ch07_spreadsheet_activity_intructions_7

Lyft launched its IPO on April 1st 2019 with a share price of $72. Before the IPO, Lyft’s board of directors was likely trying to decide how to compensate CEO Logan Green to provide an incentive for him to increase the firm’s performance and share price after it went public. Let’s say the board was considering two possibilities such that they were deciding between providing one million dollars worth of shares of the firm stock at $72 per share or one million dollars worth of call options with a strike price of $72 and a maturity and vesting date one year after the IPO. To keep things simple, let’s say CEO Logan Green can choose between providing two levels of effort: regular effort or high effort. He has been exerting regular effort all along. He could switch to high effort which would be much more costly for him as he would have to work even longer hours, but the extra effort would likely result in better performance for the firm. The goal of the board’s incentive compensation is to…

Consider a company JuiceStop who issues stocks to the public for the first time in 2022. JuiceStop provides two shares. During 2022, JuiceStop sells one of the two shares to Emily for $21,000. Later in the same year, Emily sells the share to Janet for $25,000. The second share, at a market value of $24,000, is sold to Jerome. JuiceStop uses all the funds that are financed via selling stocks to Emily and Jerome to purchase cutting-edge juicer mathines produced in the U.S. The transactions just described contribute how much to GDP for 2022? Briefly explain your answer.

Beltime Associates is a research firm that conducts market surveys and publishes reports on various worldwide market indices. In addition, the firm conducts research on individual securities within specific countries on behalf of various portfolio management firms. The firms use Beltime's research reports to provide investment advice and services.Brent Holmes is a research analyst at Beltime Associates. Holmes is currently evaluating Lianor's national equity index, a developing country, known as the Jesen equity index. Lianorian's stock exchange opened for public trading 35 years ago, in January 1975, at which time the Jesen index was established. However, returns data for the index components are only available for the years 1990 and onwards. Holmes has estimated the returns for the pre-1990 period based on the shares of 15 companies which were in existence in January 1990 and components of the index. Using the 1990 returns data, Holmes has estimated shares' returns for the 1975-1989…

SingComp-AI (“SCAI”) is a Singapore-based startup which develops compliance technology driven by artificial intelligence (“AI”) for financial institutions in Singapore. Compliance technology helps financial institutions in their adherence to applicable laws and regulations, as well as identifying and managing compliance-related risks. In the first year of its operations, SCAI assembled a competent team of professionals to help build its AI infrastructure and to support its growth. Marisa, an AI professional, was hired to head the product development team, and she is widely recognized as one of the key contributors to SCAI’s early success. In SCAI’s second year of operations, Marisa tendered her resignation. It was revealed that Marisa will be joining a rival company called “Eye-Tech” (“ET”), which upset the management of SCAI greatly. ET operates in the same business niche as SCAI, and is also looking to develop similar AI-driven compliance technology for financial institutions. Given…

QUESTION 2 Elizabeth has decided to form a portfolio by putting 30% of her money into stock 1 and 70% into stock 2. She assumes that the expected returns will be 10% and 18%, respectively, and that the standard deviations will be 15% and 24%, respectively. ​ ​  Describe what happens to the standard deviation of the portfolio returns when the coefficient of correlation ρ decreases. The standard deviation of the portfolio returns decreases as the coefficient of correlation decreases. The standard deviation of the portfolio returns increases as the coefficient of correlation increases. The standard deviation of the portfolio returns decreases as the coefficient of correlation increases. The standard deviation of the portfolio returns increases as the coefficient of correlation decreases.

You are considering buying Firm A. The current value of Firm A is V. You do not know V, but you do know that 0 2. O positive, provided that s> 1.5. O positive, for any value of s. O positive, provided that s > 1. O 0, for any value of s.

Question 2. Consider the financing decision of a new investment opportunity for the four firms. The new investment opportunity yields a return of Rs. 1.2 at the end of the period with an initial investment of Rs. 1 in the beginning of the period. Assume the rate of interest is zero and the investors are competitive. The types of the firms are T1, T2, T3 and T4. Each firm has an existing asset to generate a fixed returns plus a random part Z. The random variable Z follows a Bernoulli distribution as Z= 1.5 or -1.5 with equal probability. The prior belief about the firms type and their fixed returns are given by T1: 0.3 P(TI) = 0.01 T2: 1.5 P(T2)= 0.45 T3: 20 P(T3) = 0.09 T4: 1.6 P(T4) = 0.45 (Note that given the fixed returns any firm say T1 has the total cash flow at the end of the period is 0.30+Z+1.2 if it undertakes the investment; or 0.30+Z if it does not undertake the new investment) 2 Each firm decides whether to finance the new investment with either debt or equity or to pass…

The expected return on Stock X is 9.5%, the standard deviation of expected returns is 30%, and the beta coefficient is 0.8. Stock Y has a beta coefficient of 1.1, a standard deviation of 30.0%, and an expected return of 12.0%. The market risk premium is 5%, whereas the risk-free rate is 6%. Determine the necessary return for a portfolio with $7,500 invested in Stock X and $5,500 in Stock Y. Calculations in the middle shouldn't be rounded. Give your response a two-decimal place round. rp = %

