Economic Issues Simulation

Economic Issues Simulation
Economic Issues Simulation
Economic Issues Simulation: Constructit Constructit is a company which does not presently have
any employees with health insurance benefits. The company employs 1000 people and are willing to
fund annual premiums as long as they can pay $4,000 per person. The employees comprise of 550
men and 450 women, ranging in ages 26 to 45. Furthermore, the workers 57% of the workers range
from high activity to moderate activity while the 43% that remain are in predominantly sedentary
positions. The employer must calculate what kind of risks the employee will face when considering
what type of insurance to offer the employees. In this scenario, 38% of the employees are not at any
major risk whatsoever. ... Show more content on Helpwriting.net ...
I would also suggest to include vision screening, hearing screening, and the male/female
sterilization services. The cost for these services is relatively low and they are standard services
which should be include in any insurance plan. Eliminating these standard services would deter
employees from getting involved with the insurance plan as a whole so the company would suffer.
Custodial coverage should be another service included with the plan. This additional service is not
high cost and the amount of utilization is relatively low. Deciding on this plan while including
vision and hearing screenings, male/female sterilization, and custodial care; and removing obesity
treatment services, would result in the premium costing approximately $3,943. The total number is
just slightly under the budget of $4,000. The use of this plan will make Castor Hall up to $3.94
million from Constructit. This would be a very profitable choice for Castor Hall. I personally would
not select Castor Standard insurance because it limits the employees that are applicable for that
coverage. This particular plan does not include individuals with pre–existing conditions and other
employees with issues with obesity. Furthermore, the fact that 39% of the group has obesity issues,
there is a real possibility that there are
... Get more on HelpWriting.net ...

Finance Chapter 8 Interative Problem
Chapter 8
Integrative Problem
Assume that you recently graduated with a major in finance, and you just landed a job in the trust
department of a large regional bank. Your first assignment is to invest $100,000 from an estate for
which the bank is trustee. Because the estate is expected to be distributed to the heirs in
approximately one year, you have been instructed to plan for a 1–year holding period. Furthermore,
your boss has restricted you to the following investment alternatives, shown with their probabilities
and associated outcomes. (For now, disregard the items at the bottom of the data; you will fill in the
blanks later.) Estimated Returns on Alternative Investments
State of the Proba– ... Show more content on Helpwriting.net ...
That is, could you earn a risk premium on the part of your risk that you could have eliminated by
diversifying?
h. The expected rates of return and the beta coefficients of the alternatives as supplied by the bank's
computer program are as follows: Security Return ([pic]) Risk (β) High Tech 17.4% 1.29 Market
15.0 1.00 U.S. Rubber 13.8 0.68 T–bills 8.0 0.00 Collections 1.7 –0.86
(1) What is a beta coefficient, and how are betas used in risk analysis? (2) Do the expected returns
appear to be related to each alternative's market risk? (3) Is it possible to choose among the
alternatives on the basis of the information developed thus far? Use the data given at the beginning
of the problem to construct a graph that shows how the T–bill's, High Tech's, and Collections' beta
coefficients are calculated. Discuss what beta measures and explain how it is used in risk analysis.
i. (1) Write out the SML equation, use it to calculate the required rate of return on each alternative,
and then graph the relationship between the expected and required rates of return. (2) How do the
expected rates of return compare with the required rates of return? (3) Does the fact that Collections
has a negative beta coefficient make any sense? What is the implication of the negative beta? (4)
What would be the market

Case Study For A Mortgage Broker
Why You Need To Opt For A Mortgage Broker
The real estate market of Australia tries to develop and emerge continuously. As an outcome, many a
number of Australians invest on properties without any hesitant. But, the basic concepts in relation
with the real estate industry are still fairly new to several consumers and are also easily confused
even with the most common terms utilized in the industry.
Mortgage brokers: who they are actually?
You can now find many different kinds of professionals, including mortgage broker, in the field of
real estate. When you make a Google search on Mortgage broker, you will get that Mortgage broker
is none other than an intermediate that brings mortgage buyers and lenders together without using
his or her own funds to derive mortgages. Furthermore, mortgage brokers collect paperwork and
essential documents from the borrowers, which are then passed to mortgage lenders for the purpose
of approval and underwriting. Then, the mortgage broker will collect an origination fee or else yield
spread premium as a compensation ... Show more content on Helpwriting.net ...
But, it is of course a bad news for most mortgage shoppers who are having limited resources. The
real truth is that working with a proficient broker will even make your lending process much more
reasonable and affordable. As there are many different fees engaged in applying for the mortgage,
you have to find out ways with the aim to avoid them. During these instances, a mortgage broker
will come in handy to help you do so. It is usual for some lending companies to surrender some fees
to their trusted brokers and thereby, helping their clients in saving more in the lending process. In
short, working with the mortgage companies could surely be a little hassle in case you do it for the
very first time. In contrast, you can able to prevent yourself from wasting effort, time and resources
if you call for a good

Health Care Financing
Financing of Health Care
Teonna Smalls
HCS/440
Donna Lupinacci
05/12/2012
Introduction
HMO's and enrollees are two important players in the world of health care. Due to uncertainty on
the supply and demand, moral hazard, and adverse selection, decision making for HMO's more
complex. The simulation provided me the decision making tools necessary, when making an
economic decision for an HMO. Health care can be seen as a good that consumers demand and
managed care firms are considered to be suppliers of both health insurance and health care.
Economics tells us that rational firms make choices to maximize profits. Managed care firms incur
cost when providing health care services to their enrollees and maximize their revenue by ... Show
more content on Helpwriting.net ...
Outpatient services included are physician office visits, periodic physical examinations, annual well
women examinations, occupational therapy, speech therapy, physical therapy, ambulance services,
prescription services, durable medical equipment, diabetes management and treatment, and prenatal
and postnatal care.
Risk, Cost and Profitability Castor Collins calculates the premium and profitability based on the risk
Castor Collins will incur when providing insurance to a particular group. The risk estimates are
based on the cost of services and expected utilization by the group. Based upon the ages and health
profiles of the employees at Constructit and E–Editors, Castor Collins can estimate the expected
utilization per year. Comparing the average utilization to healthy adults in the same age group, we
can estimate the risk involved when providing insurance to each group under various plans. The
annual premium to be charged is based upon the cost and expected utilization of each service under
either plan. The cost of service is exclusive of any co–payments that enrollees may bear.
Plans Selected Based upon the health and utilization of services I choose the Castor Standard plan
for Constructit and I decided not to ensure E–Editors. Castor Standard does not cover preexisting
conditions, which means the risk of providing this plan is lower. In turn, the returns will be lower.
The

Midland
1. How are Mortensen's estimates of Midland's cost of capital used? How, if at all, should these
anticipated uses affect the calculations?
Mortensen's cost of capital estimates are used for a variety of purposes at both the divisional and
corporate levels. Examples include internal analyses such as financial accounting, performance
assessment and capital budgeting, while others are used for strategic planning purposes such as
merger and acquisition, as well as stock repurchase decisions (Luehrman and Heilprin, 2009, pg.1).
When used at the divisional rather than corporate level, special consideration should be given to the
fact that Midland's divisions are not publicly traded entities, and therefore do not have individual
Beta ... Show more content on Helpwriting.net ...
This implies an increase in standard error and deviation from the correct estimation.
3. Should Midland use a single corporate hurdle rate for evaluating investment opportunities in all of
its divisions? Why of why not?
Midland should not rely on a single corporate hurdle rate for evaluating investment opportunities
across all divisions because each division is subject to fundamentally different forces such as
political volatility, and high future expenditures. For example, R&E is expected to have capital
expenditures in excess of $8 billion over the years 2007 and 2008 while worldwide refining
capabilities are expected to decrease leading to possible investments in this division of Midland. The
Exploration and Production division faces an entirely different set of challenges as oil reserves
become more difficult to reach as in the case of arctic and deep water drilling operations, and
consequently more expensive to exploit. In addition, political instability has become increasingly
prevalent in investment considerations as oil production in areas such as the Middle East and Africa
have grown. Civil and political upheaval in these regions threatens disruption of oil production and
lead to greater volatility of prices (pg.2).
4. Compute a separate cost of capital for the E&P and Marketing & Refining divisions.
What causes them to differ from one another?
The cost of capital

