Answer:
B2B (Business to business) and B2C (Business to consumer)
Andy Pearson ran PepsiCo Inc. for nearly 15 years, driving revenues from $1 billion to $8 billion. In 1980, Fortune named him one of the 10 toughest bosses in the United States. Pearson was singled out for the relentless demands that he put on his people. As one employee put it, Pearson's talents were often "brutally abrasive." Every year, without hesitation, he fired the least productive 10% to 20% of his workforce. Pearson used a(n) _____ leadership style.
Answer:
authoritarian leadership style
Explanation:
In simple words, An authoritarian form of leadership relates to the leadership style where a leader determines strategies and practices, defines what objectives are to be accomplished, and manages and monitors all operations without substantive involvement by subordinates. An authoritative style of management can be highly successful in some cases, but also has negative consequences on community participants or staff.
Widgeon Co. manufactures three products: Bales, Tales, and Wales. The selling prices are $55, $78, and $32, respectively. The variable costs for each product are $20, $50, and $15, respectively. Each product must go through the same processing in a machine that is limited to 2,000 hours per month. Bales take 5 hours to process; Tales 7 hours; and Wales 1 hour. Assuming that Widgeon Co. can sell all of the products it can make, what is the maximum contribution margin it can earn per month?
a. $56,000.
b. $34,000.
c. $49,000.
d. $70,000.
Answer:
b. $34,000.
Explanation:
The computation of contribution margin is shown below:-
Particulars Bales Tales Wales
Seeling price $55 $78 $32
Variable cost $20 $50 $15
Contribution
margin $35 $28 $17
Required hour to
process 5 7 1
Contribution margin
per hour 7 4 17
Maximum contribution margin is
= Contribution margin per hour × number of machine hours
= 17 × 2,000
= $34,000
Using the same information from before, please calculate the WACC of Correct Inc. assuming a risk free rate of 2.5%, a company Beta of 1.2 and a market risk premium of 6%.
Answer:
WACC = 21.7%
Explanation:
The firm is an all-equity finance firm which implies that the company uses only equity funds to finance its its operation without the use of debt. Therefore, the cost of the equity of the firm would be the same as its cost of capital (WACC)
The WACC can be determined using the the capital asset pricing model (CAPM). The CAPM relates the price of a share to the market risk or systematic risk. The systematic risk is that which affects all the all the economic agents, e.g inflation, interest rate e.t.c
Using the CAPM , the required rate of return is given as follows:
E(r)= Rf +β(Rm-Rf)
E(r) - required return
β- Beta
Rm- Return on market
Rf- Risk-free rate
Rm-Rf- Market risk premium
DATA
E(r) =? , Rf- 2.5%, Rm-Rf- 6% , β- 1.2
E(r) = 2.5% + 1.2× (16%) = 21.7 %
Cost of equity = 21.7%
WACC = 21.7%
Most Company has an opportunity to invest in one of two new projects. Project Y requires a $345,000 investment for new machinery with a six-year life and no salvage value. Project Z requires a $345,000 investment for new machinery with a five-year life and no salvage value. The two projects yield the following predicted annual results. The company uses straight-line depreciation, and cash flows occur evenly throughout each year.
Project Y Project Z
Sales 360,000 288,000
Expenses
Direct materials 50,400 36,000
Direct labor 72,000 43,200
Overhead including depreciation 129,600 129,600
Selling and administrative expenses 26,000 26,000
Total expenses 278,000 234,800
Pretax income 82,000 53,200
Income taxes (38%) 31,160 20,216
Net income 50,840 32,984
Required:
a. Compute each project’s annual expected net cash flows.
b. Compute each project’s accounting rate of return.
c. Determine each project’s net present value using 6% as the discount rate. Assume that cash flows occur at each year-end.
