1.

What are some labor-related factors that Threads should consider when comparing Mexico
and Canada? 2. What are some labor-related factors that would favor Canada as the location of
the new facility? Mexico? 3. Why is it important for HR and compensation professionals to learn
about compensation practices in other

1. If you were Schein, what would you do if anything? Explain. 2. What should Bob do about
Patel’s claim that Beatty has become hostile towards him? 3. What rights and protections do
whistleblowers have in the workplace today?

1. If you were Tom Morrison, would you implement a formal mentoring program? Is so, how
would you address the VP's concerns? 2. What alternatives to a mentoring program are available
to Morrrison?

1. What are the legal and ethical issues involved in this case? Was it ethical for Gladys Morrison
to have applied for the position in the first place? 2. Should the owner hire Morrison or some
other applicant? Should the information about the pregnancy be considered? 3. If Morrison is
hired, how could Integrity Moto

See Full Questions And Answers at solutionrank.com

Discuss the basic concept of insurance. How does this concept apply to health care?

What arguments can be made in favor of using compressed work week schedules for companies
that pursue lowest-cost strategies? What are the arguments against using compressed work week
schedules in such situations?

1. What is “beautyism”? 2. To what degree was “beautyism” a factor in this

decision? How do you know? 3. Why and to what degree do more attractive male and female job
applicants have an advantage in the interview process? 4. What can managers do to eliminate the
“beautyism” bias during the job interview?

1. How does McCain view her role as human resource manager? 2. What is Harrison’s
business strategy? 3. What is the structure and staffing of HR? 4. Analyze the data in Exhibit 1.4.
What are its implications? 5. Given the organization's size and strategic goals, evaluate the
development of the human resource fun

See Full Questions And Answers at solutionrank.com

1. If you were Bob Getz, how would you recruit the needed employees? 2. Evaluate the Lake
Mead campground manager's suggestion that Getz recruit employees by placing a want ad in the
Cleveland newspaper. 3. What should the firm do if it is unable to recruit sufficient employees
for the job?

Please identify one or more issues besides the ones discussed in this chapter that you feel will
help define future of compensation professionals’ work.
1. Why is it important to provide effective communication about employee benefits? 2. What is
your opinion of JSJ’s current communication about their benefit program? 3. How can JSJ
improve their benefits communication?

1. Describe the nature and causes of the employee health insurance cost problem in this case. 2.
What information should the committee gather before making any recommendations? 3. Given
the desire of most employees to protect themselves from high healthcare costs, is there any way
for Quality Auto Parts to continue

See Full Questions And Answers at solutionrank.com

1. How and why do strategic decisions affect human resources management policies? Can human
resources policies or constraints ever affect strategy? Why or why not? 2. Identify the problem
and causes of the problem in this case. 3. Evaluate Dean Blake's strategy and human resource
policies. Did the strategy make se

1. What actions should Sweets, Inc. take now? Explain your reasoning. 2. What steps can the
firm take to prevent this problem from occurring in the future? 3. What additional information
needs to be gathered before any decisions are made or action taken?

1. Identify the major problem or problems and the causes. 2. What are some alternatives for
dealing with these problems? For example, is it possible to avoid layoffs through the use of
attrition? 3. Develop a plan for implementing employee layoffs over the next year which will
generate $3 million in savings. Gi

1. Critique each of the alternative approaches suggested for solving the problem of selecting
patient escorts at City Hospital. 2. Recommend a procedure for recruiting and hiring patient
escorts. 3. Besides improving its selection procedures, what other actions could the hospital
potentially take to improve the behav

See Full Questions And Answers at solutionrank.com

Companies generally pay temporary employees lower wages and offer fewer benefits than they
extend to their core counterparts. Nevertheless, what are some of the possible drawbacks for
companies that employ temporary workers? Do you believe that these drawbacks outweigh the
cost savings? Explain your reasoning.

Discuss your position on executive compensation. Is executive compensation excessive or

appropriate?