Risk and Return
Return, Risk and The Security Market Line – An Introduction to Risk and Return
Whether it is investing, driving or just walking down the street, everyone exposes themselves to
risk. Your personality and lifestyle play a big role in how much risk you are comfortably able to take
on. If you invest in stocks and have trouble sleeping at night, you are probably taking on too much
risk. (For more insight, see A Guide to Portfolio Construction.) Risk is defined as the chance that an
investment's actual return will be different than expected. This includes the possibility of losing
some or all of the original investment.
Those of us who work hard for every penny we earn have a hard time parting with money.
Therefore, people with less ... Show more content on Helpwriting.net ...
The variance of a portfolio's return is a function of the variance of the component assets as well as
the covariance between each of them. Covariance is a measure of the degree to which returns on two
risky assets move in tandem. A positive covariance means that asset returns move together. A
negative covariance means returns move inversely. Covariance is closely related to "correlation,"
wherein the difference between the two is that the latter factors in the standard deviation.
Modern portfolio theory says that portfolio variance can be reduced by choosing asset classes with a
low or negative covariance, such as stocks and bonds. This type of diversification is used to reduce
risk.
Portfolio variance looks at the covariance or correlation coefficient for the securities in the portfolio.
Portfolio

Midland: Cost and Equity Market Risk Essay
1. How are Mortensen's estimates of Midland's cost of capital used? How, if at all, should these
anticipated uses affect the calculations?
Mortensen's cost of capital estimates are used for a variety of purposes at both the divisional and
corporate levels. Examples include internal analyses such as financial accounting, performance
assessment and capital budgeting, while others are used for strategic planning purposes such as
merger and acquisition, as well as stock repurchase decisions (Luehrman and Heilprin, 2009, pg.1).
When used at the divisional rather than corporate level, special consideration should be given to the
fact that Midland's divisions are not publicly traded entities, and therefore do not have individual
Beta ... Show more content on Helpwriting.net ...
This implies an increase in standard error and deviation from the correct estimation.
3. Should Midland use a single corporate hurdle rate for evaluating investment opportunities in all of
its divisions? Why of why not?
Midland should not rely on a single corporate hurdle rate for evaluating investment opportunities
across all divisions because each division is subject to fundamentally different forces such as
political volatility, and high future expenditures. For example, R&E is expected to have capital
expenditures in excess of $8 billion over the years 2007 and 2008 while worldwide refining
capabilities are expected to decrease leading to possible investments in this division of Midland. The
Exploration and Production division faces an entirely different set of challenges as oil reserves
become more difficult to reach as in the case of arctic and deep water drilling operations, and
consequently more expensive to exploit. In addition, political instability has become increasingly
prevalent in investment considerations as oil production in areas such as the Middle East and Africa
have grown. Civil and political upheaval in these regions threatens disruption of oil production and
lead to greater volatility of prices (pg.2).
4. Compute a separate cost of capital for the E&P and Marketing & Refining divisions.
What causes them to differ from one another?
The cost of capital

A Managing General Agent ( Mga )
1a)
A Managing General Agent (MGA) is a type of delegated authority whereby the MGA organisation
not only 'holds the underwriting pen' of the insurer but also undertakes all the other activities of an
insurer such as marketing, selling and administration. The only responsibility the MGA does not
provide is funding for claims. There are a number of advantages and potential disadvantages that
should be noted when considering delegating authority to an MGA.
The main advantages include:
§ The MGA carries out all marketing, selling and administration (other than claims), which means
that the insurer receives a steady flow of business without using any internal resources. Therefore
the insurer can gain a profitable stream of revenue without ... Show more content on Helpwriting.net
...
Regular audits must be conducted in order to satisfy the insurer that the risks being written on its
behalf are within the MGA's parameters of authority, as well as financial checks and ensuring the
quality of staff.
§ There is a potential for a conflict of interest between the MGA and the insurer, whereby the MGA
may wish to accept risks in order to boost sales or protect client relationships that the insurer would
usually want to reject. Therefore it is vital that the scope of authority delegated to the MGA is
clearly expressed.
§ Poor performance of the MGA has an impact on the insurer's income and reputation, and
amendments to authority or withdrawal from the arrangement takes time.
§ Clear terms of authority and documentation are vital, as ambiguous terms can lead to the MGA
accepting risks that are in breach of their authority and the insurer incurring liabilities as a result of
this.
1b)
In order to reduce the effects of possible disadvantages of an MGA the insurer can implement a
stringent auditing and monitoring environment. Monthly risk bordereaux should be submitted to the
insurer for review, and audits should be carried out at least annually. At the time of audit, the risk
carrier should ensure:

§ Risks being written on its behalf fall within the authority parameters of the MGA
§ Adherence to the terms and conditions of the

Personal Finance Case 10-4
10–4. You bought a stock one year ago for $50 per share and sold it today for $55 per share. It paid a
$1 per share dividend today.
a. What was your realized return?
b. How much of the return came from dividend yield and how much came from capital gain?
Compute the realized return and dividend yield on this equity investment.
a.
b. 10–20. Consider two local banks. Bank A has 100 loans outstanding, each for $1 million, that it
expects will be repaid today. Each loan has a 5% probability of default, in which case the bank is not
repaid anything. The chance of default is independent across all the loans. Bank B has only one loan
of $100 million outstanding, which it also expects will be repaid today. It also has a 5% probability
of not ... Show more content on Helpwriting.net ...
The current share prices and expected returns of Apple, Cisco, and Colgate–Palmolive are,
respectively, $500, $20, $100 and 12%, 10%, 8%.
a. What are the portfolio weights of the three stocks in your portfolio?
b. What is the expected return of your portfolio?
c. Suppose the price of Apple stock goes up by $25, Cisco rises by $5, and Colgate–Palmolive falls
by $13. What are the new portfolio weights?
d. Assuming the stocks' expected returns remain the same, what is the expected return of the
portfolio at the new prices?
Value
a.
b.
New Price
New Value
c.
d.
Apple
600
500
12
300000
0.30
3.6
525

315000
0.315
3.78
Cisco
10000
20
10
200000
0.20
2
25
250000
0.25
2.5
Colgate
5000
100
8
500000
0.50
4
87
435000
0.435
3.48
Total
1000000
9.6
9.76
11–50. Suppose Autodesk stock has a beta of 2.16, whereas Costco stock has a beta of 0.69. If the
risk–free interest rate is 4% and the expected return of the market portfolio is 10%, what is the
expected return of a portfolio that consists of 60% Autodesk stock and 40% Costco stock, according
to the CAPM?
12–26. Unida Systems has 40 million shares outstanding trading for $10 per share. In addition,
Unida has $100 million in outstanding debt. Suppose Unida's equity cost of capital is 15%, its debt
cost of capital is 8%, and the corporate tax rate is 40%.
a. What is Unida's unlevered cost of

Fina 4355
1. What is political risk and what are the most significant elements to be considered?
Political risk is any governmental actions that diminish value of the firm operating with the
boundary or influence of that government
Most significant elements: Nationalization: Confiscation: Expropriation: Contract repudiation
Currency inconvertibility:
2. Describe in details of your study into one of your countries from your selected website addressing
political risk
Libya
Political instability: Since January 2010, there have been varying degrees of political instability and
public protests, including demonstrations which have been marked by violence, in Libya. Some
political regimes in Libya are threatened or have changed as a result of ... Show more content on
Helpwriting.net ...
5) Excess and surplus insurance: a hybrid form of cross–border insurance trade, found in U.S. It
exists when insured, denied the desired coverage of a licensed insurer, places risk with a
nonadmitted insurer.
9. Property rights are the foundation of our economic growth. What are these property rights and
how do they contribute to this growth
Property rights include: (1) the right to own and alienate real and personal property, (2) the right to
contract and (3) the right to be compensated for damage resulting from the tortuous conduct of
others.
Contribute: Without a well–defined system of private property rights and a mean to enforce these
rights, markets do not function well. Moreover, private financial services will not flourish unless
individuals' ownership interests in property are well defined and protected.
10. Describe the U.S. market for non–life insurance. Include the type of market and products and
methods of distribution. U.S is the world's largest nonlife market for decades. The market is highly
competitive. Virtually any type of nonlife insurance is available. Some nonlife insurance policies are
property insurance policies, liability insurances policies, and package insurance policies. Insurers
use multiple distribution channels to reach their customers. Brokers also figure prominently in the
market.
11. What are the 4 market issues in the US? 1) State regulation: U.S insurance