Answer:
Most Company
a. Annual expected net cash flows:
Project Y Project Z
Net cash flows before tax 139,500 122,200
Expected net cash flows:
Income taxes (38%) 31,160 20,216
Net cash flows after tax 108,340 101,984
b. Accounting rate of return:
= Annual Net Income/Average Investment
Project Y:
= $50,840/$278,000 * 100
= 18.29%
Project Z:
= $32,984/$234,800 * 100
= 14.05%
c. Net Present Value, using 6% discount rate:
Annuity PV Project Y Project Z
Annuity factor = 4.212
Annuity of operating outflows 929,746 698,350
Initial Investments 345,000 345,000
Total PV of investments $1,274,746 $1,043,350
Annuity of cash inflows $1,516,320 $1,213,056
Net present value $241,574 $169,706
Explanation:
a) Data and Calculations:
1. Investments in Projects:
Project Y Project Z
Investments $345,000 $345,000
Project's life 6 years 5 years
Salvage value 0 0
Depreciation method = straight-line method
Annual Depreciation expenses $57,500 $69,000
2. Cash Inflows:
Sales 360,000 288,000
3. Cash Outflows:
Direct materials 50,400 36,000
Direct labor 72,000 43,200
Overhead 72,100 60,600
Selling & Admin. expenses 26,000 26,000
Total Operating Outflows 220,500 165,800
Net cash flows before tax 139,500 122,200
Expected net cash flows:
Income taxes (38%) 31,160 20,216
Net cash flows after tax 108,340 101,984
4. Accounting rate of returns calculations:
Project Y Project Z
Annual Net income $50,840 $32,984
Project's life 6 years 5 years
Initial Investments 345,000 345,000
Annual Cash Outflows 220,500 165,800
Total Cash Outflows 1,323,000 829,000
Total Investments 1,668,000 1,174,000
Average Investments $278,000 $234,800
Average investments = total investments/number of project's years.
5. Most Company's accounting rate of return measures the average annual net income as a percentage of the average investments, without considering the time value of money.
6. Most Company's NPV or net present value of a project calculates the difference between the present values of the inflows and the outflows of a project over its life.
Bawl purchased ABC bonds on 1/1/21. Data regarding these available-for-sale securities follow: Cost MV December 31, 2021 $100,000 $ 91,000 December 31, 2022 100,000 111,000 December 31, 2023 100,000 106,000 The unrealized Gain/Loss reported in OCI of the 2023 Comprehensive Income statement is:
Answer:
Bawl with ABC bonds
The unrealized Gain/Loss reported in OCI of the 2023 Comprehensive Income statement is:
A Loss of $5,000
Explanation:
a) Data and Calculations:
Cost MV Unrealized Profit or (Loss)
December 31, 2021 $100,000 $ 91,000 $9,000 (Loss)
December 31, 2022 100,000 111,000 20,000
December 31, 2023 100,000 106,000 5,000 (Loss)
Available-for-sale Investment
Debit Credit
Dec 31 100,000
Loss 9,000
Dec 31 91,000
Profit 20,000
Dec 31 111,000
Loss 5,000
Dec 31 106,000
The Available-for-sale Investment will show a loss of $5,000 in the Other Comprehensive Income of the 2023 Comprehensive Income Statement based on the yearly adjustments to the account with losses and profits.
The Bob Buckham Senior Center, a not-for-profit entity, serves a hot meal to senior citizens every Friday evening. All the food is donated by a local supermarket. All the food preparation and serving is done by local volunteers. If the Center had to pay for the food, it would need to spend $10,000 a year. If it had to pay for the food preparation and service, it would need to spend $12,000 a year. How should it report these contributions in its financial statements?
