1. Determining Profit or Loss from an Investment. Three years ago, you purchased 150 shares of IBM stock for $88 a share. Today, you sold your IBM stock for $103 a share. For this problem, ignore commissions that would be charged to buy and sell your IBM shares.

a. What is the amount of profit you earned on each share of IBM stock? The profit on each share of IBM stock was $15. $103 priced when each share was sold, $88 priced when each share was purchased = $15.

b. What is the total amount of profit for your IBM investment? The total profit for the IBM transaction was $2,250. $15 profit per share x 150 shares = $2,250.

2. Calculating Rate of Return. Assume that at the beginning of the year, you purchase an investment for
$8,000 that pays $100 annual income. Also assume the investment’s value has decreased to $7,400 by the end of the year.

a. What is the rate of return for this investment?
Step 1 subtract the investment’s initial value from the investment’s value at the end of the year.
$7,400 – $8,000 = $600 (negative)
Step 2 add the annual income and the amounts from Step 1.
$600 (negative) + $100 = $500 (negative)
Step 3: divide the total dollar amount of return (Step 2) by the original investment
$500 (negative) ÷ $8,000 = .0625 (negative) = 6.25% (negative)

b. Is the rate of return a positive or negative number? The rate of return is a negative number.

3. Calculating Earnings Per Share, Price-Earnings Ratio, and Book Value. As a stockholder in Bozo Oil Company, you receive its annual report. In the financial statements, the firm has reported assets of $9 million, liabilities of $5 million, after-tax earnings of $2 million, and 750,000 outstanding shares of common stock.

a.Calculate the earnings per share of Bozo Oil’s common stock. (p. 457). 2,000,000/750,000 = $2.67 per share.

...FIN 350
Prof. Porter
ProblemSet4
1. Describe what happens to the total risk of a portfolio as the number of securities is increased. Differentiate between systematic risk and unsystematic risk and explain how total risk and systematic risk are measured.
As the number of securities increases, the total risk of the portfolio decreases. This decrease occurs due to the benefits of diversification which is the process of acquiring a portfolio of securities that have dissimilar risk-return characteristics in order to reduce overall portfolio risk. The total risk of a security or a portfolio is measured with the variance or standard deviations of returns (std dev. ^2 = variance). The larger the standard deviation, the greater the total risk and the more likely it is that you will have a large price move.
Unsystematic risk is the unique or security specific risks that tend to partially offset one another in a portfolio. /this could happen when the price of one stock in the portfolio goes down, the price of another tends to go up, which partially offsets the loss. As long as the returns of two securities are not perfectly, positively correlated, one can reduce total risk by combining securities in a portfolio. By adding securities to a portfolio, it is possible to eliminate unsystematic risk.
Systematic risk is also known as market risk or nondiversifiable risk. The risk tends to affect the entire market in a similar...

...
EXERCISES and PROBLEMSWEEK4
XACC/291C PRINCIPLES of ACCOUNNTING 2
3/15/14
E10-6
Payroll Tax Expense = 352.16
FCIA Taxes Payable = 198.40
Federal Unemployment Taxes Payable = 19.84
State Unemployment Taxes Payable = 133.92
(to record payable taxes for the week)
E10-8
1. True
2. True
3. False – when seeking long-term financing, an advantage of issuing bonds over issuing common stocks is that tax saving results.
4. True
5. False – unsecure bonds are also known as debenture bonds.
6. False – bonds that mature in installments are called serial bonds.
7. True
8. True
9. True
10. True
E10-18
A.
Jan 1
Cash - $562,613
Discounts on Bonds Payable - $37,387
Bonds Payable - $600,000
(to record sale of bonds at discount)
B.
July 1
Bonds Expense - $28,131
Discounts on Bonds Payable - $1,131
Cash - $27,000
(to record payment of bond interest and amortization of bond discount)
C.
Dec 31
Bond Interest Expense - $28,187
Discounts on Bonds Payable - $1,187
Bond Interest Payable - $27,000
(to record account bond interest and amortization on bond discount)
P10-3A
A.
May 1
Cash - $600,000
Bonds Payable - $600,000
(to record sale of bonds at face value)
B.
Dec 31
Bonds Interest Expense - $27,000
Bond Interest Payable - $27,000
(to record bond interest)
C.
Newby Corp.
Balance Sheet
Long-Term Liabilities
Bonds Payable...