Finance: Weighted Average Cost of Capital and Market Risk...
Cost of Capital questions and practice problems
Questions
1. What does the WACC measure?
2. Which is easier to calculate directly, the expected rate of return on the assets of a firm or the
expected rate of return on the firm's debt and equity? Assume you are an outsider to the firm.
3. Why are market–based weights important?
4. Why is the coupon rate of existing debt irrelevant for finding the cost of debt capital?
5. Under what assumptions can the WACC be used to value a project?
6. How should you value a project in a line of business with risk that is different than the average
risk of your firm's projects?
7. Maltese Falcone, has not checked its weighted average cost of capital for ... Show more content
on Helpwriting.net ...
If Dot.com's marginal tax rate is 38%, what is its after–tax cost of debt?
7. Reactive Industries has a market value of debt of $20 million, with a rate of return of 6%, a
market value of preferred stock of $10 million, with a rate of return of 8% and a market value of
common stock of $50 million, with a rate of return of 12%. Its tax marginal tax rate is 35%. What is
its WACC?
8. The common stock of BCCI has a beta of 0.90. The T–bill rate is 4% and the market risk
premium is estimated at 8%. BCCI's capital structure is 30% debt, having a 5% YTM, and 70%
equity. What is BCCI's cost of equity capital? It WACC? BCCI pays tax at 40%.
9. RiverRocks is considering a project with the following projected free cash flows:
|0 |1 |2 |3 |4 |
|–50 |10 |20 |20 |15 |

The firm believes that, given the risk of this project, the WACC method is the appropriate approach
to valuing the project. RiverRock's WACC is 12%. Should it take on this project? Why or why not?
10. RiverRocks (whose WACC is 12%) is considering an acquisition of Raft Adventures (whose
WACC is 15%). What is the appropriate

Investment and Market Risk Premium
Cost of Capital at Ameritrade Day 1
1. What factors should Ameritrade management consider when evaluating the proposed advertising
program and technology upgrades? Why?
– They should see how revenues have changed after adopting the new ad program and technology
upgrades
– They need to see ROI for their investments over time
2. How can the Capital Asset Pricing Model be used to estimate the cost of capital (required return)
for calculating the net present value of a project 's cash flows?
– it will help us determine the Cost of capital or discount rate which we can use to calculate NPV, in
other terms the numerator will never change (FCF), only the denominator will based on the cost of
capital
3. What is the estimate of the ... Show more content on Helpwriting.net ...
So instead, we will look at comparable firms. Firms in the same industry pursuing the same types of
projects will have the same sorts of risks, thus their asset betas will be approximately the same. The
returns we calculate for these firms, based on stock price movement, dividends, and stock splits, are
their equity betas.
These are influenced by the degree of leverage each company is using (recall that higher leverage
leads to higher ROE, EPS and DPS, but also leads to greater variability in earnings). Knowing the
amount of debt in their capital structures (at market values), we can calculate the asset beta for each
comparable firm. Then we will average these to use as a proxy for Ameritrade's asset beta
Note:
An agent that mediates sales and exchanges between securities buyers and sellers at even lower
commission rates than those offered by a regular discount broker . As one might expect, deep
discount brokers also provide fewer services to clients than standard brokers; such brokers typically
provide little more than the fulfillment of stock and option trades, charging a flat fee for each.
The problem that must be overcome in determining the implementation decision is the uncertainty
of the cost of capital.
Other Methods of Estimating Cost of Equity Capital:
The EP Method r =

Marriot Corporation Cost of Capital
1. What is the weighted average cost of capital for Marriot Corporation? Briefly outline the key
assumptions that you made in computing the WACC. 2. What is the cost of capital for the lodging
and restaurant divisions of Marriot Corporation? Briefly outline the key assumptions that you made
in computing the cost of capital and outline any limitations that are presented by your analysis. 3. If
Marriot uses a single company–wide cost of capital for evaluating investment opportunities in each
of its line of business, what do you think will happen to the company over time? 4. Briefly describe
how each of the following events will likely impact Marriot's cost of capital: (a) An increase in the
long–term T–Bond rate by 2%. (b) Increased ... Show more content on Helpwriting.net ...
rates – 1,3% Rd = 7,925% + 1,3% = 9,225% Restaurants Floating Debt (25%) – 6,9% Fixed Debt
(75%) – 8,72% Total debt = 25%*6,9% + 75%*8,72% = 8,265% Premium above Gov. rates – 1,3%
Rd = 8,265% + 1,3% = 9,565% We assume that the fixed debt in the Lodging division would have a
longer duration than that in the Restaurants division, hence we used 30– year Gov. bond rate for
fixed debt in Lodging division and 10–year Gov. rate for fixed debt in Restaurants division. For the
floating debt, we considered the 1–year Gov. rate applying to both Lodging and restaurants
divisions. Furthermore, after taking the average of both floating and fixed debt rates for both
divisions respectively we added the premium above Gov. Rate to the result and arrived at the pretax
cost of debt. Cost of Equity – Lodging and Restaurant divisions Following the footsteps of the
framework used in this analysis earlier, we would utilize the CAPM in order to calculate cost of
equity for both Lodging and restaurant divisions. re = rf + β (MRP) For Restaurants division we'll
continue considering the risk free rate of 8.72%, based on the 10–year Gov. rate. For Lodging
division we'll consider the 30–year Gov. rate of 8.95% as the risk free rate. This approach would
quantify the effect of duration differences between the investments in each division. We'll consider
the MRP (Market Risk Premium) of 7.43% based on the average spread between S&P 500
composite returns and long term US Gov.

Difference Between The Following Performance Measures
Difference between the following performance measures: The Sharpe ratio
It is a ratio that describes how much excess return on investment the business is receiving for the
extra volatility experienced by holding a riskier asset. It is the reward for holding a risky asset in a
portfolio. The ratio is calculated by dividing the portfolio risk premium by the portfolio standard
deviation. The ratio is given as follows:
Sharpe ratio = (r P – r f )/ σ P
Where: r– is the average rate of return of asset P. rf– The best variable rate of return of risk–free
security. σ P–Is the standard deviation.
The ratio is used to measure the performance of the portfolio since it makes it easier to compare the
performance of one portfolio to another while ... Show more content on Helpwriting.net ...
Jensen's alpha
It is a performance index that is used in the determination of the abnormal return of a portfolio of
securities or just a security over the theoretical expected return. The Jansen 's index is another
version of the standard alpha whose computation is based on an academic performance index rather
than a market index. It can also be described as the difference in return earned by the portfolio
compared to the return implied by the (CAPM) Capital Asset Pricing Model. The following formula
gives the Jansen 's alpha: α P = r P –[r f + β P (r M – r f )] risk premium Describe how the above
three performance measures are computed.
Sharpe ratio
The ratio is calculated by the use of the historical data that are justified based on the predicted and
justified relationships (Murphy &University College, Dublin. 2010). In its application; it can be
applied both theoretically and practically. The practical implementation uses the ex–post results
while the theoretical uses the ex–ante results or values. For this to hold, an assumption is made that
the predictive results have the predictive ability.
The ex–ante Sharpe ratio
The following are the assumptions:
Let RF be the rate of return on fund Q in the future periods
RB– the return on the benchmark portfolio or security
Therefore, the differential return (d) is given as: d'≡RF–RB Let the above–computed d ' be the