Food | Food preparation and service
a. Disclose in the notes | Disclose in the notes
b. Disclose in the notes | Report $12,000 revenue and expense
c. Report $10,000 revenue and expense | Disclose in the notes
d. Report $10,000 revenue and expense | Report $12,000 revenue and expense
Answer:
c. Report $10,000 revenue and expense | Disclose in the notes
Explanation:
Not-for-profit entities must report the fair value of all the goods they receive as donations. in this case, they would have to report the $10,000 worth of food received from a local supermarket. But they are not required to report the value of volunteer work, they only have to disclose it on the footnotes of their financial statements.
assume that the marginal propensity to consume is 0.90 and autonomous consumption expenditures equals $100 billion. Further, assume that planned investment spending is
Answer:
$4 trillion or $4,000 billion$3.5 trillion or $3,500 billionExplanation:
1. Equilibrium Output or GDP is calculated by the expression;
Output or Y = Consumption + Investment + Government expenditure + Net exports
Net exports and Government expenditure are assumed to be 0.
Consumption = 100 + 0.9Y
Investment = $300 billion
Y = 100 + 0.9Y + 300
Y - 0.9Y = 400
Y = 400/0.1
Y = $4,000 billion
2. Y = 50 + 0.9Y + 300
Y - 0.9Y = 350
0.1Y = 350
Y = 350/0.1
Y = $3,500 Billion
At 17 years old, Otto signed a contract to purchase a new Hummer by advancing a payment of $50,000. However, when Otto turned 20, he wished to disaffirm this contract. Does the law permit this
Jordan issued 10-year, 11% bonds with a par value of $110,000. Interest is paid semiannually. The market rate on the issue date was 10%. Jordan received $116,855 in cash proceeds. Which of the following statements is True? Multiple Choice Suring must pay $116,855 at maturity and no interest payments.
Answer:
$110,000 on maturity
Interest of $6,050 semiannually
Explanation:
Jordan will pay $110,000 at maturity date with 20 payments of $6050 as interest
11% bonds at par value = $110,000
Interest paid = Semiannually
Market rate = 10%
At maturity, the par value will be paid as the par value of Jordan issued bonds is 110,000, therefore, Jordan will pay 110,000 on the maturity date.
As the bonds are issued for 10 years with semiannual payments that will be like 20 payments of $6,050 (110,000 x 10% x 6/12)
Marks Company makes one product, for which it has established the following standards for materials: Average quantity of material per unit of product: 4.5 pounds Price per pound of materials, $16 During March, Marks made 10,000 units of the product, using 50,000 pounds at a total purchase price of $825,000. What is the materials price variance
Answer:
Direct material price variance= $25,000 unfavorable
Explanation:
Giving the following information:
Standard price= $16
During March, Marks made 10,000 units of the product, using 50,000 pounds at a total purchase price of $825,000.
To calculate the direct material price variance, we need to use the following formula:
Direct material price variance= (standard price - actual price)*actual quantity
Actual price= 825,000/50,000= $16.5
Direct material price variance= (16 - 16.5)*50,000
Direct material price variance= $25,000 unfavorable
It costs your company $240 to produce pens and pencils together. To produce the same amount of pens and pencils separately costs $100 for the pens and $120 for the pencils. The production of pens and pencils exhibits:_______
a. diseconomies of scope
b. economies of scope.
c. increasing returns to scale.
d. constant returns to scale.
Answer:
b
Explanation:
1.1. Which of the following ratios are key components in measuring a company's operating efficiency? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.)
a. Profit margin
b. Equity ratio
c. Return on total assets
d. Total asset turnover
1.2. Which ratio summarizes the components applicable in 11?
a. Debt ratio
b. Profit margin
c. Return on total assets
d. Total asset turnover
2. What measure reflects the difference between current assets and current liabilities?
a. Gross margin
b. Day's sales uncollected
c. Retun on total assets
3. Which of the following short-term liquidity ratios measure how frequently a company collects its accounts? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.)
a. Days' sales uncollected
b. Days' sales in inventory
c. Accounts receivable turnover
d. Acid test rato
Answer:
1.1 The ratio from the list below which measures the efficiency of the operations of a company is D - Total Asset Turnover Ratio.
Explanation:
Total Asset Turn Over Ratio is calculated by dividing Net Sales by Average Total Assets.
For example, if company CDH is reporting a value of $499,650 as initial total assets and $387,656 as ending total assets. Within the same period, the company generated sales of $250,655, with sales returns of $17,000.