...Instructions for ProblemSet #4
1. a) (Sale Price) – (Purchase Price) = Profit earned on each share
b) Profit earned on each share * number of shares purchased = Total amount of profit
2. a) Step 1: (End of year price – beginning year price) = Loss
Step 2: (Loss + annual income of $100) = Dollar Amount of Return
Step 3: Dollar Amount of Return / Beginning year price = % return
b) Hint: it should be a negative number
3. a) After-Tax Earnings / Outstanding Shares of Common Stock = Earnings Per Share
b) Market Value of Stock / Earnings Per Share = P/E Ratio
c) (Reported assets – Liabilities) / Outstanding Shares = Book Value per Share
4. a) (Purchase price) * ( % corporate bond pays) = Annual Dollar Amount Interest
b) Annual Dollar Amount of Interest / (% comparable bonds are paying) = Approximate Value
c) Hint: If you bought something that has now gone up in price relatively, it has increased in value.
5. a) (Amount invested – commission ) / price per share at time of investment = # of shares Bill could buy without margin
d) Step 1: (Amount invested from his pocket + amount borrowed on margin to invest ) = Total amount
(Step 2: Total amount – commission) / price per share = # of shares bill could be with Margin
e) Step 1 (Sale price – purchase price) * # of...

...OPIM Assignment 4
1. Cu = 24-11 = $13
Co = 11-7 = $4
Critical ratio = 13/(13+4) = 0.7647
μ = 30,000
σ = 10,000
Using normal distribution function (=norminv(0.7647,30000,10000)), the optimum order quantity is 37,216 jerseys to maximize profit.
2. Quantity = 32,000
First, we normalize the order quantity to find the z-statistic
z=Q-μσ=32,000-25,00010,000=0.7
We then look up the standard normal loss function. The expected lost sale is given by.
Lz=0.1429
Therefore, the expected lost sales = 10,000 * 0.1429 ≈ 1,429
Expected sales = 30,000 – 1,429 = 30,571 jerseys
3. First, we normalize the order quantity to find its z-statistic
z=Q-μσ=28,000-20,00010,000=0.8
In-stock probability = normdist(0.8, 0, 1, 1) = 0.788145
Therefore, the probability of filling all demand is 0.788145
4. Quantity = 8,000
First, we normalize the order quantity to find the z-statistic
z=Q-μσ=8,000-15,00010,000=-0.7
We then look up the standard normal loss function. The expected lost sale is given by.
Lz=0.8429
Therefore, the expected lost sales = 10,000 * 0.8429 = 8,429
Expected sales = 15,000 – 8,429 = 6,571 jerseys
Expected leftover = 8000 – 6,571 = 1429 jerseys
Therefore, Nike has to sell 1,429 on discount
5. Cu = 16-11 = $5
Co = 9-7 = $2
Critical ratio = 5/(5+2) = 0.7143
μ = 40,000
σ = 10,000
Using normal distribution (=norminv(0.7143,40000,10000)), the optimum order quantity is 45660 jerseys...