1. Describe the fundamental problem in this case together with its causes 2. What specific
mistakes were made by a. The General Manager and b. The Program Director? 3. Did you ever
do unpaid volunteer work? What were your purposes/goals? Did you achieve them? 4. What
types of rewards are most appropriate for vol
1. What role does the compensation package play in attracting the right talent for the CEO
position? 2. What are some recommendations the consultant may provide to the Board for the
compensation package?

See Full Questions And Answers at solutionrank.com

1. Analyze the data in Exhibit 1.20. What conclusions do you reach? (Is there evidence of
discrimination in promotion decisions?). 2. Do you believe that Gemson, Thompson, LeBlanc,
and Jackson were discriminated against? 3. What are some of the potential disadvantages of a
"word of mouth" promotion system? 4. What

1. Should Rollermakers Corporation allow the two inside sales people to miss work in order to
attend classes? Should it pay for the tuition? Why? 2. Should the firm continue to allow the
Purchasing Manager to attend the evening MBA program and to pay his tuition? 3. Should there
be a formal policy regarding education

1. What action do you believe Eastern State University should have taken with regard to Paul
Lewis? Do you agree with the dean's solution to the problem? Why or why not? 2. If you were
Professor Morris, what preventive action would you take to insure your safety and prevent Lewis
from harming you? 3. What steps shou

1. Do companies have either a moral or legal obligation to honor all terms and conditions
associated with an employee’s retirement which were in effect at the time of retirement?
Why or why not? 2. Does the purchase of the original company by another company obviate the
employer’s obligation concerning retiree ben

See Full Questions And Answers at solutionrank.com

1. What are some potential problems with Aspect’s compensation structure for sales
representatives? 2. What changes do you recommend?

1. Did Wayne have an employment contract either oral or written with EcoCare? Why or Why
not? 2. What problems, if any, do you see with EcoCare's pre-employment process? 3. Can an
employer's written personnel policies ever be construed as a contract between an employer and
an employee? 4. Was Wayne terminated for

1. Would offering telecommuting as an option benefit Med Ex? How? 2. Are there any
disadvantages or challenges in offering telecommuting? 3. What do you recommend Med Ex do?
Why? 4. Explain leased employee arrangements. Discuss employee benefits for leased workers.
5. Discuss flexible work schedules from the perspecti

1. In this particular case, was the company guilty or innocent of safety violations which resulted
in the death of Mr. Carlson? 2. Irrespective of the jury's decision in this case, what should the
company do now to avoid a similar incident in the future?
See Full Questions And Answers at solutionrank.com

1. What additional information about the CEO’s pay package should Don identify to
potentially share with the employees? 2. How can Don explain the pay disparity to the
employees to ease their concerns about the fairness of the CEO’s pay? 3. Discuss the six
forms of deferred (stock) compensation. 4. Briefly discuss

1. Would you recommend that Joan Collins bring this issue before the CEO and the Board of
Directors and recommend implementation? Why or why not? 2. If you believe that Collins
should recommend implementation of domestic partner benefits, what are the potential benefits
to Baptist Hospital, and how should she document

1. What lessons can you draw from this case regarding what students, employers, and faculty can
use social media such as Facebook during the recruitment and selection process. 2. What
policies, if any, should employers develop concerning the use of social media for various
purposes including employee recruitment and s

Discuss your views about whether discretionary employee benefits should be an entitlement or
something earned based on performance.

See Full Questions And Answers at solutionrank.com

1. How should Dale approach the determination of the consultant’s salaries as expatriates? 2.
Should Jenkins offer any incentive compensation or additional benefits to the expatriates? Why
or why not? 3. Describe the four challenges that companies face in the development and the
implementation of international comp

1. Evaluate Mills management of Carpenter’s performance. What are the strengths and
weaknesses of their approach to performance appraisal (i.e. management by objectives)? 2. Do
you agree or disagree with Amato’s observation that Carpenter should have been terminated
earlier? 3. Will Carpenter prevail in his char

Except for the Family and Medical Leave Act, the remaining legally required benefits were
conceived decades ago. What changes in the business environment and society might affect the
relevance or perhaps the viability of any of these benefits? Discuss your ideas.