Essay Ameritrade Cost of Capital
Ameritrade is formed in 1971, and is a pioneer in the deep–discount brokerage sector.
In march 1997, Ameritrade raised $22.5 million in an initial public offering. Management at
Ameritrade is considering substantial investments in technology and advertising, but is unsure of the
appropriate cost of capital.
Estimating the cost of capital 1. Since we do not have the beta for Ameritrade, we need to find
comparable firms for which we could compute the betas. There are several candidates in the case.
Discuss which firms are most appropriate.
Thus, the proportion of the revenue a firm earns from transactions and interest (brokerage activities)
has something to do with the risk. Thus, to find the firms of comparable risks, we may take ... Show
more content on Helpwriting.net ...
CAPM = rf + B x (rm –rf)
4. What is the estimate for the risk free rate that should be employed in calculating the cost of
capital for Ameritrade?
Since the project involves substantial investments in technology and advertising and the cash flows
are projected in the future we can assume that it's a long term investment so we should use long term
rates and we should use current rates, not historical rates.
I'll use a 10 year time horizon so the current 10 year interest rate is: 6.34%
5. What is the estimate of the market risk premium that should be employed in calculating the cost
of capital for Ameritrade?
The market risk premium for Ameritrade we should use the difference between the returns on small
stocks (Ameritrade has a market capitalisation as of August 29, 1997 of $273,127,000 and the
returns on long term (20 years) government bonds:
We use the more recent historical data as the first one includes war periods and is less modern and
therefore less consistent with new technology.
Risk premium (1950–1996) = 17.8% – 6.0% = 11.8%
6. What do we use for Beta?
To compute betas we need the periodic returns of comparable companies and the returns of the value
weighted market index as a whole. We regress both returns and get the slope of the line which is our
Beta. We should use estimates for the last 5 years.

[pic]
[pic]
[pic]
7. What comparable firms can

Factors Affecting Risk Premium Of Emerging Market
Factors in Risk Premium of Emerging Market Can't Be Ignored: Evidence from China's Stock
Market
Most companies set hurdle rates by determined their own weighted average cost of capital (WACC)
plus premiums for additional risk factors. During the past eight years, the WACC of most U.S.
companies has been in the range of 7% to 9%, which is about 3% to 5% lower than it is in those
emerging markets such as China and India. Research led by Gregory V. Milano and Jeffrey L. Routh
suggested that companies should use lower hurdle rates while investing in growing nations.
According to their research, hurdle rates are simply set too high by some companies because they
"exaggerate the risks" and "underestimate the growth potential of emerging markets". In my
opinion, some certain kinds of risks can't be ignored while investing in the foreign market,
especially in the emerging market. The following are four pieces of evidence from China's stock
market:
A Young Stock Market
Compared to global standards, the development of China's financial market still remains an early
stage. It has existed for only 25 years since Deng conducted the reform and opening–up policy in
China. As a result, the market is not yet mature and full of rumors and speculators. Mom–and–pop
investors who have only limited understanding of what the market is and, more importantly, how it
works are everywhere in the stock market. These individual investors drive more than 80 percent of
trading on bourses in Shanghai and

How Can Risk Influence Risk Premium? How Are Risk and...
How can risk influence risk premium? How are risk and return related? Risk and return are the
fundamental basis upon which investors make their decision whether or not they should invest in a
particular investment. How they are related and the influence between the two, is the decision
making process that all investors must weigh up. This essay will show how risk can influence risk
premium, outlining their relationship and how risk and return are related. Within any investment
there is a certain amount of risk, which must be taken into account by an investor when deciding to
invest. Risk is defined as the chance of financial loss or, more formally the variability of returns
associated with a given asset. (Gitman, et al., 2011, p. 208) ... Show more content on
Helpwriting.net ...
The key goal for any financial manager is to manage risk, by finding the appropriate balance
between the levels of risk so that both risk premium and return can be maximised with as little risk
as possible. By understanding risk and return any financial manager can implement formulas such as
the one shown above to better understand the investments potential and harness the best outcome for
the individual or firm. To further understand the theoretical influence risk has on risk premium, we
will use the example below to illustrate their connection. The example will take into account the use
of the CAPM formula to calculate the required rate of return on a Qantas share. Example The
Australian Government bond rate is 3.1% (Tresury, 2012) while the average return on the All Ords
Index is 10.6% (ASX, 2012) and Qantas has a Beta of 1.41. (Reuters, 2012) What should be the
required rate of return on Qantas Airways Ltd shares? Rj = Rf + [Bj (Rm–Rf)] Rj= the required rate
of return Rf= 3.1 Bj= 1.41 Rm= 10.6 Solution Rj = 3.1 + [1.41 (10.6–3.1)] Rj= 3.1 + [10.575] Rj=
13.675 From the solution we see that according to CAPM, Qantas shares should be priced to give a
13.675% return on the original investment. However if the risk free rate and therefore, the
government bond rate were to change to 8% the required rate of return on an investment in Qantas
shares would

Finance and Question Essay
Question 1
(5 points) In a world with no frictions (i.e., taxes, etc.), having debt is always better because it
increases the value of the firm/project.
Your Answer Score Explanation
True.
False. Correct 5.00 Correct. You understand the irrelevance of financing.
Total 5.00 / 5.00
Question Explanation
Fundamental question about value creation.
Question 2
(5 points) The return of equity is equal to the return on debt of a project/firm
Sometimes true.
Always true.
Never true. Correct 5.00 Correct. Equity is always riskier.
Total 5.00 / 5.00
Financing's effects on equity.
Question 3
(10 points) Suppose the expected returns on equity of two ... Show more content on Helpwriting.net
...
Alpha, Inc., has debt that is viewed by the market as risk–less with a market value of $500 million.
Beta, Inc., has no debt. Both firms are expected to generate cash flows of $100 million per year for
the foreseeable future and the market value of the equity of Beta, Inc is $1 billion. Estimate the
return on equity of Alpha, Inc. Assume there are no taxes, and the risk–free rate is 5%. (No more
than two decimals in the percentage interest rate, but do not enter the % sign.)
Answer for Question 7
You entered:
20
20 Incorrect 0.00
Total 0.00 / 10.00

A mechanical problem if you understand the effects of financing and use all information.
Question 8
(10 points) Banana, Inc. has had debt with market value of $0.5 million that has paid a 5% coupon
and has had an expiration date that is far, far away. The expected annual earnings before interest and
taxes for the firm are $1 million and the firm has not grown, nor does it have plans for any growth.
The firm however has just raised more equity to retire all its debt. If the required rate of return to
equity–holders (after the capital structure change) is now 10%, what is the market value of the firm?
Assume there are no taxes. (Enter just the number without the $ sign or a comma; round to the
nearest whole dollar.)
Answer for Question 8
You entered:
10000000

Empirical Evidence Bearing On Capital Asset Pricing Theories
This study explores the (troubling) empirical evidence bearing on capital asset pricing theories.
General formulas for the coefficient on beta and it standard error are derived, which show that the
outcomes of cross–sectional tests have no causal relation to the pricing models. If a test refutes a
model, this could be because the model is misspecified or because poor proxies for true expected
returns and betas are used. Simulation and calibration results suggest that realized returns are a
much poorer proxy than estimated betas are. The noise in realized returns typically inflates the
estimated standard error, with drastic effects on the statistical power. Inferences based on ex ante
returns are more powerful but suffer from a serious size problem. JEL: G12, C31, C52. I.
Introduction One should hardly have to tell to financial economists that the noise in the data they
use is critically important: garbage in, garbage out. And yet the information surprises in returns are
the neglected child in the house of empirical finance, a neglect described by Elton (1999, p.1218) in
the following terms: "When I first entered the profession, anyone using realized returns as expected
returns made the argument that in the long run we should get what we expect. Even this weak
defense is no longer used and researchers generally treat realized returns as expected returns in their
tests without any qualifications." In this paper, I shall argue that the information surprises in returns,
along

