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A restaurant owner has hired a manager to run the daily operations of her restaurant. Restaurant profits depend on both the manager’s unobservable effort level and random fluctuations in demand. The expected value of restaurant profits if the manager exerts effort, e, is given by e/2. Effort costs the manager 0.25e2. If the risk neutral manager’s salary is a percentage, c, of restaurant profits, how much effort should we expect the manager to exert? What is the optimal value of c from the owner’s perspective? How does the level of effort compare with the optimal level if the manager was also the owner of the restaurant?
A non-dividend-paying stock has a futures contract with a price of $71.5 and a maturity of six months. If the risk-free rate is 4.1 percent, what is the price of the stock?
Stock A has a beta of .2, and investors expect it to return 8%. Stock B has a beta of 1.8, and investors expect it to return 12%. Use the CAPM to find the expected rate of return and the market risk premium on the market
A7X Corp. just paid a dividend of $1.40 per share. The dividends are expected to grow at 17 percent for the next eight years and then level off to a growth rate of 5 percent indefinitely. If the required return is 12 percent, what is the price of the..
You and three other staff members of the U.S. Offices of Comptroller of the Currency have been assigned identical projects. You are to review the various articles that have been written, the various speeches made, and in general the various suggestio..
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next nine years because the firm needs to plow back its earnings to fuel growth. The company will pay a $10 per share dividend 10 years from today ..
Discuss the relationship among quality, value and satisfaction and their roles for developing a long-term relationship with customers
TuleTime Comics is considering a new show that will generate annual cash flows of $100,000 into the infinite future. If the initial outlay for such a production is $1,500,000 and the appropriate discount rate is 6 percent for the cash flows, then wha..
The covariance of the returns between Willow stock and Sky stock is 0.0740. The variance of Willow is 0.1310 and the variance of sky diamond is 0.1130. What is the correlation coefficient between the returns of the two stocks?
A company currently pays a dividend of $2 per share (D0 = $2). It is estimated that the company's dividend will grow at a rate of 16% per year for the next 2 years, then at a constant rate of 8% thereafter. The company's stock has a beta of 1.25, the..
On your very first day, Bill asks you to help him with his retirement planning. Bill is now 50 years old and plans to retire in 10 years. He wants to have a total of $400,000 in savings in 10 years when he retires. He currently has $100,000 saved up;..
If the initial margin requirement (IMR) is 70%, and we buy $100,000 worth of stock, how much may we borrow? If the maintenance margin requirement is 35%, at what price will the brokerage house force us to sell, or add cash to our account?
On July 1, Nancy paid $600,000 for a commercial building and an additional $150,000 for the land on which it stands. Four years later, also on July 1, she sold the property for $850,000. Compute the modified accelerated cost recovery system depreciat..
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