What impact will flexible work schedules have on employees’ commitment to their
employers? On employee productivity? On company effectiveness?

See Full Questions And Answers at solutionrank.com

1. If you were Bill Baldwin, what actions would you take in response to Tran’s request? 2.
What hiring policy should the firm follow? 3. Does the firm have too diverse a workforce?
1. What policies and procedures do you suggest Mr. Baker propose to address each of the areas
identified above in the Wall Street Journal article? 2. Given his Central Florida, what types of
disasters are most likely to occur in that location and why? Which disasters are most likely to
occur in your current location?

1. If you were on the HR Committee of State Bank, what decisions would you suggest regarding
raises for tellers? 2. How much faith should the HR Committee place in the accuracy of the wage
survey? 3. Critique State Bank’s policy of giving merit raises that range from zero to 8
percent, depending on job performance.

Two employees perform the same job, and each received exemplary performance ratings. Is it
fair to give one employee a smaller percentage merit because his pay falls within the third
quartile but give a larger percentage merit increase to the other because his pay falls within the
first quartile? Please explain your an

See Full Questions And Answers at solutionrank.com

This chapter discusses four important issues that will shape compensation professionals’
work for years to come. Which of these stands to create the greatest uncertainty for
compensation professionals? Explain your answer.

Provide your reaction to the statement, “Employee benefits are seen by employees as an
entitlement for their membership in companies.” Explain the rationale for your reaction.

How can compensation practices affect the willingness of executives at Global Appliance to take
international assignments? What are some aspects of Global’s compensation practices that
Jackson should examine?

1. What, if anything, should the Ships,Inc. do with regard to salaried personnel who have
vacations planned later this year and now don't have enough vacation time? 2. What, if anything,
should the firm do regarding the lost vacation time for all of the other employees, both salaried
and hourly? 3. Should the firm ch

See Full Questions And Answers at solutionrank.com

Describe the most recent developments in health care reform. How do these developments
compare to what is discussed in this chapter? To help answer this question, conduct a search on
the internet using terms such as ‘health care reform’ or ‘Patient Protection and
Affordable Care Act’.

1. What are the pros and cons of the firm's strategy of hiring replacement workers? 2. Assume
that the firm's goal is to break the union, what are the advantages and disadvantages of this
strategy? 3. What standard should the firm use in setting wage rates? (Industry or geographic)
1. What recruitment sources do you recommend Jackson Hotels use for the kinds of positions
they are planning to utilize? Why? 2. What background investigation, if any, would you
recommend to differentiate acceptable from unacceptable job candidates? Why? 3. What
selection criteria and processes would you recommend to

1. What are some advantages of the implementing the HSA option? 2. What are some potential
disadvantages of the HSA option? 3. What do you recommend? Why? 4. Compare and contrast
defined contribution plans with defined benefit plans. 5. Define health insurance concepts such
as insurance policy and premium and explain

See Full Questions And Answers at solutionrank.com

1. Describe the nature and causes of the compensation problem describe this incident. 2. Are
"merit" salary increases always based on "merit?" Why or why not? 3. Why has Dean Smith had
a policy of equal percentage salary increases for all department chairs despite the stated
university policy? Are all the chairs equa

1. Do you think Bob’s approach to job analysis will be effective in creating useful job
descriptions? 2. What can be done to improve this job analysis process?

1. What is cultural diversity? 2. Why is cultural diversity an important issue for all
organizations? What are the potential disadvantages of ignoring it as an issue? What steps should
a proactive organization take to respond to this challenge? 3. Evaluate the content and training
method used by the university in thi

Discuss the main differences between retirement systems in the United States (taking into
account legally required and discretionary programs) and one other country discussed in this
chapter. Does it appear that the costs of retirement programs are creating burdens for competitive
advantage?

