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Consider a person with the following utility function over wealth: u(w) = ew, where e is the exponential function (approximately equal to 2.7183) and w = wealth in hundreds of thousands of dollars. Suppose that this person has a 40% chance of wealth of $50,000 and a 60% chance of wealth of $1,000,000 as summarized by P(0.40, $50,000, $1,000,000). a. What is the expected value of wealth? b. Construct a graph of this utility function (recall your excel?). c. Is this person risk averse, risk neutral, or a risk seeker? d. What is this person’s certainty equivalent for the prospect? In your response be clear which part you are addressing.
What is project finance?
Howard Hane had taken out a $130,000 fire insurance policy for his new restaurant at a rate of $.82 per $100. Nine months later, Howard canceled the policy and decided to move his store to a new location. The cost of the premium to Howard is (use the..
In March 2012, Daniela Motor Financing (DMF), offered some securities for sale to the public. Under the terms of the deal, DMF promised to repay the owner of one of these securities $300 in March 2037, but investors would receive nothing until then. ..
To get the money for this payment, you will make 5 equal deposits, beginning today and for the following 4 quarters, in a bank that pays a nominal interest rate of 8% with quarterly compounding.
A US T-bill, with a face value of $100 and maturing in 60 days, can be purchased for $99.40. Calculate its discount yield and its bond equivalent yield.
“Before there was Paris Hilton, there was Consuelo Vanderbilt Balsan – a Gilded Age heiress and socialite, re-nowned for her beauty and wealth. Now Ms. Balsan’s onetime Hamptons home is slated to hit the market priced at $28 million with Tim Davis of..
Computer stocks currently provide an expected rate of return of 14%. MBI, a large computer company, will pay a year-end dividend of $1 per share. If the stock is selling at $20 per share, what must be the market's expectation of the growth rate of MB..
Keenan Co. is expected to maintain a constant 3.6 percent growth rate in its dividends indefinitely. If the company has a dividend yield of 5.4 percent, what is the required return on the company’s stock? (Round your answer to 2 decimal places. (e.g...
East Coast Television is considering a project with an initial outlay of $X (you will have to determine this amount). It is expected that the project will produce a positive cash flow of $44,000 a year at the end of each year for the next 13 years. T..
Boeing has entered into a 10 year interest rate swap with Bank America with a notional principal of $500 million. Boeing has agreed to pay LIBOR – the floating rate side of the swap. Bank America has agreed to pay a fixed rate of 7%. Assume that next..
L.J.’s Toys Inc. just purchased a $450,000 machine to produce toy cars. The machine will be fully depreciated by the straight-line method over its six-year economic life. Each toy sells for $27. The variable cost per toy is $12, and the firm incurs f..
You are buying a put option of GM at a strike price of $75 and maturity of 1 month. The current trading price is $75. The price of the option is $2. What would the major motive to buy the put option? What is the maximum loss for the investment? What ..
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