This means that, the asset turnover ratio for Company CDH is calculated as follows:
($250,655-$17,000)/(($387,656+$499,650)/2)
The answer is 0.52667
Thus, every dollar in total assets generates $0.52667 in sales.
Efficiency ratios are important for rating the operations of the business. They are also used by investors and lenders when conducting financial analysis of businesses to decide whether the companies are a good investment.
1.2 The component which summarises the components applicable in 1.1 is D Total Asset Turnover
2. Working capital is the variance between current assets and current liabilities.
. This is simply the capital that an organisation uses in its day-to-day business operations.
3. The short-term liquidity ratios which calculate how frequently a company collects its accounts are:
A) Days' sales Uncollected and
C) Accounts receivable turnover.
A) Days' sales Uncollected is calculated by
(Accounts receivable/Net annual credit sales) x 365
It is the number of days before receivables are collected.
The lower the ratio the more liquid the company is likely to be. High Days' Sales Uncollected Ratios are bad for business.
C) Accounts receivable turnover is the annual rate at which a business collects its average accounts receivable.
Cheers!
The income statement and selected balance sheet information for Direct Products Company for the year ended December 31 are presented below. Income Statement Sales Revenue Expenses S 41,600 Cost of Goods Sold Depreciation Expense Salaries and Wages Expense Rent Expense Insurance Expense Interest Expense Utilities Expense 17,500 1,300 8,300 3,800 1,550 1,450 Net Income S 6,650 Selected Balance Sheet Accounts Ending Beginning Balances Balances Accounts Recelvable Inventory Accounts Payable Prepaid Rent Prepaid Insurance Salaries and Wages Payable Utilities Payable $570 820 430 29 27 600 685 480 32 43 17
Required:
Prepare the cash flows from operating activities section of the statement of cash flows using the indirect method.
Answer:
Direct Products Company
Operating cash flow statement
For the year ended December 31, 202x
Net income $6,500
Adjustments to net income:
Depreciation expense $1,300Decrease in accounts receivable $30Decrease in prepaid insurance $5Increase in salaries payable $23Increase in utilities payable $7Increase in inventory ($135)Increase in prepaid rent ($7)Decrease in accounts payable ($50) $1,173Net cash flow provided by operating activities $7,673
Explanation:
Net Income $6,650
Depreciation Expense $1,300
ending beginning
Accounts Receivable $570 $600
Inventory $820 $685
Accounts Payable $430 $480
Prepaid Rent $29 $22
Prepaid Insurance $27 $32
Salaries Payable $66 $43
Utilities Payable $24 $17
An investor in the United States bought a one year Brazilian security valued at $195,000 Brazilian reals. The U.S. dollar equivalent was 100,000. The Brazilian security earned 16.00% during the year, but the Brazilian real depreciated 5 cents against the us dollar during the time period ($0.51 to $0.46)
Required:
a. After the transfer of funds back to the united states, what was the investors return on her $100,000?
b. Determine the total ending value of the Brazilian investment in Brazilian reals and then translate this Brazilian value to US dollar’s. Then compute the return on the $100,000.
Answer:
S
Explanation:
I enjoy working with this team because we all trust each other and respect what each person brings to the team. Which characteristic of team excellence am I displaying
Answer: Collaborative climate
Explanation:
When an individual enjoys working with this team because they all trust each other and respect what each person brings to the team, the characteristic of team excellence displayed is referred to as collaborative climate.
Collaborative teams come together and work together in order to achieve the aims and objectives of the organization. A collaborative team bonds and trust each other.