See Full Questions And Answers at solutionrank.com

Many compensation professionals are faced with making choices about which discretionary
benefits to drop because funds are limited and the costs of these benefits continually increase.
Assume you make such choices. Rank order discretionary benefits, starting with the ones you
would most likely drop to the ones you woul

In the International Mulch and Compost example (Section 6.2), we assumed that losses on the
project could be used to offset taxable profits elsewhere in the corporation. Suppose that the
losses had to be carried forward and offset against future taxable profits from the project. How
would the project NPV change? What i

Look back at project A in Section 9.6. Now assume that a. Expected cash flow is $150 per year
for five years. b. The risk-free rate of interest is 5 percent. c. The market risk premium is 6
percent. d. The estimated beta is 1.2. Recalculate the certainty-equivalent cash flows, and show
that the ratio of these certa

What is the NPV of the electric scooter project under the followingscenario?

See Full Questions And Answers at solutionrank.com

Suppose you are valuing a future stream of high-risk (high-beta) cash outflows. High risk means
a high discount rate. But the higher the discount rate, the less the present value. This seems to
say that the higher the risk of cash outflows, the less you should worry about them! Can that be
right? Should the sign of the

Agnes Magna has found some errors in her data (see Section 10.3). The corrected figures are as
follows: Redraw the decision tree with the changed data. Calculate the value of the option to
expand. Which plane should Ms. Magnabuy?

Table 7.8 shows standard deviations and correlation coefficients for seven stocks from different
countries. Calculate the variance of a portfolio 40 percent invested in BP, 40 percent invested in
KLM, and 20 percent invested inNestlé.

“Investors’ home country bias is diminishing rapidly. Sooner or later most investors will
hold the world market portfolio, or a close approximation to it.” Suppose that statement is
correct. What are the implications for evaluating foreign capital investment projects?

See Full Questions And Answers at solutionrank.com

Diversification has enormous value to investors, yet opportunities for diversification should not
sway capital investment decisions by corporations. How would you explain this apparent
paradox?

Explain why real options are most valuable when forecasts of future cash flows are most
uncertain.

Respond to the following comments: a. “ Risk is not variability. If I know a stock is going to
fluctuate between $10 and $20, I can make myself a bundle.” b. “There are all sorts of risk
in addition to beta risk. There’s the risk that we’ll have a downturn in demand,
there’s the risk that my best plant man

The following table shows the sensitivity of four stocks to the three Fama–French factors in
the five years to 2001. Estimate the expected return on each stock assuming that the interest rate
is 3.5 percent, the expected risk premium on the market is 8.8 percent, the expected risk premium
on the size factor is 3.1 pe

See Full Questions And Answers at solutionrank.com

An oil company executive is considering investing $10 million in one or both of two wells: Well
1 is expected to produce oil worth $3 million a year for 10 years; well 2 is expected to produce
$2 million for 15 years. These are real (inflation-adjusted) cash flows. The beta for producing
wells is .9. The market risk pr

“The cost of capital always depends on the risk of the project being evaluated. Therefore the
company cost of capital is useless.” Do you agree?

Suppose that after-tax investment is defined as the investment outlay minus the present value of
future depreciation tax shields. In the guano project, for example, after-tax investment would be
$10,000,000 – 2,174,000 +$7,826,000. This figure would be entered as the investment outlay
then future cash flows would be

M. Grandet has invested 60 percent of his money in share A and the remainder in share B. He
assesses their prospects as follows: a. What are the expected return and standard deviation of
returns on his portfolio? b. How would your answer change if the correlation coefficient was 0 or
_.5? c. Is M. Grandet’s port

See Full Questions And Answers at solutionrank.com

Reevaluate the NPV of the proposed polyzone project under each of the following assumptions.
Follow the format of Table 11.3. What’s the right management decision in each case? a.
Competitive entry does not begin until year 5, when the spread falls to $1.10 per pound, and is
complete in year 6, when the spread is $.

