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Suppose there are only two possible future states of the world, and the utility function is logarithmic. Let the probability of state 1, n,, equal 3, and the prices of the pure securities, p, and p2 , equal $0.60 and $0.40, respectively. An individual has an initial wealth or endowment, Wo, of $50,000.
a) What amounts will the risk-averse individual invest in pure securities 1 and 2?
b) How will the individual divide his or her initial endowment between current and future consumption?
The Poseidon Swim Company produces swim trunks. The average selling price for one of their swim trunks is $84.44. The variable cost per unit is $22.14, Poseidon Swim has average fixed costs per year of $5,685. Determine the degree of operating levera..
This will be a real challenge, but it should be an interesting challenge. Much of the way we measure risk relies on probability distribution (the bell curve as shown on page 425). For many things in life, and business, this is perfectly valid, but fo..
Common Products has just made its first issue of stock. It raised $1.8 million by selling 100,000 shares of stock to the public. These are the only shares outstanding. The par value of each share was $2. Complete the following table: Common stock (pa..
Starting today, George is going to contribute $300 on the first of each month to his retirement account. His employer will contribute an additional 50% of the amount George contributes. If both George and his employer continue to do this and he can e..
You are invited to advice a Group Sales Manager (GSM) who is currently supervising a group of insurance adjusters who are highly experienced confidence in their abilities, particularly on taking up new assignments. They seem to that any new accomplis..
Harrison Corporation is interested in acquiring Van Buren Corporation. Assume that the risk-free rate of interest is 3% and the market risk premium is 7%. Harrison estimates that if it acquires Van Buren, the year-end dividend will remain at $2.05 a ..
You buy a bond for $994 that has a coupon rate of 6.1% and a 5-year maturity. A year later, the bond price is $1,184. (Assume a face value of $1,000 and annual coupon payments.) What is the new yield to maturity on the bond?
Able, Baker, and Charlie are the only three stocks in an index. The stocks sell for $36, $312, and $82, respectively. If Baker undergoes a 3-for-2 stock split, what is the new divisor for the price-weighted index?
Matt operates a sole proprietorship and files his return on a calendar year basis. He took out a fire insurance policy for his business effective July 1, year 1, and paid a premium of 3,600 for 4 years. Matt reports his income and expenses on a cash ..
2000 is deposited into a newly opened fund on January 1, 1999. Another deposit is made into the fund on July, 1 1999. On January 1, 2000, the balance in the fund is 6000. The time-weighted rate of return in 1999 is 8.0% and the dollar-weighted rate o..
You receive a $6,000 check from your grandparents for graduation. You decide to save it toward a down payment on a house. You invest it earning 6% per year and you think you will need to have $12,000 saved for the down payment. How long will it be be..
A small sheet metal company has estimated that its fuel costs for the next 5 years will have a present worth of $70,000. The company expects the cost next year to be $12,000, after which time the cost will increase according to a uniform gradient. At..
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