A Report On The Teletech Corporation
The Teletech Corporation is currently using a single, constant, hurdle rate for their two different
segments, which are, telecommunications services and products and systems divisions. Based on the
estimate of corporation's WACC, the hurdle rate is the cost of capital.
Using the data in Exhibit 1, we have calculated the WACC for the telecommunications services
segment and the products and systems segment of Teletech. The WACC for Telecommunications
Services is 8.47%, while it is 11.30% for Products and Services. We used the CAPM model to find
the expected return. The average beta and weight of debt for telecommunication services segment
are 1.04 and 27.1%, respectively. We pulled this information from the Telecommunications Services
industry information in Exhibit 3.
For telecommunications, we first calculated cost of equity with Ts=Rf+β*(Rm–
Rf)=4.62+1.04*5.5%=10.34%
So, WACC Ts= 27.1%*3.44%+72.9%*10.34%=8.47%
In order to determine the beta and weight of debt for the Products and Systems segment, we
averaged the Equity Beta and and the Mkt. Val. Debt/Capital for the Telecommunications
Equipment and Computer and Network Equipment industries.
For products and systems first we calculated the expected return which is, 4.62%+[(1.39+1.33)/2]
(5.5%)= .121
And we calculated the weight of debt which was Weight of debt for P&S= [(13.1%+5.3%)/2]= 9.2%
So, 1–.092= 90.8%. The WACC for P&S is WACC(P&S)= 9.2% (3.44%) + 90.8%(12.1%), which
equals to 11.30% Rick Phillips' Figure 2

Fnce
FNCE 370v8: Assignment 4 Assignment 4 is worth 5% of your final mark. Complete and submit
Assignment 4 after you complete Lesson 12. There are 12 questions in this assignment. The break–
down of marks for each question is presented in the table below. Please show all your work as this
will help the marker give you part marks as well as serve as a good study aid as you prepare for the
Final Examination. Question | Marks Available | Reference | 1 | 5 | Lesson 10 | 2 | 5 | Lesson 10 | 3 | 5
| Lesson 10 | 4 | 5 | Lesson 10 | 5 | 10 | Lesson 11 | 6 | 15 | Lesson 11 | 7 | 10 | Lesson 11 | 8 | 10 |
Lesson 11 | 9 | 5 | Lesson 12 | 10 | 10 | Lesson 12 | 11 | 10 | Lesson 12 | 12 | 10 | Lesson 12 | Total |
100 | | 1. Explain the ... Show more content on Helpwriting.net ...
––––––––––––––––––––––––––––––––––––––––––––––––– Security | Expected Return | Variance
of Returns | Correlation | | | | A | B | C | D | A | 0.17 | 0.0169 | 1.0 | 0.4 | 0.7 | 0.2 | B | 0.13 | 0.0361 | |
1.0 | 0.6 | 0.5 | C | 0.09 | 0.0049 | | | 1.0 | 0.9 | D | 0.07 | 0.0050 | | | | 1.0 | a. Determine the expected
return and variance for a portfolio composed of 25% of security A and 75% of security B. Portfolio
Expected Return = A*r(a) + B*r(b) Portfolio Expected Return = 25%*0.17 + 75%*0.13 =
0.0425+0.0975 = 0.14 =14% Standard Deviation (SD) = sqrt( Variance) = Sqrt(V) SD (A) = Sqrt
(0.0169) = 0.13 SD(B) = sqrt(0.0361) = 0.19 Correlation(a,b) = Covariance(a,b) / ( St.Dev.(a)*
St.Dev.(b) ) Covariance(a,b) = Correlation(a,b) *( St.Dev.(a)* St.Dev.(b) ) = 0.4*0.13*0.19 =
0.00988 Variance(a,b) = sq(A)*var(a) + sq(B)*var(b) + 2*A*B*cv(a,b) = sqrt(25%)*0.17 +
sqrt(75%)*0.13+2*25%*75%*0.00988 ie Var(a,b) = 0.085+0.1126+0.0037 = 0.2013 b. Determine
the expected return and variance of a portfolio that contains 78% security A and 22% security B. Is
this portfolio superior to that one in (a) above? Portfolio Expected Return = 78%*0.17 + 22%*0.13
= 0.1326+0.0286 = 0.1612=16.12% Variance(a,b) = sq(A)*var(a) + sq(B)*var(b) + 2*A*B*cv(a,b)
= sqrt(78%)*0.17+sqrt(22%)*0.13+2*78%*22%*0.00988 = 0.15+0.061+0.0034 = 0.2144 Yes. This
Portfolio is superior to the one in (a).

Should Teenagers Be Charged Higher Rates For Car...
Turning fifteen is a very exciting moment for teenagers because they get to start driving. It is also
expensive because of the high premiums that teenagers have to pay for car insurance. One of the
main reasons insurance premiums are higher for teenagers is because many of them are
inexperienced and higher insurance premiums will cover the cost that some teenagers pose. A few
reasons for this are that teenagers are involved in more accidents, get more traffic tickets and
commit more traffic violations than older drivers. Similarly, teenagers are poor at decision making
skills and therefore are more likely to get into accidents. One might argue that teenagers should pay
less for car insurance since their salaries are less compared to what they have to pay for tuition and
car insurance. However, if we charged teenagers the same price for car insurance as older adults, the
cost of car insurance would go up across the board for everyone. Thus, teenagers should be charged
higher rates for car insurance.
One of the main reasons that teenagers are involved in accidents and commit traffic violations is that
when teenagers first start driving they are very inexperienced. According to The National Center for
Biotechnology Information (NCBI) , "crash rates are highest during the first 250 miles of driving
(3.2 crashes per 10,000 miles) and the second 250 miles (2.0 per 10,000 miles)" (The Anatomy 1).
Likewise, "after this introductory period, the crash rates decline sharply" (The

Finance Quiz
1. Barker Corp. has a beta of 1.10, the real risk–free rate is 2.00%, investors expect a 3.00% future
inflation rate, and the market risk premium is 4.70%. What is Barker's required rate of return?
Answer D | | | |2010 |21.00% | |2009 |–12.50% | |2008 |25.00% | | | | Answer B | |20.08% | | | |20.59% |
| | |21.11% | | | |21.64% | | | |22.18% | | 4. Which ... Show more content on Helpwriting.net ...
| | | |These two stocks should have the same expected return. | | | |These two stocks must have the
same expected capital gains yield. | | | |These two stocks must have the same expected year–end
dividend. | | | |These two stocks should have the same price. | | 9. Stocks A and B have the same price
and are in equilibrium, but Stock A has the higher required rate of return. Which of the following
statements is CORRECT? Answer A | |Stock B must have a higher dividend yield than Stock A. | | |
|Stock A must have a higher dividend yield than Stock B. | | | |If Stock A has a higher dividend yield
than Stock B, its expected capital gains yield must be lower than Stock B's. | | | |Stock A must have
both a higher dividend yield and a higher capital gains yield than Stock B. | | | |If Stock A has a lower
dividend yield than Stock B, its expected capital gains yield must be higher than Stock B's. | |10.
Two constant growth stocks are in equilibrium, have the same price, and have the same required rate
of return. Which of the following statements is CORRECT? Answer | |If one stock has a higher
dividend yield, it must also have a lower dividend growth rate. | | | |If one stock has a higher
dividend yield, it must also have a higher dividend growth rate. | | | |The two stocks must have the
same dividend growth rate. | | | |The two stocks must have the same dividend yield. | | | |The two
stocks must have the same dividend per share. | | 11. Which of the following statements