A widget manufacturer currently produces 200,000 units a year. It buys widget lids from an
outside supplier at a price of $2 a lid. The plant manager believes that it would be cheaper to
make these lids rather than buy them. Direct production costs are estimated to be only $1.50 a
lid. The necessary machinery would cos

Hayden Inc. has a number of copiers that were bought four years ago for $20,000. Currently
maintenance costs $2,000 a year, but the maintenance agreement expires at the end of two years
and thereafter the annual maintenance charge will rise to $8,000. The machines have a current
resale value of $8,000, but at the end o

The president’s executive jet is not fully utilized. You judge that its use by other officers
would increase direct operating costs by only $20,000 a year and would save $100,000 a year in
airline bills. On the other hand, you believe that with the increased use the company will need to
replace the jet at the end of

See Full Questions And Answers at solutionrank.com

We warned that equivalent annual costs should be calculated in real terms. We did not fully
explain why. This problem will show you. Look back to the cash flows for machines A and B (in
“Choosing between Long- and Short-Lived Equipment”). The present values of purchase
and operating costs are 28.37 (over three year

A project has the following forecasted cash flows:The estimated project beta is 1.5. The market
return rm is 16 percent, and the risk-free rate rf is 7 percent. a. Estimate the opportunity cost of
capital and the project’s PV (using the same rate to discount each cash flow). b. What are the
certainty-equivalent cas

Hippique s.a., which owns a stable of racehorses, has just invested in a mysterious black stallion
with great form but disputed bloodlines. Some experts in horseflesh predict the horse will win
the coveted Prix de Bidet; others argue that it should be put out to grass. Is this a risky
investment for Hippique shareholde

The following question illustrates the APT. Imagine that there are only two pervasive
macroeconomic factors. Investments X, Y, and Z have the following sensitivities to these two
factors: We assume that the expected risk premium is 4 percent on factor 1 and 8 percent on
actor 2. Treasury bills obviously offer zero ri

See Full Questions And Answers at solutionrank.com

The Rustic Welt Company is proposing to replace its old welt-making machinery with more
modern equipment. The new equipment costs $10 million and the company expects to sell its old
equipment for $1 million. The attraction of the new machinery is that it is expected to cut
manufacturing costs from their current level o

The world airline system is composed of the routes X and Y, each of which requires 10 aircraft.
These routes can be serviced by three types of aircraft—A, B, and C. There are 5 type A aircraft
available, 10 type B, and 10 type C. These aircraft are identical except for their operating costs,
which are as follows: T

Why is an M.B.A. student who has just learned about DCF like a baby with a hammer? What
was the point of our answer?

The Cambridge Opera Association has come up with a unique door prize for its December
(2004) fund-raising ball: Twenty door prizes will be distributed, each one a ticket entitling the
bearer to receive a cash award from the association on December 30, 2005. The cash award is to
be determined by calculating the ratio of

See Full Questions And Answers at solutionrank.com

Look again at Practice Question 14. Consider a portfolio with equal investments in stocks P, P2,
and P3. a. What are the factor risk exposures for the portfolio? b. What is the portfolio’s
expected return?
An auto plant that costs $100 million to build can produce a new line of cars that will generate
cash flows with a present value of $140 million if the line is successful, but only $50 million if it
is unsuccessful. You believe that the probability of success is only about 50 percent. a. Would
you build the plant? b.

Otobai is considering still another production method for its electric scooter. It would require an
additional investment of ¥15 billion but would reduce variable costs by ¥40,000 per unit.
Other assumptions follow Table 10.1. a. What is the NPV of this alternative scheme?b. Draw
break-even charts for this alternativ

Download “Monthly Adjusted Prices” for General Motors (GM) and Harley Davidson
(HDI) from the Standard & Poor’s Market Insight website ( HYPERLINK
"www.mhhe.com/" www.mhhe.com/ edumarketinsight). a. Calculate each company’s beta,
following the procedure described in Practice Question 13. b. Calculate the a

See Full Questions And Answers at solutionrank.com

An oil company is drilling a series of new wells on the perimeter of a producing oil field. About
20 percent of the new wells will be dry holes. Even if a new well strikes oil, there is still
uncertainty about the amount of oil produced: 40 percent of new wells which strike oil produce
only 1,000 barrels a day; 60 perc

a. How many variance terms and how many covariance terms do you need to calculate the risk of
a 100-share portfolio? b. Suppose all stocks had a standard deviation of 30 percent and a
correlation with each other of .4. What is the standard deviation of the returns on a portfolio that
has equal holdings in 50 stocks?

