MGAB01H3 Lecture 2: Investing and Financing Decisions and the Statement of Financial Position

Q84

A private health-care clinic has been offered a leasing dealwhere it could lease a CAT scanner at a fixed charge of $2,000 permonth and a charge per patient of $6 per patient scanned. Theclinic currently charges $10 per patient for taking a scan. (a) Atwhat level of demand (in number of patients per week) will theclinic break even on the cost of leasing the CAT scan? (b) Would arevised lease that stipulated a fixed cost of $3,000 per week and avariable cost of $0.2 per patient be a better deal? [3 Marks]

Heels, a shoe manufacturer, is evaluating the costs and benefitsof new equipment that would custom fit each pair of athletic shoes.The customer would have his or her foot scanned by digital computerequipment; this information would be used to cut the raw materialsto provide the customer a perfect fit. The new equipment costs$111,000 and is expected to generate an additional $44,000 in cashflows for 5 years. A bank will make a $111,000 loan to the companyat a 12% interest rate for this equipment’s purchase. Use thefollowing table to determine the break-even time for thisequipment. All cash flows occur at year-end. (PV of $1, FV of $1,PVA of $1, and FVA of $1) (Use appropriate factor(s) fromthe tables provided.)

8-13: CAPM, PORTFOLIO RISK, AND RETURN Consider the following information for Stocks X, Y, and Z. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correlation coefficients is between 0 and 1.) Stock Expected Return Standard Deviation Beta

X 9.00% 15% 0.8

Y 10.75 15 1.2

Z 12.50 15 1.6

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Fund Q has one-third of its funds invested in each of the three stocks. The risk-free rate is 5 5%, and the market is in equilibrium. (That is, required returns equal expected returns.)

a. What is the market risk premium rM − rRF ?

b. What is the beta of Fund Q?

c. What is the required return of Fund Q?

d. Would you expect the standard deviation of Fund Q to be less than 15%, equal to 15%, or greater than 15%? Explain.

Use your financial calculator, show what the PV,FV,N,I/Y