Essay about Hbs Case Study
Midland Resources 1. How are Mortensen's estimates of Midland's costs of capital used? How, if at
all, should these anticipated uses affect the calculations? The cost of capital is the minimum
acceptable rate of return for new investments in the corporation. Estimates of Midland's cost of
capital are used in many analysis within Midland, including asset appraisal for both capital
budgeting and financial accounting, performance assessments, M&A proposals, and stock
repurchase decisions. These estimates are used at the divison or the business unit level and also on
the corporate level. When asses the cost of capital on different levels of business, managers must
invest in new ventures that have an expected rate of return higher than ... Show more content on
Helpwriting.net ...
Should Midland use a single corporate hurdle rate for evaluating investment opportunities in all of
its divisions? Why or why not? Each division has different business operations which has different
risks. 4. Compute a separate cost of capital for the E&P and Marketing & Refining divisions. What
causes them to differ from one another? Assume the business is on–going for a long period of time.
We use 4.98% rate as Rf from 30 years U.S. Treasury bond. Rd=Rf+Spread to Treasury Cost of
Debt:: E&P: Rd=4.98%+1.60%=6.5 ,8% Refining & Marketing: Rd=4.98%+1.80%=6.78% Cost of
Equity: For EMRP, Midland adopted the estimate of 5.0%. We assume the Beta for Exploration &
Production and Refining & Marketing is the average of the companies listed in Exhibit 5, which are
1.15 and 1.20, respectively. We also ass`ume the company's Beta is the weighted average of the
three operations an assets level, which is 1.25. Then the Beta for Petrochemicals is calculated to be
1.91 Exploration & Production: Re=4.98%+1.15(5%) =10.73% Defining & Marketing:
Re=4.98%+1.20(5%) =10.98% WACC: Exploration & Production: WACC=6.58%*46.0 %*( 1–
40%) +10.73 %*( 1–46.0%) =7.61% Refining & Marketing: WACC=6.78%*31.0 %*( 1–40%)
+10.98 %*( 1–31.0%)

The Phenomena Behind Equity Risk Premium Discussion For 35...
Literature Review
The phenomena behind equity risk premium discussion for 35 years, was first took place in Robert
J. Schiller's work done on volatility of equity prices. The research conduct by Schiller (1982),
highlighted the difficulty of explaining the historical volatility of stock prices. The results of
Shiller's paper stunned the profession at first as most of economists felt discount rates were close to
constant over time. The intuition behind the unpredictability of volatility, later named volatility
puzzle by scholars who have studied this paradox as well. Just after 3 years from Schiller work on
historical volatility, Mehra and Prescott (1985) introduced the equity premium puzzle. It is mainly
based on the lack of evidence for a high risk premium in terms of consumption growth. In other
words, investors require and have high returns which have low covariance with consumption
growth. Using Schiller's data collected on the volatility puzzle, they have found out that between
1889 and 1978, the consumption growth rate, the indicator for opportunity cost of investors is
insufficient to explain 6% risk premium. Moreover, it was so high that the findings suggested only a
risk premium of 0.35% on top of the risk–free rate. Behavioural finance approached this puzzle
based on preference of investors. The decision making process of investors on investing on equities
and why do they require high risk premium and fear equities this much. One of the leading papers
on the

Economic Issues Simulation Paper
HCS 440 – Economics: The Financing of Health Care
Health care system has evolved tremendously in the last few years, with many changes with the
health care laws including but not limited to Universal Health Care, many individuals have choices
when it comes to their coverage. According to healthcare.gov, in January of 2015, an employer with
50 or more full time employees will have to make an Employer Shared Responsibility Payment if a
full time employee gets a lower health coverage premium cost if insurance is purchase in a
marketplace. However, employers are not subject to this law if the numbers of employees are lesser
than 50 but are still ... Show more content on Helpwriting.net ...
In January of 2006, Castro Collins was approached and met with two groups of people for health
insurance coverage. These groups are Constructit and E–editors, neither of them have group
employer's insurance. Constructit have 1000 people and they are willing to pay a maximum of
$4000 per person as an annual premium, meanwhile E–editors will pay a maximum annual premium
of $4500 per person with 1,600 people. Castor Collins offers three types of health plans: Castor
Standard, Castor Enhanced, and the customized plan called Castor Enhanced Minor. The standard
plan does not cover pre–existing medical conditions, the enhanced plan, however, cover pre–
existing medical conditions and offers more services. Castor Enhanced Minor is a customized plan
that is almost equivalent to Castor Enhanced with somewhat lesser services that requires high
utilization.
Demographics and Health Care Risk Factors There are 550 men and 450 women employees in
Constructit with ages 26 to 45 and 60 percent from this age group ranging from 26 to 42 are
married. This means, spouses and children need to be considered in getting health plan. Also, great
physical activities are involve within thirty– two percent of the people at Constructit, while 25
percent of the people has moderate physical

Rate of Return
ch10
Student:
___________________________________________________________________________
1.
The capital gains yield plus the dividend yield on a security is called the:
A. geometric return.
B. average period return.
C. current yield.
D. total return.
2.
The expected return on a security in the market context is:
A. a negative function of execs security risk.
B. a positive function of the beta.
C. a negative function of the beta.
D. a positive function of the excess security risk.
E. independent of beta.
3.
A capital gain occurs when:
A. the selling price is less than the purchase price.
B. the purchase price is less than the selling price.
C. there is no dividend paid.
D. there is no income component of ... Show more content on Helpwriting.net ...
What was the average risk premium earned by long–term Bonds, and small company stocks
respectively?
A. 9.5%; 1.8%
B. 4.4; 11.9%
C. 2.16%; 7.37%
D. 1.8%; 13.3%
19. The Alpha stock you bought for $26 3/4 a year ago is now selling for $32 1/2. Alpha also paid

you $2.25 in dividends. What would your dollar return be from this stock?
A. $7.75
B. $8.00
C. $8.25
D. $5.75
20. Suppose you own a risky asset with an expected return of 12% and a standard deviation of 20%.
If the returns are normally distributed, the approximate probability of receiving a return greater than
32% is: A. .67.
B. .33.
C. .05.
D. .02.
E. .16.
21. Suppose you own a risky asset with an expected return of 12% and a standard deviation of 20%.
If the returns are normally distributed, the approximate probability of receiving a return greater than
72%, or less than –48% is:
A. greater than 99%
B. greater than 95%
C. less than 5%
D. less than 1%
22. Last year you bought some Alpha stock for $26 3/4 a share. It is currently selling for $32 1/2.
You received a dividend of $2.25 during the year. What is your total rate of return?
A. 30%
B. 21%
C. 8.5%
D. 12%
23. The return pattern on your favorite stock has been 5%, 8%, –12%, 15%, 21% over the last five
years.
What has your average return and total change in

Value Proposition For End Customer
Value proposition for end–customer:
Allowing end–customers to have undisrupted production / operational process within Low Voltage
Motors by utilizing ABB's extensive network of Authorized Value Providers / OEM's and building a
stronger brand image through reliable and on–demand maintenance offering.
Overview:
End–Customers, who decided to share the data collected from SMT with ABB are eligible for this
option. Since the data is collected from multiple motors, and customer 's maintenance teams are
responsible for many other operations beside the low voltage department, end–customers face
unnecessary opportunity costs, which could be better utilized if shifted to their core operations. In
addition, End–customer maintenance teams are not necessarily certified to repair ABB products
(which can result in faster breakages, loss of warranty, etc.)
How ABB can seize this market opportunity:
ABB can enter by creating a new service offering through so called insurance approach. Within this
business model, customers are able to choose between a standard and premium option to reduce in–
house costs of their maintenance (through less on–site teams needed, less training) and also the risk
of bad service. Solution is simple, nevertheless highly rewarding. When the signal goes yellow / red,
end–customers contact ABB who, with their 24/7 responsive line, access to on–site / on–demand
spare parts and vast network of authorized service providers (through distributors, OEM 's), sends
their