Draw up an outline or flowchart tracing the capital budgeting process from the initial idea for a
new investment project to the completion of the project and the start of operations. Assume the
idea for a new obfuscator machine comes from a plant manager in the Deconstruction Division
of the Modern Language Corporation

Here are inflation rates and stock market and Treasury bill returns between 1996 and 2000: a.
What was the real return on the S&P 500 in each year? b. What was the average real return? c.
What was the risk premium in each year? d. What was the average risk premium? e. What was
the standard deviation of the riskp

See Full Questions And Answers at solutionrank.com

Discuss the value of postaudits. Who should conduct them? When? Should they consider solely
financial performance? Should they be confined to the larger projects?
True or false? a. Stocks of small companies have done better than predicted by the CAPM. b.
Stocks with high ratios of book value to market price have done better than predicted by the
CAPM. c. On average, stock returns have been positively related to beta.

There are few, if any, real companies with negative betas. But suppose you found one with β =
− .25. a. How would you expect this stock’s rate of return to change if the overall market
rose by an extra 5 percent? What if the market fell by an extra 5 percent? b. You have $1 million
invested in a well-diversif

You are considering starting a company to provide a new Internet access service. There is a 60
percent chance the demand will be high in the first year. If it is high, there is an 80 percent
chance that it will continue high indefinitely. If demand is low in the first year, there is a 60
percent chance that it will con

See Full Questions And Answers at solutionrank.com

Mark Harrywitz proposes to invest in two shares, X and Y. He expects a return of 12 percent
from X and 8 percent from Y. The standard deviation of returns is 8 percent for X and 5 percent
for Y. The correlation coefficient between the returns is .2. a. Compute the expected return and
standard deviation of the followin

Taxes are a cost, and, therefore, changes in tax rates can affect consumer prices, project lives,
and the value of existing firms. The following problem illustrates this. It also illustrates that tax
changes that appear to be “good for business” do not always increase the value of existing
firms. Indeed, unless new

“Suppose you could forecast the behavior of APT factors, such as industrial production,
interest rates, etc. You could then identify stocks’ sensitivities to these factors, pick the right
stocks, and make lots of money.” Is this a good argument favoring the APT? Explain why or
why not.

The McGregor Whisky Company is proposing to market diet scotch. The product will first be
test-marketed for two years in southern California at an initial cost of $500,000. This test launch
is not expected to produce any profits but should reveal consumer preferences. There is a 60
percent chance that demand will be sa

See Full Questions And Answers at solutionrank.com

Look again at Table 9.1. This time we will concentrate on Burlington Northern. a. Calculate
Burlingtons cost of equity from the CAPM using its own beta estimate and the industry beta
estimate. How different are your answers? Assume a risk free rate of 3.5 percent and a market
risk premium of 8 percent. b. Can you be co
It is often useful to know how well your portfolio is diversified. Two measures have been
suggested: a. The variance of the returns on a fully diversified portfolio as a proportion of the
variance of returns on your portfolio. b. The number of shares in a portfolio that (i) has the same
risk as yours, (ii) is investe

Mom and Pop Groceries has just dispatched a year’s supply of groceries to the government
of the Central Antarctic Republic. Payment of $250,000 will be made one year hence after the
shipment arrives by snow train. Unfortunately there is a good chance of a coup d’état, in
which case the new government will not pay.

Consider the beta estimates for the country indexes shown in Table 9.2. Could this information
be helpful to a U.S. company considering capital investment projects in these countries? Would a
German company find this information useful?Explain.

See Full Questions And Answers at solutionrank.com

Rustic Welt could commission engineering tests to determine the actual improvement in
manufacturing costs generated by the proposed new welt machines. (See problem 4 above.) The
study would cost $450,000. Would you advise the company to go ahead with the study?

Consider the following simplified APT model (compare Tables 8.3 and 8.4): Calculate the
expected return for the following stocks. Assume rf = 5 percent.

