity and the increase of real output because of that activity. When output increases, economic theory says that employers will typically need to hire more workers in order to handle their increased sales and output. However, this may not be the case in todays modern economy because modern businesses’ potential output are not directly proportional to their workforce. The long run economic impact depends on whether or not the unexpected short run money supply increase is permanent or not. If the money...