Assessing return and risk Swift Manufacturing must choose between two asset purchases. The annual rate of return and the related probabilities given in the following table (on page 268) summarize the firm’s analysis to this point.

268 PART TWO Important Financial Concepts

Project 257                                       Project 432
Rate of return     Probability                   Rate of return    Probability
_10%          .01                                10%                       .05
10            .04                                15                         .10
20            .05                                20                         .10
30            .10                                25                         .15
40            .15                                30                         .20
45             .30                                35                        .15
50            .15                                40                        .10
60            .10                                45                         .10
70            .05                                50                        .05
80             .04
100             .01

a. For each project, compute:

(1) The range of possible rates of return

(2) The expected value of return.

(3) The standard deviation of the returns.

(4) The coefficient of variation of the returns.

b. Construct a bar chart of each distribution of rates of return.

c. Which project would you consider less risky? Why?

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P5–4 Risk analysis Solar Designs is considering an investment in an expanded product line. Two possible types of expansion are being considered. After investigating the possible outcomes, the company made the estimates shown in the following table:

Expansion A                 Expansion B

Initial investment                    $12,000                        $12,000

Annual rate of return

Pessimistic                               16%                               10%

Most likely                                        20%                               20%

Optimistic                               24%                              30%

a. Determine the range of the rates of return for each of the two projects.

b. Which project is less risky? Why?

c. If you were making the investment decision, which one would you choose? Why?

d. Assume that expansion B’s most likely outcome is 21% per year and that all other facts remain the same. Does this change your answer to part c? Why?

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FIN 419, FIN/419 Week 2

Tutorial Includes

Barnett Corporation

Solar Designs

Swift Manufacturing

Murdock Paints

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P5–3 Risk preferences Sharon Smith, the financial manager for Barnett Corporation, wishes to evaluate three prospective investments: X, Y, and Z. Currently, the firm earns 12% on its investments, which have a risk index of 6%. The expected return and expected risk of the investments are as follows:

Expected        Expected

Investment                 return             risk index

X                     14%                      7%

Y                     12                          8

Z                      10                        9

a. If Sharon were risk-indifferent, which investments would she select? Explain why.

b. If she were risk-averse, which investments would she select? Why?

c. If she were risk-seeking, which investments would she select? Why?

d. Given the traditional risk preference behavior exhibited by financial managers, which   

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FIN419 Week 1 ( Score 100% )

Tutorial Includes

Limited Liability Corporation and Partnership Paper

DQ's as

Why are companies interested in systems operations management today? Why is it important?

Describe 2-3 statistical process controls? Why are they important?

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Acc 291 week 5

comprises of;

-individual exercise.

-individual impact of unethical behaviour article analysis.

-learning team ratio analysis memo.

-learning team reflection.

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Acc 291 week 4
comprises of;

-DQ 1

-DQ 2

-DQ 3

-Individual exercise

-Week 4 ltb summary

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