Subject | General |
Due By (Pacific Time) | 11/20/2016 12:00 pm |
Textbook: Keat, P., Young, P., & Erfle, S. (2014). Managerial economics: Economic tools for today’s decision makers. (7th ed.). Upper Saddle River, NJ: Prentice Hall.
Chapter 12: Capital Budgeting and Risk
1. In 200 words, If a company's stock is perceived to be more risky than average, what will happen to their equity cost of capital? Explain using the capital asset pricing model.
2. In 200 words, project C has an expected value of $500 and a standard deviation of $50. Project D has an expected value of $300 and a standard deviation of $10. Comment on the desirability of these projects.
3. In 200 words, In terms of capital budgeting, explain the difference between risk and uncertainty.
4. In 200 words, describe the capital asset pricing model (CAPM) and how it is used in capital budgeting decisions.
5. In 200 words, Project A and Project B both have expected values of $5,000. Project A has a standard deviation of $1,000, while Project B has a standard deviation of $3,000. Comment on the desirability of these projects.
6. You are given the following risky cash flows and certainty equivalent factors for a four-year project:
Certainty Period |
Cash Flow |
Equivalent Factor |
1 |
$2,500 |
0.95 |
2 |
3,000 |
0.92 |
3 |
4,000 |
0.88 |
4 |
3,000 |
0.84 |
The initial investment for this project is $8,000, and the risk-free interest rate is six percent. Calculate the net present value of the project.
7. The Widget Company has estimated the following revenue possibilities for the year:
Sales |
Probability |
100 |
0.15 |
150 |
0.20 |
220 |
0.30 |
290 |
0.20 |
310 |
0.15 |
a. Find the expected revenue.
b. Find the standard deviation.
c. Find the coefficient of variation
8. The Petram Company has estimated expected cash flows for 1996 to be as follows:
Probability |
Cash Flow |
.10 |
$120,000 |
.15 |
140,000 |
.50 |
150,000 |
.15 |
180,000 |
.10 |
210,000 |
Calculate the following:
a. expected value
b. standard deviation
c. coefficient of variation
d. the probability that the cash flow will be less than $100,000
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