You have been at your job with S&S Air for a week now and have decided you need to sign up for the company’s 401(k) plan. Even after your discussion with Audrey Sanborn, the Bledsoe Financial Services representative, you are still unsure as to which investment option you should choose. Recall that the options available to you are stock in S&S Air, the Bledsoe S&P 500 Index Fund, the Bledsoe Small-Cap Fund, the Bled-soe Large-Company Stock Fund, the Bledsoe Bond Fund, and the Bledsoe Money Market Fund. You have decided that you should invest in a diversified portfolio, with 70% of your investment in equities, 25% in bonds, and 5% in the money market fund.

 You have also decided to focus your equity investment on large-cap stocks, but you are debating whether to select the S&P 500 Index Fund or the Large-Company Stock Fund. In thinking it over, you understand the basic difference in the two funds. One is a purely passive fund that replicates a widely followed large-cap index, the S&P 500, and has low fees. The other is actively managed with the intention that the skill of the portfolio manager will result in improved performance relative to an index. Fees are higher in the latter fund. You’re just not certain which way to go, so you ask Chris Guthrie, who works in the company’s finance area, for advice.

 After discussing your concerns, Chris gives you some information comparing the performance of equity mutual funds and the Vanguard 500 Index Fund. The Vanguard 500 is the world’s largest equity index mutual fund. It replicates the S&P 500, and its return is only negligibly different from the S&P 500. Fees are very low. As a result, the Vanguard 500 is essentially identical to the Bledsoe S&P 500 Index Fund offered in the 401(k) plan, but it has been in existence for much longer, so you can study its track record for over two decades. Chris recommends that you study the figure in this chapter and answer the following questions.

QUESTION

What investment decision would you make for the equity portion of your 401(k) account? Why?

Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The company president is Shelley Couts, who inherited the company. When it was founded over 70 years ago, the company originally repaired radios and other household appliances. Over the years, the company expanded into manufacturing and is now a reputable manufacturer of various electronic items. Jay McCanless, a recent MBA graduate, has been hired by the company’s finance department.

 One of the major revenue-producing items manufactured by Conch Republic is a smart phone. Conch Republic currently has one smart phone model on the market, and sales have been excellent. The smart phone is a unique item in that it comes in a variety of tropical colors and is preprogrammed to play Jimmy Buffett music. However, as with any electronic item, technology changes rapidly, and the current smart phone has limited features in comparison with newer models. Conch Republic spent $750,000 to develop a prototype for a new smart phone that has all the features of the existing smart phone but adds new features such as WiFi tethering. The company has spent a further$200,000 for a marketing study to determine the expected sales figures for the new smart phone.

 Conch Republic can manufacture the new smart phones for $215 each in variable costs. Fixed costs for the operation are estimated to run$6.1 million per year. The estimated sales volume is 155,000, 165,000, 125,000, 95,000, and 75,000 per year for the next five years, respectively. The unit price of the new smart phone will be $520. The necessary equipment can be purchased for$40.5 million and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be $6.1 million.

 As previously discussed, Conch Republic currently manufactures a smart phone. Production of the existing model is expected to be terminated in two years. If Conch Republic does not introduce the new smart phone, sales will be 95,000 units and 65,000 units for the next two years, respectively. The price of the existing smart phone is$380 per unit, with variable costs of $145 each and fixed costs of$4.3 million per year. If Conch Republic does introduce the new smart phone, sales of the existing smart phone will fall by 30,000 units per year, and the price of the existing units will have to be lowered to $210 each. Net working capital for the smart phones will be 20% of sales and will occur with the timing of the cash flows for the year; for example, there is no initial outlay for NWC, but changes in NWC will first occur in Year 1 with the first year’s sales. Conch Republic has a 35% corporate tax rate and a required return of 12%.

What is the NPV of the project?

Define overconfidence. How is it likely to be costly?