A company issued 5-year, 7% bonds with a par value of $100,000. The market rate when the bonds were issued was 6.5%. The company received $102,105 cash for the bonds. Using the straight-line method, the amount of recorded interest expense for the first semiannual interest period is:
Answer:
$3,289.5
Explanation:
The computation of the amount of recorded interest expense for the first semiannual interest period is shown below:-
Amortization of premium = Premium amount ÷ Number of semi-annual periods
where
Premium amount = Par value - issue price
= $102,105 - $100,000
= $2,105
Number of semi-annual periods = 5 × 2
= 10 periods
Amortization of premium = $2,105 ÷ 10
= 210.5
Semi-annual interest expense = Face value × Coupon rate × (6 ÷ 12)
= $100,000 × 7% × (6 ÷ 12)
= $3,500
First semi-annual interest expense = $3,500 - 210.5
= $3,289.5
A management control system is a logical integration of techniques to gather and use data and to evaluate performance.
a. True
b. False
Answer:
The correct answer is the option A: True.
Explanation:
To begin with, a management control system is understood as an ensemble of different subsystems that work with each other in order to cooperate to do the task and obtain the objectives that the user is looking for. In this case in particular, this type of system focus primarily in the objective of gathering data with the purpose of using it to evaluate the performances of the members of the organization so that would help the manager to take decisions when he has to. That is why that this system is a logical integration of techniques that would ensemble data to be used.
Which if the following companies is most likely to benefit from economies of scale? (Select the best answer.)
a. a company that had only variable costs
b. a company that has many variables startup costs
c. a company that has many fixed costs
d. a company that doesn't have many employees
Answer:C
Explanation: A company that has many fixed costs
A midyear burst of minimum-wage increases starts on July 1
On July 1, 2016, the minimum wage will increase in 14 U.S. cities, states and counties, and in the District of Columbia. In SanFrancisco, the minimum wage will rise to $13.00 by 2018.
Source: The Wall Street Journal, July 1, 2016
The rise in the minimum wage _______.
A. increases aggregate supply because when workers receive a higher wage rate, they work harder
B. decreases aggregate supply because firms' costs increase
C. creates a movement up along the aggregate supply curve because the price level rises
D. does not change aggregate supply because most people earn more than the minimum wage
Answer: B. decreases aggregate supply because firms' costs increase
Explanation:
The rise in the the minimum wage rate raise the production cost .
This tends to shift the aggregate supply curve leftwards because the profit margins of firm will decrease and that tends to decrease the production.( at each unite of production.)
Hence, the rise in the minimum wage decreases aggregate supply because firms' costs increase .
Therefore , the correct option is 'B'.
Suppose you bought a bond with an annual coupon rate of 4.2 percent one year ago for $900. The bond sells for $950 today. a. Assuming a $1,000 face value, what was your total dollar return on this investment over the past year? b. What was your total nominal rate of return on this investment over the past year? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. If the inflation rate last year was 2.5 percent, what was your total real rate of return on this investment? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Answer:
a) total return = ($1,000 x 4.2%) + ($950 - $900) = $92
b) nominal rate of return = total return / total investment = $92 / $900 = 10.22%
c) we calculate the approximate real rate of return = nominal rate of return - inflation rate = 10.22% - 2.5% = 7.72%
if we want to determine the exact real rate of return:
exact real rate of return = [(1 + nominal rate) / (1 + inflation rate)] - 1 = (1.1022 /1.025) - 1 = 7.53%
A gift-wrapping business is staffed by Kaitlyn, Rob, Sam, Susan and Sarah. The production by each of the staff members for an average eight-hour work day is as follows:
Assume that the standard or normal productivity in the organization is 10 minutes per package. What is Kaitlyn's efficiency?
