A stock's returns have the following distribution:

$$\small{ \begin{array}{lcc} \begin{array}{l} \textbf{ Demand for the } \\ \textbf{ Company's Products } \end{array} & \begin{array}{c} \textbf{ Probability of This } \\ \textbf{ Demand Occurring } \end{array} & \begin{array}{c} \textbf{ Rate of Retum if This } \\ \textbf{ Demand Occurs } \end{array} \\ \hline \text { Weak } & 0.1 & (50 \%) \\ \text { Below average } & 0.2 & (5) \\ \text { Average } & 0.4 & 16 \\ \text { Above average } & 0.2 & 25 \\ \text { Strong } & \underline{0.1} & 60\\ &\underline{\underline{0.1}}\\\ \end{array}}$$

Calculate the stock's expected return, standard deviation, and coefficient of variation.

Seneca Hill Winery recently purchased land for the purpose of establishing a new vineyard. Management is considering two varieties of white grapes for the new vineyard: Chardonnay and Riesling. The Chardonnay grapes would be used to produce a dry Chardonnay wine, and the Riesling grapes would be used to produce a semi-dry Riesling wine. It takes approximately four years from the time of planting before new grapes can be harvested. This length of time creates a great deal of uncertainty concerning future demand and makes the decision concerning the type of grapes to plant difficult. Three possibilities are being considered: Chardonnay grapes only; Riesling grapes only; and both Chardonnay and Riesling grapes. Seneca management decided that for planning purposes it would be adequate to consider only two demand possibilities for each type of wine: strong or weak. With two possibilities for each type of wine it was necessary to assess four probabilities. With the help of some forecasts in industry publications management made the following probability assessments.

$$\begin{matrix} \text{ } & \text{Riesling} & \text{Demand}\\ \text{Chardonnay Demand} & \text{Weak} & \text{Strong}\\ \text{Weak} & \text{.05} & \text{.50}\\ \text{Strong} & \text{.25} & \text{.20}\\ \end{matrix}$$

Revenue projections show an annual contribution to profit of $20,000 if Seneca Hill only plants Chardonnay grapes and demand is weak for Chardonnay wine, and$70,000 if they only plant Chardonnay grapes and demand is strong for Chardonnay wine. If they only plant Riesling grapes, the annual profit projection is $25,000 if demand is weak for Riesling grapes and$45,000 if demand is strong for Riesling grapes. If Seneca plants both types of grapes, the annual profit projections are shown in the following table.

$$\begin{matrix} \text{ } & \text{Riesling} & \text{Demand}\\ \text{Chardonnay Demand} & \text{Weak} & \text{Strong}\\ \text{Weak} & \text{\$22,000} & \text{\$40,000}\\ \text{Strong} & \text{\$26,000} & \text{\$60,000}\\ \end{matrix}$$

a. What is the decision to be made, what is the chance event, and what is the consequence? Identify the alternatives for the decisions and the possible outcomes for the chance events. b. Develop a decision tree. c. Use the expected value approach to recommend which alternative Seneca Hill Winery should follow in order to maximize expected annual profit. d. Suppose management is concerned about the probability assessments when demand for Chardonnay wine is strong. Some believe it is likely for Riesling demand to also be strong in this case. Suppose the probability of strong demand for Chardonnay and weak demand for Riesling is .05 and that the probability of strong demand for Chardonnay and strong demand for Riesling is .40. How does this change the recommended decision? Assume that the probabilities when Chardonnay demand is weak are still .05 and .50. e. Other members of the management team expect the Chardonnay market to become saturated at some point in the future, causing a fall in prices. Suppose that the annual profit projections fall to $50,000 when demand for Chardonnay is strong and Chardonnay grapes only are planted. Using the original probability assessments, determine how this change would affect the optimal decision.

