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You are in the market for a used car and see an ad for the model that you like. The owner has not set a price but invites potential buyers to make offers.
Your prepurchase inspection gives you only a very rough idea of the value of the car; you think it is equally likely to be anywhere in the range of $1,000 to $5,000 (so your calculation of the average of this value is $3,000).
The current owner knows the exact value and will accept your offer if it exceeds that value. If your offer is accepted and you get the car, then you will find out the truth.
But you have some special repair skills and know that, when you own the car, you will be able to work on it and increase its value by a third (33.3 . . . %) of whatever it is worth.
(a) What is your expected profit if you offer $3,000? Should you make such an offer?
(b) What is the highest offer that you can make without losing money on the deal?
A portfolio manager has made an investment that will generate returns that are subject to the state of the economy during the year. Use the following information to calculate the standard deviation of the return distribution for the portfolio.
You wish to know how well a company is managing its accounts receivable and inventory. You will be looking at:
Ang Electronics, Inc., has developed a new DVDR. If the DVDR is successful, the present value of the payoff (when the product is brought to market) is $33.6 million. If the DVDR fails, the present value of the payoff is $11.6 million. Calculate the N..
A 25-year, 8% semi annual coupon bond with a par value of $1,000 may be called in 4 years at a call price of $1,100. The bond sells for $950. What is the bond's yield to maturity? What is the bond's capital gain or loss yield? What is the bond's yiel..
You are the manager of a large crude-oil refinery. As part of the refining process, a certain heat exchanger (operated at high temperatures and with abrasive material flowing through it) must be replaced every year. If the company's cost of capital i..
A project has an initial outlay of $1,964. It has a single payoff at the end of year 7 of $6,219. What is the net present value (NPV) of the project if the company’s cost of capital is 10.89 percent?
What are some risks of international business that may not exist for local business? What does this chapter reveal about the relationship between an MNC's degree of international business and its risk?
Assume that you are the portfolio manager of the Coastal Fund, a $3 million hedge fund that contains the following stocks. The required rate of return on the market is 11.00% and the risk-free rate is 5.00%. What rate of return should investors expec..
Calculate the present value of the future cash flow, given the following information: (a) Future Payment: $25,000, (b) Interest Rate: 5%, and (c) Number of Periods: 10.
Symon Meats is looking at a new sausage system with an installed cost of $245,000. The cost will be depreciated straight-line to zero over the project’s five-year life, at the end of which the sausage system can be scrapped for $30,000. If the tax ra..
Although not shown on Table 1, the Center uses (sells) $800,000 of drugs annually in its dialysis treatments, which cost the hospital (pharmacy) $400,000. The $400,000 profit on these drugs accrues to the pharmacy, which records $800,000 of revenues ..
Suppose you know that a company’s stock currently sells for $62 per share and the required return on the stock is 12 percent. You also know that the total return on the stock is evenly divided between a capital gains yield and a dividend yield.
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