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Imagine there are two free agent outfielders available. They both cost the same price, but you only have the money to sign one. Assume home runs alone are a proxy for performance. Suppose Player 1 has a 20% chance of hitting 20 home runs and a 20% chance of hitting 25 home runs, a 25% chance of hitting 30 home runs, a 20% chance of hitting 35 home runs, and a 15% chance of hitting 40 home runs. Player 2 has a 10% chance of hitting 10 home runs and a 10% chance of hitting 15 home runs, a 10% chance of hitting 25 home runs, a 30% chance of hitting 30 home runs, a 30% chance of hitting 35 home runs, and a 10% chance of hitting 50 home runs.
Which player has the highest expected return?
Which player would represent the riskier investment?
Which player would you choose?
What does this say about your risk preferences?
Firms HL and LL are identical except for their leverage ratios and the interest rates they pay on debt. Each has $30 million in invested capital, has $9 million of EBIT, and is in the 40% federal-plus-state tax bracket. Calculate the return on invest..
A 25-year maturity bond with face value of $1,000 makes semiannual coupon payments and has a coupon rate of 8%. What is the bond's yield to maturity if the bond is selling for $1,090? What is the bond's yield to maturity if the bond is selling for $1..
The operating cost of a new machine is $500 for the first year. Starting the second year, the operating cost increases by $200 per year for the next 10 years. Calculate the equivalent annual operating cost of the machine. What will be the present and..
Calculate the accounting rate of return on the project. Which projects are acceptable according to this criterion? (Note: Assume net income is equal to after-tax cash flow less depreciation)
Mary and Carlos want to buy a $400,000 house. They have $50,000 for a down payment. Their lender is offering them a 30 year mortgage at 6.2%. What is their total mortgage payment (principal & interest + escrow)?
Momsen Corp. is experiencing rapid growth. Dividends are expected to grow at 26 percent per year during the next three years, 16 percent over the following year, and then 5 percent per year indefinitely. The required return on this stock is 12 percen..
On May 10, a company issued for cash 2,000 shares of no-par common stock (with a stated value of $4) at $17, and on May 15, it issued for cash 3,000 shares of $17 par preferred stock at $61. Journalize the entries for May 10 and 15, assuming that the..
Which one of the following is NOT an attractive way to reduce production and/or marketing costs for entry-level cameras and strive to achieve a competitive advantage over rivals based on lower overall costs per entry-level camera sold?
Suppose you buy a round lot of Francesca Industries stock on 55 percent margin when the stock is selling at $20 a share. The broker charges a 10 percent annual interest rate, and commissions are 3 percent of the stock value on the purchase and sal..
Calculate the nominal annual cost of nonfree trade credit under each of the following terms. Assume payment is made either on the due date or on the discount date. Assume 365 days in year for your calculations. A chain of appliance stores, APP Corpor..
A client is concerned about the impact that inflation will have on her retirement income. The client currently earns $40,000 per year. Assuming that inflation averages 2.25% for the first five years, 2.5% for the next five years and 3.25% for the rem..
Meadow Brook Manor would like to buy some additional land and build a new assisted living center. The anticipated total cost is $29 million. The CEO of the firm is quite conservative and will only do this when the company has sufficient funds to pay ..
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