You are running an arbitrage-based hedge fund focusing on merger transactions. Company XYZ has just received a tender offer for $47 per share from the management of AcquisiCorp. For the past two weeks, XYZ's shares traded at around $35, but immediately after the tender offer the market price of those shares rose to their current level of $43. On the other hand, AcquisiCorp's share price fell from $81 to $76 right after the announcement of the proposed takeover. Further, interest rates in the economy have recently risen from 2.5 percent to 3.3 percent based on renewed fears of inflation. a. Calculate the market's implied probability that the takeover will ultimately be successful. Do not round intermediate calculations. Round your answer to two decimal places. % b. Explain how you can use this information to decide whether you should take a long position or a short position in the stock of Company XYZ. Round the monetary values to the nearest dollar and percentage value to two decimal…

Pelican Point Financial Group’s clientele consists of two types of investors. The first type of investor makes many transactions in a given year and has a net worth of over $1 million. These investors seek unlimited access to investment consultants and are willing to pay up to $10,000 annually for no-fee-based transactions, or alternatively, $25 per trade. The other type of investor also has a net worth of over $1 million but makes few transactions each year and therefore is willing to pay $100 per trade.   As the manager of Pelican Point Financial Group, you are unable to determine whether any given individual is a high- or low-volume transaction investor. To deal with this issue, you design a self-selection mechanism that permits you to identify each type of investor.  You offer two types of plans for customers with more than $1 million in assets: one plan has an annual maintenance fee but offers a large number of "free" transactions (call this the "Free Trade" Account); the other…

Find the attached file.

AIR, an airline company, used to deal only in derivatives of futures and swaps to hedge its jet fuel market risk. However, in the mid2003, AIR started trading in speculative derivative options and took a bullish view of the jet fuel market.The company predicted correctly but by the end of 2003, AIR revised its strategy to a bearish stance.The CEO signed contracts with several banks, buying put options and selling call options, but the prices soared above the strike priceof the call, and AIR faced a large deficit.1. Explain how AIR could have floored the losses through an adequate risk management procedureDespite mark to market losses of $30 million by mid 2004, the CEO increased AIR exposure.In addition, the trading was not disclosed in the financial statements, and AIR accounted for the options at intrinsic value, ignoringthe time value component.From March 2003, AIR started trading options on its own account.AIR was unable to meet some of the margin calls, resulting in the company…

Semi-Salt Industries began its operation in 1975 and remains the only firm in the world that produces and sells commercial-grade polyglutamate. While virtually anyone with a degree in college chemistry could replicate the firm’s formula, due to the relatively high cost, Semi-Salt has decided not to apply for a patent. Despite the absence of patent protection, Semi-Salt has averaged accounting profits of 5.5 percent on investment since it began producing polyglutamate—a rate comparable to the average rate of interest that large banks paid on deposits over this period. Do you think Semi-Salt is earning monopoly profits? Why?

Your retirement portfolio comprises 100 shares of the Standard & Poor's 500 fund (SPY) and 100 shares of iShares Barclays Aggregate Bond Fund (AGG). The price of SPY is $115 and that of AGG is $96. If you expect the return on SPY to be 10% in the next year and the return on AGG to be 5%, what is the expected return for your retirement portfolio?

Becker Financial recently declared a 2-for-1 stock split. Prior to the split, the stock sold for $80 per share. If the firm's total market value is unchanged by the split, what will the stock price be following the split?

Your bank account pays an interest rate of 5 percent. You are considering buying a share of stock in XYZ Corporation for $100. After 1, 2, and 3 years, it will pay a dividend of $3. You expect to sell the stock after 3 years for $110. XYZ is a good investment.

You are an investment analyst for De Caul’s Investments Inc., an independent financial consulting firm.  Your latest assignment is to provide an independent assessment of RBL.  RBL is a Caribbean-based company that manufactures building products and provides services for the construction and engineering sectors.  The company has several divisions which operate as separate entities. The case study analysis consists of a core section, The Markowitz Portfolio Theory and you will have to either conduct research or perform calculations.  The assessment must be completed within five days because a meeting has been scheduled with the client to discuss your findings. Saving cash in the bank is not as attractive as it was in the past, and RBL is looking to invest some of its surplus cash.  In a meeting with senior managers in the company, you mention the Modern Portfolio Theory which was pioneered by Markowitz.   Required: Explain to the senior manager, The purpose of the Markowitz Portfolio…

Suppose you take the following position based on the current prices: purchase one share of stock, purchase TWO Put options, and sell/write one Call option. Using the table below, calculate the payoffs (values) AND profits from this investment strategy for stock prices ranging from $0 to $60.     Use word file for answer. Do all calculation.Answer must be correct.

