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An S& L can make one of two types of loans. It can lend money on home mort-gages, where it has a 75% probability of earning $ 100 million and a 25% probability of earning $ 80 million. Alternatively, it can lend money to oil speculators, where it has a 25% probability of earning $ 400 million and a 75% probability of losing $ 160 million (due to loan defaults by the speculators). Bernie, the manager of the S& L who will make the lending decision, receives 1% of the firm's earnings. He believes that if the S& L loses money, he can walk away from his job without repercussions, although without compensation. Bernie and the share-holders of the company are risk neutral.
a. Determine the S& L's expected return on the two investments.
b. Compare the S& L manager's expected profits on the two investments.
c. Compare the shareholders' expected profits on the two investments.
d. Which decision would Bernie make if all he cares about is maximizing his personal expected earnings? Which investment would the stockholders prefer?
e. How would your answer to d. change if Bernie cannot walk away in case of losses, so he would be paid 1% of the firm's earnings regardless of their positive or negative sign?
The Ajax Manufacturing Company wishes to choose one of the following machines. Machine 1 Machine 2 Machine 3Initial cost $12,000 $15,000 $21,000 Planning horizon 5 years 5 years 5 years Salvage value $1200 $2,000 $3,000Revenue years 1,..,k $3,000 +50..
Whay is the payback period of the following investment when a) i=0% and b) i=10%/ year Initial Cost ($) 1,000,000 Annual Cost ($) 100,000 Annual income ($) 300,000 salvage Value ($) 500,000 Max Life time: 10 years
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You spendthrift cousin want to buy a fancy watch for $425. Instead, you suggest that she buy an inexpensive watch for $25and save the difference of $400 for 40years in account earning 9% interest per year.how much will she accumulate in this accoun..
On Juan's twenty-sixth birthday, he deposited $6,000 in a retirement account. Each year thereafter, he deposited $1,000 more than the previous year. Using a gradient series factor,determine how much was in the account immediately after his thirty-f..
Consider a Stackelberg duopoly game of quantity competition. Firm #1 is the "Leader" and firm #2 is the "Follower." Market demand is given by the inverse demand function p=1000-4Q.where Q=q1+q2 is the total output of the two firms.
Each society in the nation is suddenly responsible for designing its own local commodity based financial system, and you have been assigned the task of selecting what commodity your society will use and how it will be implemented.
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