Kaitlyn Rob Sam Susan Sarah
72 packages 55 packages 52 packages 52 packages 48 packages
a. 0.75 (75%)
b. 1.50(150%)
c. 9.0 packages per hour
d. 1.50 packages per hour
e. 9.0 minutes per package
Answer:
b. 1.50(150%)
Explanation:
Given that, the standard time per packages is 10 minutes
Then, the total time taken in eight hour shift is 8 * 60 = 480 minutes
The standard output = Total time taken / Standard time = 480/10 = 48 packages
Therefore, the efficiency of Kaitlyn = Kaitlyn's Output / Standard output
=72 / 48
= 1.5
Hence, the answer is 150% or 1.5
. A particular parcel of real estate (land) is sold for $20,000,000 and was originally purchased for $10,000,000. On a taxable sale, explain a circumstance (type of investor, intent, entity, etc.) that would pay the following U.S. federal income tax results on the $10,000,000 gain (exclude the 3.8% net investment income tax and any state taxes in the calculation):
Question Completion:
Choices: a. No tax liability on the sale b. $2,000,000 of tax c. $2,960,000 of tax d. $2,100,000 of tax
Answer:
b. $2,000,000 of tax for individuals
Explanation:
Long-term capital gains tax is a tax on profits from the sale of an asset which an investor has held for more than a year. The approved long-term capital gains tax rates are 0%, 15% or 20% depending on your taxable income bracket and whether you are filing as a single or jointly as married. But, an important point to note is that long-term capital gains tax rates are generally lower than short-term capital gains tax rates, thus encouraging investors to hold assets for a longer time. Short-term capital gains tax rates are the rates applicable to the normal individual income tax brackets.
Construction Products Company and Dante enter into a contract for a sale of bricks and stones. Construction Products knows the purpose for which Dante will use the goods. Under the UCC, an implied warranty of fitness of a particular purpose arises Group of answer choices
Complete Question:
Construction Products Company and Dante enter into a contract for a sale of bricks and stones. Construction Products knows the purpose for which Dante will use the goods. Under the UCC, an implied warranty of fitness of a particular purpose arises:
Group of answer choices.
a. if the buyer is relying on the seller to select suitable goods.
b. if the buyer asks for it.
c. if the seller is a merchant who deals in goods of the kind sold.
d. in conjunction with lease contracts, not sales contracts.
Answer:
a. if the buyer is relying on the seller to select suitable goods.
Explanation:
In this scenario, Construction Products Company and Dante enter into a contract for a sale of bricks and stones. Construction Products knows the purpose for which Dante will use the goods (bricks and stones). Under the Uniform Commercial Code (UCC), an implied warranty of fitness of a particular purpose arises if the buyer is relying on the seller to select suitable goods. This simply means that, Construction Products who is the seller of the bricks and stones implied a warranty of fitness because they know the purpose for which Dante will use the acquired goods and should meet his requirements or needs.
Hence, Construction Products Company is bounded by the contractual agreement (warranty) to provide quality goods which would meet Dante's reasons for buying them since he relying on their expertise or judgmental skills.
What type of policy lowers interest rates to allow individuals access to more money for large purchases
Complete Question:
What type of policy lowers interest rates to allow individuals access to more money for large purchases?
Group of answer choices
A. Fiscal.
B. Stimulus.
C. Discount.
D. Monetary.
Answer:
D. Monetary.
Explanation:
Monetary policy can be defined as the actions (macroeconomic policies) adopted and undertaken by the central bank of a particular country to control the money supply and interest rates so as to boost or enhance economic growth. The central bank uses monetary policies to manage inflation, economic growth through long-term interest rates and level of unemployment in a country. In order to boost economic growth, monetary policy is used to increase money supply (liquidity) while it is also used to prevent inflation by reducing money supply.
Generally, money supply comprises of checks, cash, money market mutual funds (MMF) and credit (mortgage, bonds and loans).
Additionally, monetary policy lowers interest rates to allow individuals access to more money for large purchases.
Which of the following is included in the entry to record the issuance of shares of par value common stock at per share for cash?
A) Cash is debited for $294,000.
B) Common Stock is debited for $98,000.
C) Common Stock is credited for $294,000.
D) Paid-In Capital in Excess of Par-Common is debited for $196,000.
Answer:
A) Cash is debited for $294,000. and,
C) Common Stock is credited for $294,000.
Explanation:
When Shares are Issued for Cash, recognize the Assets of Cash (Debit) and also recognize an equity element - Common Stock (Credit).