homework week 4 Essay
Chapter 8 Problem 6 The following are the historic returns for the Chelle Computer Company: Year
Chelle Computer General Index Year chelle computer general index 1 37 15 2 9 13 3 –11 14 4 8 –9
5 11 12 6 4 9 Based on this information, compute the following: a. The correlation coefficient
between Chelle Computer and the General Index. Answer : r= .1305 b. The standard deviation for
the company and the index Answer: sd of company= 14.209, sd of index= 8.266 c. The beta for the
Chelle Computer Company Answer: beta= .00759 Problem 8 8. As an equity analyst, you have
developed the following return forecasts and risk estimates for two different ... Show more content
on Helpwriting.net ...
 = Cov i,m/(m)2 Cov i,m = 187.4 m2 = 190.4 Using the proxy: using proxy = 187.4/190.4 =
.984 The true index the covariance = 176.4 using true = 176.4/168 = 1.05 c. Proxy E(RR) = 0.08 +
0.984(0.12 – 0.08) = 0.08 + 0.0394 = .1194 or 11.94 percent True market E(RR) = 0.06 + 1.05(0.12
– 0.06) = 0.06 + 0.063 = 0.123 or 12.3 percent Chapter 9 Problem 3 You have been assigned the task
of estimating the expected returns for three different stocks: QRS, TUV, and WXY. Your preliminary
analysis has established the historical risk premiums associated with three risk factors that could
potentially be included in your calculations: the excess return on a proxy for the market portfolio
(MKT), and two variables capturing general macroeconomic exposures (MACRO1 and MACRO2).
These values are: ƛMKT=7.5%, ƛMACRO1= –0.3%, and ƛMACRO2= 0.6%. You have also
estimated the following factor betas (i.e. loadings) for all three stocks with respect to each of these
potential risk factors: FACTOR LOADING Stock MKT MACRO1 MACRO2 QRS 1.24 –0.42 0.00
TUV 0.91 0.54 0.23 WXY 1.03 –0.09 0.00 a) Calculated expected returns for the three stocks using
just the MKT risk factor. Assume a risk–free rate of 4.5%. b) Calculate the expected returns for the
three stocks using all three risk factors

Peachtree Securities Case Essay
Peachtree Securities Case
1. The return on a 1–year T–Bond is risk–free since it does not vary according to the state of the
economy. The T–Bond return is independent of the state of the economy because the estimated
return is 8% at all times. The only possible factor affecting a T–Bond may be inflation. 2. If we were
only to consider the expected return, then the S&P 500 appears to be the best investments since it
has the greatest expected return.
3. The standard deviation provides a measurement of the total risk by examining the tightness of the
probability distribution associated with the different possible outcomes whereas the coefficient of
variation measures risk per unit. The coefficient of variation is a
better ... Show more content on Helpwriting.net ...
Nevertheless, such reduction in diversification would make risk increase. The complete table "Risk
and returns of portfolios" provides the different changes.
5. The portfolio between TECO – S&P 500 has an expected return of
14.3% and a standard deviation of 14.1%. In this portfolio the correlation is greater than the one in
the other portfolio because the risk–reducing effect is much lower than the one in the portfolio
TECO
– Gold Hill. (See all the possible combinations on TABLE 2).
6.
a) The portfolio's risk would decrease if more stocks were. The correlation between stocks is also
relevant.
b) I think investors consider the risk as a whole rather than by each. Nevertheless, if a big part of a
portfolio is made up of a risky stock, it would make the portfolio more risky as a whole.
c) Total risk is made by Diversifiable (company–specific) risk and market (non–diversifiable) risk.
Unique events to a particular firm cause the diversifiable risk while factors that affect all companies
cause the market risk. The difference between diversifiable and market risk is that diversifiable risk
can be reduced by diversifying whereas market risk can not be eliminated.

d) No, because the market compensates risk diversification if you don't diversify is your fault and
you should be willing to accept the risk. 7.

Aes Case Solution Essay
1. How would you evaluate the capital budgeting method used historically by AES? What's good
and bad about it?
"When AES undertook primarily domestic contract generation projects where the risk of changes to
input and output prices was minimal, a project finance framework was employed."
Usually, project finance framework is used when the project has predictable cash flows, which can
easily represent operating targets through explicit contract. When cash flows are certainty, the
company can have higher level of leverage and it is easier to separate project assets from the parent
company.
Advantages and Disadvantages: 1) Advantages a. Maximize Leverage b. Off–Balance Sheet
Treatment c. Agency Cost d. Multilateral ... Show more content on Helpwriting.net ...
project and Pakistan project are 8.07% (4.5%+3.47%), in which both U.S. project and Pakistan
project have a same spread, 3.47%.
To adjust we add the sovereign risk into calculation. In Exhibit 7a, the sovereign risk for the U.S. is
0% but for Pakistan is 9.9%. We thereby get the new evaluation of the cost of capital and cost of
debt, which are constant for U.S. and rise to 17.1% and 17.97% for Pakistan.
Finally we calculate the WACC. The formula is leveraged beta * (cost of capital) + Debt to capital *
(cost of debt) * (1–tax rate). Then we get for the U.S. WACC= 6.48% and for Pakistan WACC=
15.93%.
Finally, we should adjust the WACC with its risk score. Because everything is calculated in U.S.
dollar, the U.S. risk score is 0. So the U.S. projects WACC is constant. The Pakistan risk premium is
1.425. So the change is 1.425 * 500= 705bp = 7.05%. Therefore, we get the final Pakistan WACC,
which is 23.08% (15.93%+7.05%).
In conclusion, the difference between the U.S. and Pakistan projects is 16.60%. Obviously, the U.S.
project looks much more favorable.
3. Does this make sense as a way to do capital budgeting?
The financial strategy employed by AES was historically based on project finance. The model
worked well in the domestic market and in the international operations. However, when AES started
its diversification of business, it had to face to increasing symmetrical risks, such as business risk. In
addition, project finance did not include the risk of

Case Study On Mergers And Acquisitions
CHAPTER 1 INTRODUCTION 1.0 Overview of Study Mergers and Acquisitions (M&A) is a
precise significant strategic interchange to sustain in competitiveness within the global market and it
turns out to be one of a popular tools for corporate–level strategy. M&A is the amalgamation of two
corporate entities to convert into solitary legitimate entity by combining resources and capabilities
in order to attain a competitive advantage. Merger typically means reunion two particular companies
together on equivalent basic whereas acquisition ordinarily means a greater sized corporation
procuring a smaller sized corporation. The M&A activity has been continuously increased over the
last 100 years and this phenomena is described by several M&A 'waves' (refer to Table 1). Table 1:
Waves of M&A activity Name Period ... Show more content on Helpwriting.net ...
Vertical mergers. Conglomerate or diversifying mergers. Hostile takeovers, more leverage, more
going private transactions, and dominated by mixtures the medium and small sized companies.
Large M&A deals, cross–border mergers and strategic combinations. Shareholder activism, private
equity and leverage buyouts (LBO). Source: Bruner (2004) and Lipton (2006). Malik, Anuar, Khan,
and Khan (2014) further explained this different waves in mergers as first merger wave was failure
to acquire advantage from horizontal M&A activity due to mismatch transactions with exploit
established goals and objectives. The principal objective for the second merger wave intended to
move

Worldwide Paper
Drexel University
Worldwide Paper Company
Group 2 Case Analysis
Brian Burke, John Lafferty
FIN 790 Winter 2015
Seminar in Finance
Dr. Samuel H. Szewczyk
Lebow School of Business
February 9, 2015
Executive Summary:
Blue Ridge Mill is a wood mill owned by Worldwide Paper Company and supplies wood pulp for
the company for use in paper production. Blue Ridge Mill bought its wood supply from Shenandoah
Mill's excess production of shortwood that was processed from its longwood supplies. In 2006, Bob
Prescott, the controller for Blue Ridge Mill, was considering a project that would give Blue Ridge
Mill the capability to process longwood into shortwood, which would eliminate the need to purchase
from Shenandoah Mill, as well as compete ... Show more content on Helpwriting.net ...
As a result, the cost of debt is 5.88% and is calculated as follows:
The cost of equity can be calculated by using the capital asset pricing model (CAPM). CAPM
requires that a market risk free rate, the market risk premium, and the beta for the company. The
market risk premium (6%) and the company beta (1.1) is given directly and can be seen in tables 2
and 3 below. Government bonds are used for the risk free rate. Since 10 year corporate bonds are
used for the cost of debt, the 10 year Treasury Bond of 5.60% will be selected as the risk free rate.
The 10 year bonds are also a good match for the project duration, which is between 5 and 10 years.
The cost of equity of 11.20% is than calculated as follows:
With the cost of debt and the cost of equity calculated, the WACC is calculated below. The cost of
debt is further discounted by one minus the tax rate since the interest paid on debt is treated as an
expense prior to being taxed.
Table 2: Interest Rates December 2006

Table 3: Company Financial Information
Using the calculated WACC and the company's hurdle rate for this project, under Bob Prescott's cost
savings and additional revenues assumption, the project's IRR is now greater than the hurdle rate.
Furthermore, the net present value (NPV), payback period and the additional value added to the
earnings per share (EPS) are shown in Table 4 below. Using just these figures, the project should be
accepted.

