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Your utility function is U = log(2C), where C is the amount of consumption that you have in any given period. Your income is $40,000 per year and there is a 2% chance that you will be involved in a catastrophic accident that will cost you $30,000 next year.
a. What is your expected utility?
b. Calculate an actuarially fair insurance premium. What would your expected utility be were you to purchase the actuarially fair insurance premium?
c. What is the most that you would be willing to pay for insurance, given your utility function?
Mojito Mint Company has a debt–equity ratio of .25. The required return on the company’s unlevered equity is 15 percent, and the pretax cost of the firm’s debt is 7.4 percent. Sales revenue for the company is expected to remain stable indefinitely at..
Fama's Llamas has a weighted average cost of capital of 9.8 percent. The company's cost of equity is 12 percent, and its pretax cost of debt is 7.8 percent. The tax rate is 40 percent. What is the company's target debt-equity ratio?
Prezario's has 225,000 shares of stock outstanding with a par value of $1.00 per share. The current market value of the firm is $1,690,000. The company just announced a 2-for-1 stock split. By how much does the common stock account balance change aft..
You have decided to buy a small apartment building for $100,000 near a local college. You used $10,000 as a down payment and obtained a mortgage from a local bank for the remaining $90,000. The annual mortgage payment to the bank is $11,500. how much..
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A preferred stock would be an ideal example of: Cash flows associated with annuities are considered to be:
Lang Industrial Systems Company (LISC) is trying to decide between two different conveyor belt systems. System A costs $220,000, has a four-year life, and requires $70,000 in pretax annual operating costs. System B costs $312,000, has a six-year life..
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.88 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life. If the tax rate is 35 percent..
What's the future value of the initial $1,100 investment after 20 years? We assume the expected annual return is 8%.
The _____ is the time period that elapses from the point when the firm uses the raw materials in manufacturing a finished good to the point when the finished good is sold. In the EOQ model, if carrying costs increase while all other costs remain unch..
The wholesale cost of a hair dryer is $20. The original markup was 46% based on selling price. Find the final sale price after the following series of price changes: a markup of 32%, a markup of 19%, a markdown of 49% and a markdown of 12%. (Round ea..
About 10% of Albany's operating expenses are in Australian dollars; all other expenses are in pounds. Explain how Alright can reduce its economic exposure to exchange rate fluctuations.
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