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...

...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...

...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...

...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...

...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...

...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 |
|...

...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...

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