"Myrtle Air Express decided to offer direct service from Cleveland to Myrtle Beach. Management must decide between a full-price service using the company’s new fleet of jet aircraft and a discount service using smaller-capacity commuter planes. It is clear that the best choice depends on the market reaction to the service Myrtle Air offers. Management developed estimates of the contribution to profit for each type of service based on two possible levels of demand for service to Myrtle Beach: strong and weak. The following table shows the estimated quarterly profits (in thousands of dollars):

$$\begin{aligned} &\text { Demand for Service }\\ &\begin{array}{lcr} \text { Service } & \text { Strong } & \text { Weak } \\ \text { Full Price } & \$ 960 & -\$ 490 \\ \text { Discount } & \$ 670 & \$ 320 \end{array} \end{aligned}$$

Suppose that management of Myrtle Air Express believes that the probability of strong demand is 0.7 and the probability of weak demand is 0.3. Use the expected value approach to determine an optimal decision."

Demand function. Given the demand function

$$p=D(x)=\frac{1,000}{x}$$

find the average price (in dollars) over the demand interval $[400, 600]$.

"Seneca Hill Winery recently purchased land for the purpose of establishing a new vineyard. Management is considering two varieties of white grapes for the new vineyard: Chardonnay and Riesling. The Chardonnay grapes would be used to produce a dry Chardonnay wine, and the Riesling grapes would be used to produce a semidry Riesling wine. It takes approximately four years from the time of planting before new grapes can be harvested. This length of time creates a great deal of uncertainty concerning future demand and makes the decision about the type of grapes to plant difficult. Three possibilities are being considered: Chardonnay grapes only; Riesling grapes only; and both Chardonnay and Riesling grapes. Seneca management decided that for planning purposes it would be adequate to consider only two demand possibilities for each type of wine: strong or weak. With two possibilities for each type of wine, it was necessary to assess four probabilities. With the help of some forecasts in industry publications, management made the following probability assessments:

$$\begin{aligned} &\text { Riesling Demand }\\ &\begin{array}{lcc} \text { Chardonnay Demand } & \text { Weak } & \text { Strong } \\ \text { Weak } & 0.05 & 0.50 \\ \text { Strong } & 0.25 & 0.20 \end{array} \end{aligned}$$

Revenue projections show an annual contribution to profit of $20,000 if Seneca Hill plants only Chardonnay grapes and demand is weak for Chardonnay wine, and$70,000 if Seneca plants only Chardonnay grapes and demand is strong for Chardonnay wine. If Seneca plants only Riesling grapes, the annual profit projection is $25,000 if demand is weak for Riesling grapes and$45,000 if demand is strong for Riesling grapes. If Seneca plants both types of grapes, the annual profit projections are shown in the following table:

$$\begin{aligned} &\text { Riesling Demand }\\ &\begin{array}{lcc} \text { Chardonnay Demand } & \text { Weak } & \text { Strong } \\ \text { Weak } & \$ 22,000 & \$ 40,000 \\ \text { Strong } & \$ 26,000 & \$ 60,000 \end{array} \end{aligned}$$

Suppose management is concerned about the probability assessments when demand for Chardonnay wine is strong. Some believe it is likely for Riesling demand to also be strong in this case. Suppose the probability of strong demand for Chardonnay and weak demand for Riesling is 0.05 and that the probability of strong demand for Chardonnay and strong demand for Riesling is 0.40. How does this change the recommended decision? Assume that the probabilities when Chardonnay demand is weak are still 0.05 and 0.50."

A stock has a required return of $11 \%$, the risk-free rate is $7 \%$, and the market risk premium is $4 \%$.

a. What is the stock's beta?

b. If the market risk premium increased to $6 \%$, what would happen to the stock's required rate of return? Assume that the risk-free rate and the beta remain unchanged.

ECRI Corporation is a holding company with four main subsidiaries. The percentage of its capital invested in each of the subsidiaries (and their respective betas) are as follows:

$$\begin{array}{lcc} \text{Subsidiary} & \text{Percentage of Capital} & \text{Beta} \\ \hline \text{Electric utility} & 60 \% & 0.70 \\ \text{Cable company} & 25 & 0.90 \\ \text{Real estate development} & 10 & 1.30 \\ \text{International/special projects} & 5 & 1.50 \end{array}$$

a. What is the holding company's beta?

b. If the risk-free rate is $6 \%$ and the market risk premium is $5 \%$, what is the holding company's required rate of return?

c. ECRI is considering a change in its strategic focus; it will reduce its reliance on the electric utility subsidiary, so the percentage of its capital in this subsidiary will be reduced to $50 \%$. At the same time, it will increase its reliance on the international/ special projects division, so the percentage of its capital in that subsidiary will rise to $15 \%$. What will the company's required rate of return be after these changes?