Mega Studios is thinking of producing a megafilm which could be a megahit or a megaflop. Profit is uncertain for two reasons: (1) the cost of producing the film may be low or high, and (2) the market reception for the film may be strong or weak. There is a 0.6 chance of low costs (and a 0.4 chance of high costs). The probability of strong demand is 0.5 (the probability of weak demand is 0.5). The studio’s profits (in millions of dollars) for the four possible outcomes are shown in the table:     demand     strong weak cost low 80 10 high 0 -70   a) Should the studio produce the film? Justify your answer using expected profits. b) The studio is concerned that the film’s director might let production costs get out of control. Thus, the studio insists on a clause in the production contract giving it the right to terminate the project after the first $30 million is spent. By this time, the studio will know for certain whether total production costs are going to be low (i.e. under control)…

Orca Industries is considering the purchase of Shark Manufacturing. Shark is currently a supplier for Orca and the acquisition would allow Orca to better control its material supply. The current cash flow from assets for Shark is $7 million. The cash flows are expected to grow at 8 percent for the next five years before leveling off to 5 percent for the indefinite future. The costs of capital for Orca and Shark are 12 percent and 10 percent, respectively. Shark currently has 3 million shares of stock outstanding and $25 million in debt outstanding. What is the maximum price per share Orca should pay for Shark? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Price per share

As CEO of firm A, you and your management team face the decision of whether to undertake a $200 million R&D effort to create a new mega-medicine. Your research scientists estimate that there is a 40 percent chance of successfully creating the drug. Success means securing a worldwide patent worth $550 million (implying a net profit of $350 million). However, firm B (your main rival) has just announced that it is spending $150 million to pursue development of the same medicine (by a scientific method completely independent of yours). You judge that B’s chance of success is 30 percent. Furthermore, if both firms are successful, they will split equally the available worldwide profits ($275 million each) based on separate patents. Assume that firms A and B are risk neutral. Use decision trees to justify your answer for the following problems. a)     Suppose that firms A and B form a joint venture and are going to pursue A’s R&D program first and in case of its failure they will…

On the golf course, John was playing near a group of four golfers. One of the four golfers was a director of Company ABC. The director was telling the three other golfers in his group that his company made much higher profits in the past year than in the previous year. When John went back to the office after the golf game, he checked with his broker regarding the stock and found that, two weeks earlier, the company had made an announcement similar to what the director had told his friends. John went ahead to buy the stock and was very pleased that the stock earned him abnormal returns over the next month. (i) Discuss the type of information that John heard on the golf course. Appraise which one (1) of the three forms of market efficiency is most relevant to this situation. (ii) Analyse and discuss whether the above situation describes a violation of the efficient markets hypothesis.

MisstheMark INC. has fallen on hard times since 2016. Prices have fallen for their main product, the electric typewriter. At this point, the average fixed costs for their product is $20 while their total cost is $150. The market price is only $140, so the firm is losing $10 on every typewriter sold. In spite of these losses, management has suggested keeping the firm open. As the single largest shareholder of the firm, what is your response to that decision? Why?

Question 11 The beta of an active portfolio is 1.45. The standard deviation of the returns on the market index is 22%. The nonsystematic variance of the active portfolio is 3%. The standard deviation of the returns on the active portfolio is a) 36.30%. b) 5.84%. c) 19.60%. d) 24.17%. e) 26.0%.

MisstheMark INC. has fallen on hard times since 2016. Prices have fallen for their main product, the electric typewriter. At this point, the average fixed costs for their product is $20 while their total cost is $150. The market price is only $140, so the firm is losing $10 on every typewriter sold. In spite of these losses, management has suggested keeping the firm open. As the single largest shareholder of the firm, what would be your response to that decision? Why would this be your response?

Abercrombie Inc. is currently selling a consumer good and faces two related decisions, one with respect to pricing and the other with respect to marketing. With respect to pricing, it can maintain its "standard" price or it can adopt a lower "discount" price. With respect to marketing, it can keep with its current advertising campaign or it can expand its advertising. The main risk facing the firm concerns the course of the economy in the near-term; whether the economy will continue healthy growth or whether it will experience a recession. The table below shows the firm's possible profit results (in $ millions) depending on its price and advertising actions. Finally, the firm judges that there is a 60% chance of growth and a 40% chance of a recession. Standard P + Level ads Discount P + Level ads Standard P+ Increased ads Discount P + Increased ads Growing economy 25 15 30 20 Recession -20 0 -45 -10 (1) Determine the alternative maximizing its expected profit if Abercrombie must make…

Gaborone Fried Chicken (GFC), is a Botswana based fast food restaurant chain headquartered in Gaborone and specializes in fried chicken. It is the Southern African region's second-largest restaurant chain as measured by sales. It has locations in Zimbabwe, South Africa, Lesotho, Swaziland and Namibia. GFC was founded by Ms. Foody who then roped in local and regional shareholders into the business. Analyse country risks that GFC may encounter in the five countries other than Botswana

Suppose the present value of a new medical equipment purchased in a hospital is $60,000. Consider the life of the equipment is 8 years and the discount rate is 5%. The hospital decided to pay in five equal yearly installments. How much does the hospital need to pay each year?