A Current D / V Using Market Values
A Current D/V using market values: 41.%
B Risk–free return (rf): 4.58%
B Equity beta: 0.97
B Market risk premium (rm – rf): 7.43%
B Levered cost of equity (re) at current D/V: 11.79%
C Cost of debt (rd): 3.43%
C Corporate tax rate (t): 41.63%
D Unlevered cost of equity (re) at D/V = 0% 9.36%
E Average cost of capital (r*) at D/V = 60%: 7.03%
A) Current level of leverage:
The current level of leverage for Marriott Corporation is 41% as it the market leverage in the exhibit
3, which is the book value of debt divided by the sum of the book value of debt plus market value of
equity.
B) Cost of equity:
The risk free rate is taken as 4.58% as it is the average of the Long–term U.S. government bond
returns from 1926 to 1987 in exhibit 4.
The equity beta given is 0.97, calculated for the period 1986 – 1987 using the stock returns. This
beta gives us the risk attached to Marriott Corporation's shares.
The market risk premium is calculated as 7.43%. As the market risk premium is the difference
between the expected market portfolio return and the risk free rate. The expected market return is
12.01% for the period 1926 – 1987, mentioned in exhibit 4 in S & P's 500 composite stock return
index. The risk free rate is 4.58%.
The cost of equity is calculated using the CAPM formula:
Expected return = risk–free rate + β * (risk premium) re = 4.58 + 0.97 * (7.43) re= 11.79%
C) Cost of debt and corporate tax rates:
The cost of debt for Marriott Corporation is calculated

Should Teenagers Be Charged Higher For Car Insurance? Essay
Turning fifteen is an exciting moment for teenagers because they get to start driving. It is also an
expensive movement because of the high premiums that teenagers have to pay for car insurance.
Even though teenagers have no prior driving history, should they unilaterally pay high premiums
based on their age? Although there are many arguments concerning higher premiums to insure
teenagers, most of the counterarguments are theoretical and abstract, while the arguments in favor
are grounded in statistics, risks and demographics. Since teenagers lack experience, their brain
chemistry is different compared to adults, and they lack proper decision– making skills, teenagers
should be charged higher for car insurance.
One of the main reasons that teenagers are involved in accidents and commit traffic violations is that
when teenagers start driving, they are inexperienced. According to The National Center for
Biotechnology Information (NCBI), "crash rates are highest during the first 500 miles of driving"
(The Anatomy 1). This means that due to the inexperience of teenagers, there are more crashes
during the early teenage years of driving and the number of crashes decline as they gain experience.
Furthermore, countries in which the legal age to obtain a driver's license is 18 or above, there are a
higher number of crashes in early years of driving (Anatomy 1). This research supports that
"practice makes perfect," meaning that as teenagers practice driving, they gain experience and

The Classical Expected Utility Theory And The Dual Theory...
INTRODUCTION:
Identifying, defining risks (market risks as well as non–market risks), presenting and justifying a
unified framework for the analysis, construction and implementation of risk measures are important
components of insurance pricing.
According to the Oxford's advanced learners dictionary, risk can be defined as the possibility that
something uncertain (not predictable) and unpleasant will happen. Both financial and insurance
organisations are therefore faced with this concept of risk in their everyday activities. Financial risk
can be said to be the possibility that the return achieved on an investment will be different from that
expected, and also takes into account the size of the difference. Whereas insurers will define risk as
a chance of harm, damage or loss against something which is insured.
Several literatures reveal a good number of different approaches and theories to the price of risk.
The two main competing economic theories we shall consider are the classical expected utility
theory, and the dual theory of risk which was developed by Yaari(1987).
They defined the price of an insurance risk excluding other expenses as the risk adjusted premium.
The rest of this paper is structured as follows: section 2 presents the class of distortion operators
used in insurance pricing, their properties and an application of pricing by distortion. Section 3
incorporates a new pricing principle by Wang (2002) and its relevance to natural hedging.
Section 4

Pioneer Petroleum Case Analysis Essay
Pioneer Petroleum Cases Analysis The Problem: Pioneer Petroleum Corporation (PPC) has two
major problems that are interfering with the goal of the firm to maximize shareholder wealth. The
first is that PPC has been calculating their weighted average cost of capital incorrectly, by
incorrectly calculating their after tax cost of debt and their cost of equity. This miscalculation has
subjected PPC to more risk and has hurt the company's ability to make appropriate investment
decisions. This has also led PPC to accepting investment decisions that should not have been
included within their acceptable range. Second, PPC has been using a single company–wide rate for
their multi–divisional company. In either instance the company is not ... Show more content on
Helpwriting.net ...
Analysis: Using a single cut–off rate for the entire company has increased the overall risk of their
company. The use of an acceptable range based on a company–wide average cost of capital
inappropriately leads the company to invest in divisions with high risk that should possibly have a
higher required rate of return or to not invest in low risk divisions that would be profitable, merely
because they do not exceed the company rate. Thus, using a WACC for each division will more
accurately allow the corporation to decide which projects to accept and deny based on the specific
risk factors of the section instead of the risk of the entire company which has been skewed because
of diversification. Based on my calculations, the company wide WACC and cut off rate that should
be used is 9.94% based on CAPM or 9.8% based on Dividend–growth, and any projects that are
below that percentage should not be accepted for the company as a whole. Recommendations:
Overall, I would recommend that PPC recalculate their WACC per each specific division and
establish multiple cutoff rates instead of calculating a company wide WACC cutoff rate. This will
benefit them the most in accepting and denying projects that will meet the appropriate cutoff rate
that each division is susceptible to based off the specific risk each division must overcome. When
recalculating their

Best Practices in Estimating the Cost of Capital: An Update
BROTHERSON ET AL. – "BEST PRACTICES" IN ESTIMATING THE COST OF CAPITAL: AN
UPDATE
15
"Best Practices" in Estimating the Cost of Capital: An Update
W. Todd Brotherson, Kenneth M. Eades, Robert S. Harris, and Robert C. Higgins
"Cost of capital is so critical to things we do, and CAPM has so many holes in it–and the books
don't tell you which numbers to use... so at the end of the day, you wonder a bit if you've got a solid
number. Am I fooling myself with this
Theories on cost of capital have been around for decades.
Unfortunately for practice, the academic discussions typically stop at a high level of generality,
leaving important questions
This paper updates our earlier work on the state of the art in cost of capital ... Show more content on
Helpwriting.net ...
For instance, Jacobs and
Shivdasani (2012) provide useful insights based on the
Association for Finance Professionals (AFP) cost of capital survey. While the survey had 309
respondents, AFP (2011, page 18) reports this was a response rate of about 7% based on its
membership companies. In contrast, we report the result of personal telephone interviews with
practitioners from a carefully chosen group of leading corporations and
theory is silent or ambiguous and practitioners are left to their own devices.
The following section gives a brief overview of the weighted–average cost of capital. The research
approach and sample selection are discussed in Section II. Section III reports the general survey
results. Key points of disparity are reviewed in Section IV. Section V discusses further survey results
on risk adjustment to a baseline cost of capital, and
Section VI highlights some institutional and market forces affecting cost of capital estimation.
Section VII offers
(1)

where:
K = component cost of capital.
W = weight of each component as percent of total capital. t = marginal corporate tax rate.
For simplicity, this formula includes only two sources of capital; it can be easily expanded to
include other sources as well.
Finance theory offers

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