What will be the nominal rate of return on a perpetual preferred stock with a $100 par value, a stated dividend of 8% of par, and a current market price of:

(a)$60
(b) $80
(c)$100
(d) $140

Suppose management is concerned about the probability assessments when demand for Chardonnay wine is strong. Some believe it is likely for Riesling demand to also be strong in this case. Suppose that the probability of strong demand for Chardonnay and weak demand for Riesling is 0.05 and that the probability of strong demand for Chardonnay and strong demand for Riesling is 0.40 . How does this change the recommended decision? Assume that the probabilities when Chardonnay demand is weak are still 0.05 and 0.50 .

You are given the following information: Stockholders' equity as reported on the firm's balance sheet = 6.5 billion dollars, price/earnings ratio = 9, common shares outstanding = 180 million dollars, and market/book ratio = 2.0 dollars. The firm's market value of total debt is 7 billion dollars, the firm has cash and equivalents totaling 250 million dollars, and the firm's EBITDA equals 2 billion dollars. What is the price of a share of the company's common stock? What is the firm's EV/EBITDA?

A stock has a required return of 9%, the risk-free rate is 4.5%, and the market risk premium is 3%. a. What is the stock’s beta? b. If the market risk premium increased to 5%, what would happen to the stock’s required rate of return? Assume that the risk-free rate and the beta remain unchanged.

Using the data for the Stocks A and B have the following historical returns:

a. Calculate the average rate of return for each stock during the period 2013 through 2017.

b. Assume that someone held a portfolio consisting of 50 percent of Stock A and 50 percent of Stock B. What would the realized rate of return on the portfolio have been each year? What would the average return on the portfolio have been during this period?

c. Calculate the standard deviation of returns for each stock and for the portfolio.

d. Calculate the coefficient of variation for each stock and for the portfolio.

e. Assuming you are a risk-averse investor, would you prefer to hold Stock A, Stock B, or the portfolio? Why?

Stocks A and B have the following historical returns:

$$\begin{array}{ccc} \textbf{ Year } & \textbf{ Stock A's Returns, } \mathbf{r}_{\mathbf{A}} & \textbf{ Stock B's Returns, } \mathbf{r}_{\mathrm{B}} \\ \hline 2010 & (18.00 \%) & (14.50 \%) \\ 2011 & 33.00 & 21.80 \\ 2012 & 15.00 & 30.50 \\ 2013 & (0.50) & (7.60) \\ 2014 & 27.00 & 26.30 \end{array}$$

a. Calculate the average rate of return for each stock during the period $2010$ through $2014$.

b. Assume that someone held a portfolio consisting of $50 \%$ of Stock A and $50 \%$ of Stock B. What would the realized rate of return on the portfolio have been each year? What would the average return on the portfolio have been during this period?

c. Calculate the standard deviation of returns for each stock and for the portfolio.

d. Calculate the coefficient of variation for each stock and for the portfolio.

e. Assuming you are a risk-averse investor, would you prefer to hold Stock A, Stock B, or the portfolio? Why?

MediSecure, Inc., uses the FIFO method in its process costing system. It produces clear plastic containers for pharmacies in a process that starts in the Molding Department. Data concerning that department's operations in the most recent period appear below:

$$\begin{array}{lr} \text{Beginning work in process: } \\ \text{$\quad$Units in process} & 500 \\ \text{$\quad$Completion with respect to materials}& 80\% \\ \text{$\quad$Completion with respect to conversion } & 40\%\\ \text{Units started into production during the month} & 153,600 \\ \text{Units completed and transferred out}& 153,700 \\ \text{Ending work in process: } \\ \text{$\quad$Units in process } & 400 \\ \text{$\quad$Completion with respect to materials} & 75\% \\ \text{$\quad$Completion with respect to conversion} & 20\% \\ \end{array}$$

Required:

Compute the Molding Department's equivalent units of production for materials and conversion for the period.