U.S. pharmaceutical companies have an average beta of about 8. These companies have very
little debt financing, so the asset beta is also about .8. Yet a European investor would calculate a
beta of much less than .8 relative to returns on European stock markets. (How do you explain
this?) Now consider some possible imp

Here are some historical data on the risk characteristics of Dell and Microsoft: Assume the
standard deviation of the return on the market was 15 percent. a. The correlation coefficient of
Dell’s return versus Microsoft’s is .66. What is the standard deviation of a portfolio
invested half in Dell and half in Mic

See Full Questions And Answers at solutionrank.com

Amalgamated Products has three operating divisions: To estimate the cost of capital for each
division, Amalgamated has identified the following three principal competitors: Assume these
betas are accurate estimates and that the CAPM is correct. a. Assuming that the debt of these
firms is risk-free, estimate t

As a result of improvements in product engineering, United Automation is able to sell one of its
two milling machines. Both machines perform the same function but differ in age. The newer
machine could be sold today for $50,000. Its operating costs are $20,000 a year, but in five years
the machine will require a $20,00
Thanks to acquisition of a key patent, your company now has exclusive production rights for
barkelgassers (BGs) in North America. Production facilities for 200,000 BGs per year will
require a $25 million immediate capital expenditure. Production costs are estimated at $65 per
BG. The BG marketing manager is confident t

Your eccentric Aunt Claudia has left you $50,000 in Alcan shares plus $50,000 cash.
Unfortunately her will requires that the Alcan stock not be sold for one year and the $50,000
cash must be entirely invested in one of the stocks shown in Table 7.8. What is the safest
attainable portfolio under theserestrictions?

See Full Questions And Answers at solutionrank.com

Photographic laboratories recover and recycle the silver used in photographic film. Stikine River
Photo is considering purchase of improved equipment for their laboratory at Telegraph Creek.
Here is the information they have: • The equipment costs $100,000. • It will cost $80,000
per year to run. • It has an econ

A project requires an initial investment of $100,000 and is expected to produce a cash inflow
before tax of $26,000 per year for five years. Company A has substantial accumulated tax losses
and is unlikely to pay taxes in the foreseeable future. Company B pays corporate taxes at a rate
of 35 percent and can depreciate

Operating leverage is often measured as the percentage increase in profits after depreciation for a
1 percent increase in sales. a. Calculate the operating leverage for the electric scooter project
assuming unit sales are 100,000 (see Section 10.1). b. Now show that this figure is equal to 1 +
(fixed costs/profits) i

Suppose the current price of gold is $280 per ounce. Hotshot Consultants advises you that gold
prices will increase at an average rate of 12 percent for the next two years. After that the growth
rate will fall to a long-run trend of 3 percent per year. What is the price of 1 million ounces of
gold produced in eight yea

See Full Questions And Answers at solutionrank.com

The manufacture of polysyllabic acid is a competitive industry. Most plants have an annual
output of 100,000 tons. Operating costs are $.90 a ton, and the sales price is $1 a ton. A 100,000-
ton plant costs $100,000 and has an indefinite life. Its current scrap value of $60,000 is expected
to decline to $57,900 over the

How can decision trees help the financial manager to “open up the black box” and
understand a capital investment project better? Why are decision trees not complete solutions to
the valuation of real options?
Look again at the set of efficient portfolios that we calculated in Section 8.1. a. If the interest rate
is 10 percent, which of the four efficient portfolios should you hold? b. What is the beta of each
holding relative to that portfolio? c. How would your answers to (a) and (b) change if the interest
rate was 5 pe

Summarize the problems that a manager would encounter in interpreting a standard sensitivity
analysis, such as the one shown in Table 10.2. Which of these problems are alleviated by
examining the project under alternativescenarios?

