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Rate of Return

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Question

    Rate of Return  ScenarioProbabilityStocksBonds  Recession.20−8%16%  Normal economy.5019 9   Boom.3025 6  a.Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms?   YesNo b.Calculate the expected rate of return and standard deviation for each investment. (Do not round intermediate calculations. Enter your answers as a percent rounded to 1 decimal place.)  Expected Rate
of ReturnStandard
Deviation  Stocks %    %     Bonds %    %   Top hedge fund manager Diana Sauros believes that a stock with the same market risk as the S&P 500 will sell at year-end at a price of $43. The stock will pay a dividend at year-end of $3.00. Assume that risk-free Treasury securities currently offer an interest rate of 1.8%. Average rates of return on Treasury bills, government bonds, and common stocks, 1900–2013 (figures in percent per year) are as follows.   Portfolio Average Annual
Rate of Return Average Premium (Extra return
versus Treasury bills)   Treasury bills   3.9     Treasury bonds   5.2 1.3   Common stocks 11.5 7.6  What is the discount rate on the stock? (Enter your answer as a percent rounded to 2 decimal places.)   Discount rate %   What price should she be willing to pay for the stock today? (Do not round intermediate calculations.Round your answer to 2 decimal places.)   Stock price$

 
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cash flows

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Question

An auto plant that costs $200 million to build can produce a line of flexfuel cars that will produce cash flows

with a present value of $270 million if the line is successful but only $120 million if it is unsuccessful. You believe that the probability of success is only about 52%. You will learn whether the line is successful immediately after building the plant.

a-1.Calculate the expected NPV. (Do not round intermediate calculations. A negative amount should be indicated by a minus sign. Enter your answer in millions rounded to 1 decimal place.)
  Expected NPV$  million  
a-2.Would you build the plant?
    
 YesNo
Suppose that the plant can be sold for $160 million to another automaker if the auto line is not successful.
b-1.Calculate the expected NPV. (Do not round intermediate calculations. A negative amount should be indicated by a minus sign. Enter your answer in millions rounded to 2 decimal places.)
  Expected NPV$  million  
b-2.Would you build the plant?
  
 YesNo
 
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You estimate that your cattle farm will generate $.15 million

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Question

You estimate that your cattle farm will generate $.15 million of profits on sales of $3 million under normal

economic conditions and that the degree of operating leverage is 2. (Leave no cells blank – be certain to enter “0” wherever required. Do not round intermediate calculations. Enter your answers in millions rounded to 1 decimal place.)

a.What will profits be if sales turn out to be $1.5 million?
  Profit will(Click to select)increasedecrease to$  million.  
b.What if they are $4.5 million?
  Profit will

Please show work.		(Click to select)increasedecrease to

$  million.  
 
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A project currently generates sales of $19 million

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Question

A project currently generates sales of $19 million, variable costs equal 40% of sales, and fixed costs are $3.8

million. The firm’s tax rate is 35%. Assume all sales and expenses are cash items.

a.What are the effects on cash flow, if sales increase from $19 million to $20.9 million? (Input the amount as positive value. Enter your answer in dollars not in millions.)
  Cash flow (Click to select)increasesdecreases by $ 
b.What are the effects on cash flow, if variable costs increase to 50% of sales? (Input the amount as positive value. Enter your answer in dollars not in millions.)
  Cash flow (Click to select)increasesdecreases by $ 
Please show work.  Thank you!
 
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