Ashley wants to increase the profits of her e-business. She recognizes that most online searchers click on links on the first search page, so she optimizes her website structure so that it ranks higher on a search. What strategy does this illustrate
Answer:
The strategy is Search Engine Optimization (SEO), an important strategy in digital marketing.
Explanation:
Search Engine Optimization (SEO) means optimizing the website structure, improve on keywords strategy and visual effects to increase the website's visibility, its ranking on search engine like google, bing, yahoo search .etc... and subsequently, push up the traffic volume to the website.
What must be the price of a $5,000 bond with a 6.6% coupon rate, semiannual coupons, and two years to maturity if it has a yield to maturity of 10% APR?
Answer:
Bond Price = $4698.59
Explanation:
The price of a bond is equal to the present value of the interest payments, which are in form of an annuity, made by the bond plus the present value of the face value of the bond.
The formula to calculate the price of the bond is attached.
The semi annual coupon rate = 6.6% / 2 = 3.3%
Total period = 2 * 2 = 4
Semi annual YTM = 10% / 2 = 5%
Semi annual coupon payment = 5000 * 0.033 = 165
Bond Price = 165 * [( 1 - (1 + 0.05)^-4) / 0.05] + 5000 / (1+0.05)^4
Bond Price = $4698.59
Suppose that the S&P 500, with a beta of 1.0, has an expected return of 13% and T-bills provide a risk-free return of 4%. a. What would be the expected return and beta of portfolios constructed from these two assets with weights in the S&P 500 of (i) 0; (ii) 0.25; (iii) 0.50; (iv) 0.75; (v) 1.0
Answer:
a. The answers are as follows:
(i) Expected of Return of Portfolio = 4%; and Beta of Portfolio = 0
(ii) Expected of Return of Portfolio = 6.25%; and Beta of Portfolio = 0.25
(iii) Expected of Return of Portfolio = 8.50%; and Beta of Portfolio = 0.50
(iv) Expected of Return of Portfolio = 10.75%; and Beta of Portfolio = 0.75
(v) Expected of Return of Portfolio = 13%; and Beta of Portfolio = 1.0
b. Change in expected return = 9% increase
Explanation:
Note: This question is not complete as part b of it is omitted. The complete question is therefore provided before answering the question as follows:
Suppose that the S&P 500, with a beta of 1.0, has an expected return of 13% and T-bills provide a risk-free return of 4%.
a. What would be the expected return and beta of portfolios constructed from these two assets with weights in the S&P 500 of (i) 0; (ii) 0.25; (iii) 0.50; (iv) 0.75; (v) 1.0
b. How does expected return vary with beta? (Do not round intermediate calculations.)
The explanation to the answers are now provided as follows:
a. What would be the expected return and beta of portfolios constructed from these two assets with weights in the S&P 500 of (i) 0; (ii) 0.25; (iii) 0.50; (iv) 0.75; (v) 1.0
To calculate these, we use the following formula:
Expected of Return of Portfolio = (WS&P * RS&P) + (WT * RT) ………… (1)
Beta of Portfolio = (WS&P * BS&P) + (WT * BT) ………………..………………. (2)
Where;
WS&P = Weight of S&P = (1) – (1v)
RS&P = Return of S&P = 13%, or 0.13
WT = Weight of T-bills = 1 – WS&P
RT = Return of T-bills = 4%, or 0.04
BS&P = 1.0
BT = 0
After substituting the values into equation (1) & (2), we therefore have:
(i) Expected return and beta of portfolios with weights in the S&P 500 of 0 (i.e. WS&P = 0)
Using equation (1), we have:
Expected of Return of Portfolio = (0 * 0.13) + ((1 - 0) * 0.04) = 0.04, or 4%
Using equation (2), we have:
Beta of Portfolio = (0 * 1.0) + ((1 - 0) * 0) = 0
(ii) Expected return and beta of portfolios with weights in the S&P 500 of 0.25 (i.e. WS&P = 0.25)
Using equation (1), we have:
Expected of Return of Portfolio = (0.25 * 0.13) + ((1 - 0.25) * 0.04) = 0.0625, or 6.25%