...PROBLEMSET4
1) Consider the following utility functions, where W is wealth:
(a) U (W ) = W 2
1
(b) U (W ) =
W
(c) U (W ) = −W
(d) U (W ) = W
(e) U (W ) = ln(W )
(f) U (W ) =
W 1−γ
, with γ = 2
1−γ
How likely are each of these functions to represent actual investor preferences? Why?
2) Suppose investors have preference described by the following utility function
with A > 0:
U = E(r) − 1 Aσ 2
2
Each investor has to choose between three portfolios with the following characteristics:
E(rA ) = 20%
σA = 20%
E(rB ) = 12%
σB = 22%
E(rC ) = 15%
σC = 28%
(a) Which portfolio would every investor pick and why?
(b) What utility would an investor with a risk aversion parameter, A, of 1
get from the three portfolios?
(c) What must be the risk aversion of an investor that is indiﬀerent between
picking portfolio B and portfolio C?
1
3) Consider an investment universe consisting of three assets with the following
characteristics:
E(r1 ) = 12%
E(r2 ) = 17%
E(r3 ) = 7%
σ1 = 25%
ρ1,2 = 0.5
σ2 = 30%
ρ1,3 = 0.25
ρ2,3 = 0.35
σ3 = 20%
(a) What is the expected return and standard deviation of an equally weighted
portfolio investing in all three assets?
(b) What would the diversiﬁcation beneﬁt be for an investor that shifted
her investment to the equally weighted portfolio from an investment
consisting only of asset 1?
(c) If choosing between investing all her capital...

...Tutorial Revision Exercises
Set4
1 What is the elasticity of demand, and identify the simple formula for own price elasticity? What are two determinants of price elasticity of demand?
Demand Elasticity refers to the responsiveness of quality demanded to a change in another variable. For price elasticity of demand, that variable is its price.
Elastic demand & inelastic demand
2 Empirical estimates suggest the following price elasticities of demand: 0.6 for physicians’ services, 4.0 for overseas travel holidays. Based on generalisations for the determinants of elasticity, explain why the figures are different.
3 A survey found that price elasticity of demand for mobile phones varied greatly among different age groups, with people over 40 having an average price elasticity of 1.1, whereas people under 25 had an average price elasticity of 0.7. Can you offer an explanation for the differences?
4 # What is the relationship between elasticity and total revenue as price is reduced? Refer to figure 6.2 of the JMW textbook.
5 The typical demand curve as shown in (a) is elastic in high price ranges and inelastic in lower price ranges. In image (b), total revenue (TR) rises in the elastic range as prices reduced. As price falls in the inelastic range, revenue falls. Total revenue will be at a maximum at the intermediate point of unit elasticity.
A decline in price will result in an increase in TR, this is an elastic demand. A...

...Week4 – Check Your Understanding:
Chapter 7 Exercise 1, 6, 8, and 9
1. In the Deep Creek Mining Company example 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 500-bhp rating.
a. Complete the following table:
|LABOR INPUT L (NO. OF WORKERS)|TOTAL PRODUCT TPL (=|MARGINAL PRODUCT MPL |AVAERAGE PRODUCT APL |
| |Q) | | |
|1 | | | |
|2 | | | |
|3 | | | |
|4 | | | |
|5 | | | |
|6 | | | |
|7 | | | |
|8 | | | |
|9 | | | ...

...Guillermo’s Furniture Store Scenario
There are three alternatives available to the Guillermo’s Furniture Store. One is they can keep the current position or they can become broker or make it high-tech. Therefore, Guillermo’s furniture store can divide the project into current project, High tech project and the broker project.
Guillermo’s furniture store needs to select the option which is good for them and can provide competitive advantage to the store. It has been clear that managers are responsible for the use of capital budgeting techniques to find out exclusive project. We have different types of capital budgeting techniques. These capital budgeting techniques are:
1-Simple Payback, and/or Discounted Payback
2-Net Present Value (NPV)
3-Internal Rate Of Return (IRR)
The simple payback period:
“We can define the simple payback period as the expected number of years required to recover the original investment by Guillermo’s Furniture Store” (Brown, et. al, (2006), i.e. if the store has invested $300 millions in its project, then how much time it will take to recover its invested amount. Payback period is the first formal method used to evaluate capital budgeting projects. Here is the payback period for Guillermo’s Furniture Store. The cumulative cash flow of Guillermo’s Furniture store at t = 0 is just the initial cost of -$300,000. At Year 1 the cumulative cash flow is the previous cumulative of $300,000 plus the...

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