How could overconfidence have an effect on the financial manager of the firm and the firm’s shareholders?

How could overconfidence have an effect on the financial manager of the firm and the firm’s shareholders?

Assume that you invest $5$ percent of your salary and receive the full $5$ percent match from $S \& S$ Air. What EAR do you earn from the match? What conclusions do you draw about matching plans?

In the chapter, we presented an example where you had lost $78 and were given the opportunity to make a wager in which your loss would increase to$100 80% of the time and decrease to $0 20% of the time. Applying the stand-alone principle from capital budgeting, explain how your decision to accept or reject the proposal could have been affected by frame dependence. In other words, reframe the question in a way in which most people are likely to analyze the proposal correctly.

In the chapter, we discussed the 3Com/Palm and Royal Dutch/Shell mispricings. Which of the limits to arbitrage would least likely be the primary reason for these mispricings? Explain.

You have been at your job with S&S Air for a week now and have decided you need to sign up for the company’s 401(k) plan. Even after your discussion with Audrey Sanborn, the Bledsoe Financial Services representative, you are still unsure as to which investment option you should choose. Recall that the options available to you are stock in S&S Air, the Bledsoe S&P 500 Index Fund, the Bledsoe Small-Cap Fund, the Bled-soe Large-Company Stock Fund, the Bledsoe Bond Fund, and the Bledsoe Money Market Fund. You have decided that you should invest in a diversified portfolio, with 70% of your investment in equities, 25% in bonds, and 5% in the money market fund.

 You have also decided to focus your equity investment on large-cap stocks, but you are debating whether to select the S&P 500 Index Fund or the Large-Company Stock Fund. In thinking it over, you understand the basic difference in the two funds. One is a purely passive fund that replicates a widely followed large-cap index, the S&P 500, and has low fees. The other is actively managed with the intention that the skill of the portfolio manager will result in improved performance relative to an index. Fees are higher in the latter fund. You’re just not certain which way to go, so you ask Chris Guthrie, who works in the company’s finance area, for advice.

 After discussing your concerns, Chris gives you some information comparing the performance of equity mutual funds and the Vanguard 500 Index Fund. The Vanguard 500 is the world’s largest equity index mutual fund. It replicates the S&P 500, and its return is only negligibly different from the S&P 500. Fees are very low. As a result, the Vanguard 500 is essentially identical to the Bledsoe S&P 500 Index Fund offered in the 401(k) plan, but it has been in existence for much longer, so you can study its track record for over two decades. Chris recommends that you study the figure in this chapter and answer the following questions.

QUESTION

What implications do you draw from the graph for mutual fund investors?

Assume you decide you should invest at least part of your money in large-capitalization stocks of companies based in the United States. What are the advantages and disadvantages of choosing the Bledsoe Large-Company Stock Fund compared to the Bledsoe S&P $500$ Index Fund?

Where was the most intense fighting concentrated? (Spanish Civil War, $1936–1939$)

Which statement accurately describes a vector graphic?

What is the standard deduction for each filing status?

Seth Bullock, the owner of Bullock Gold Mining, is assessing a new gold mine in South Dakota. Dan Dority, the company’s geologist, has just finished his analysis of the mine site. He has estimated that the mine would be productive for eight years, after which the gold would be completely mined. Dan has taken an estimate of the gold deposits to Alma Garrett, the company’s financial officer. Alma has been asked by Seth to perform an analysis of the new mine and present her recommendation on whether the company should open the new mine.

 Alma has used the estimates provided by Dan to determine the revenues that could be expected from the mine. She has also projected the expense of opening the mine and the annual operating expenses. If the company opens the mine, it will cost $525 million today, and it will have a cash outflow of$35 million nine years from today in costs associated with closing the mine and reclaiming the area surrounding it. The expected cash flows each year from the mine are shown in the table. Bullock Mining has a required return of 12% on all of its gold mines.

Based on your analysis, should the company open the mine?