Using equation (2), we have:
Beta of Portfolio = (0.25 * 1.0) + ((1 - 0.25) * 0) = 0.25
(iii) Expected return and beta of portfolios with weights in the S&P 500 of 0.50 (i.e. WS&P = 0.50)
Using equation (1), we have:
Expected of Return of Portfolio = (0.50 * 0.13) + ((1 - 0.50) * 0.04) = 0.0850, or 8.50%
Using equation (2), we have:
Beta of Portfolio = (0.50 * 1.0) + ((1 - 0.50) * 0) = 0.50
(iv) Expected return and beta of portfolios with weights in the S&P 500 of 0.75 (i.e. WS&P = 0.75)
Using equation (1), we have:
Expected of Return of Portfolio = (0.75 * 0.13) + ((1 - 0.75) * 0.04) = 0.1075, or 10.75%
Using equation (2), we have:
Beta of Portfolio = (0.75 * 1.0) + ((1 - 0.75) * 0) = 0.75
(v) Expected return and beta of portfolios with weights in the S&P 500 of 1.0 (i.e. WS&P = 1.0)
Using equation (1), we have:
Expected of Return of Portfolio = (1.0 * 0.13) + ((1 – 1.0) * 0.04) = 0.13, or 13%
Using equation (2), we have:
Beta of Portfolio = (1.0 * 1.0) + (1 – 1.0) * 0) = 1.0
b. How does expected return vary with beta? (Do not round intermediate calculations.)
There expected return will increase by the percentage of the difference between Expected Return and Risk free rate. That is;
Change in expected return = Expected Return - Risk free rate = 13% - 4% = 9% increase
g According to the CAPM, what is the expected rate of return for a stock with a beta of 1.2. when the risk-free rate is 6% and the market rate of return is 12%
Answer:
20.40%
Explanation:
According to CAPM :
expected rate of return = risk free rate + (beta x market rate of return)
6% + (1.2 x 12%) = 20.40%
Effects of fixed and variable cost behavior on the risk and rewards of business opportunities LO 11-2
Kenton and Denton Universities offer executive training courses to corporate clients. Kenton pays its instructors $5,000 per course taught. Denton pays its instructors $250 per student enrolled in the class. Both universities charge executives a $450 tuition fee per course attended.
Required
Prepare income statements for Kenton and Denton, assuming that 20 students attend a course.
Kenton University embarks on a strategy to entice students from Denton University by lowering its tuition to $240 per course. Prepare an income statement for Kenton assuming that the university is successful and enrolls 40 students in its course.
Denton University embarks on a strategy to entice students from Kenton University by lowering its tuition to $240 per course. Prepare an income statement for Denton, assuming that the university is successful and enrolls 40 students in its course.
Prepare income statements for Kenton and Denton Universities, assuming that 10 students attend a course, and assuming that both universities charge executives a $450 tuition fee per course attended.
Answer and Explanation:
The Preparation of income statement of each point is shown below:-
A. Kenton and Denton Universities
Income Statement
Particulars Kenton Denton
Revenue (20 × $450) $9,000 $9,000
Less: Instruction fees
Per course fees $5,000
Per student fee (20 × $250) $5,000
Net income $4,000 $4,000
B. Kenton Universities
Income Statement
Particulars Kenton
Revenue (40 × $240) $9,600
Less: Instruction fees
Per course fees $5,000
Net income $4,600
C. Denton Universities
Income Statement
Particulars Denton
Revenue (40 × $240) $9,600
Less: Instruction fees
Per student fee (40 × $250) $10,000
Net income -$400
D. Kenton and Denton Universities
Income Statement
Particulars Kenton Denton
Revenue (10 × $450) $4,500 $4,500
Less: Instruction fees
Per course fees $5,000
Per student fee (10 × $250) $2,500
Net income -$500 $2,000
We simply deduct all the expenses from the revenue to arrive at net income and a net loss