See Full Questions And Answers at solutionrank.com

Some true or false questions about the APT: a. The APT factors cannot reflect diversifiable risks.
b. The market rate of return cannot be an APT factor. c. Each APT factor must have a positive
risk premium associated with it; otherwise the model is inconsistent. d. There is no theory that
specifically identifies the

Suppose that you are considering investing in an asset for which there is a reasonably good
secondary market. Specifically, you’re Delta Airlines, and the asset is a Boeing 757—a
widely used airplane. How does the presence of a secondary market simplify your problem in
principle? Do you think these simplifications

True or false? Explain or qualify as necessary. a. Investors demand higher expected rates of
return on stocks with more variable rates of return. b. The CAPM predicts that a security with a
beta of 0 will offer a zero expected return. c. An investor who puts $10,000 in Treasury bills and
$20,000 in the market por

There is an active, competitive leasing (i.e., rental) market for most standard types of commercial
jets. Many of the planes flown by the major domestic and international airlines are not owned by
them but leased for periods ranging from a few months to several years. Gamma Airlines,
however, owns two long-range DC-11s

See Full Questions And Answers at solutionrank.com

How would your answer to question 5 change if: • Technological improvements reduce the
cost of new BG production facilities by 3 percent per year? Thus a new plant built in year 1
would cost only 25 (1 − .03) = $24.25 million; a plant built in year 2 would cost $23.52 million;
and so on. Assume that production cos

Suppose that Treasury bills offer a return of about 6 percent and the expected market risk
premium is 8.5 percent. The standard deviation of Treasury-bill returns is zero and the standard
deviation of market returns is 20 percent. Use the formula for portfolio risk to calculate the
standard deviation of portfolios with
Table 6.8 shows investment and projected income in euros for Flanel’s new perfume factory.
Forecast cash flows and calculate NPV. The nominal cost of capital in euros is 11percent.

You own 500 acres of timberland, with young timber worth $40,000 if logged now. This
represents 1,000 cords of wood worth $40 per cord net of costs of cutting and hauling. A paper
company has offered to purchase your tract for $140,000. Should you accept the offer? You have
the following information: • You expect

See Full Questions And Answers at solutionrank.com

Marsha Jones, whom you met in the Chapter Mini-case, has bought a used Mercedes horse
transporter for her Connecticut estate. It cost $35,000. The object is to save on horse transporter
rentals. Marsha had been renting a transporter every other week for $200 per day plus $1.00 per
mile. Most of the trips are 40 or 50 m

One measure of the effective tax rate is the difference between the IRRs of pretax and after tax
cash flows, divided by the pretax IRR. Consider, for example, an investment I generating a
perpetual stream of pretax cash flows C. The pretax IRR is C/I, and the after-tax IRR is C(1 –
Tc)/I, where Tc is the statutory ta

Suppose that the standard deviation of returns from a typical share is about .40 (or 40 percent) a
year. The correlation between the returns of each pair of shares is about .3. a. Calculate the
variance and standard deviation of the returns on a portfolio that has equal investments in two
shares, three shares, and so

The following table shows estimates of the risk of two well-known British stocks during the five
years ending July 2001: a. What proportion of each stock’s risk was market risk, and what
proportion was unique risk? b. What is the variance of BP? What is the unique variance? c. What
is the confidence level on Brit

See Full Questions And Answers at solutionrank.com

you are given the following information for Lorelei Motorwerke. Note: 300,000 means 300,000
euros. (...)

United Pigpen is considering a proposal to manufacture high-protein hog feed. The project would
make use of an existing warehouse, which is currently rented out to a neighboring firm. The next
year’s rental charge on the warehouse is $100,000, and thereafter the rent is expected to grow
in line with inflation at 4 pe

M. Grandet has invested 60 percent of his money in share A and the remainder in share B. He
assesses their prospects as follows: a. What are the expected return and standard deviation of
returns on his portfolio? b. How would your answer change if the correlation coefficient was 0 or
_.5? c. Is M. Grandet’s port
Look at Table 9.2. What would the four countries’ betas be if the correlation coefficient for
each was 0.5? Do the calculation andexplain.

See Full Questions And Answers at solutionrank.com

Reliable Electric is considering a proposal to manufacture a new type of industrial electric motor
which would replace most of its existing product line. A research breakthrough has given
Reliable a two-year lead on its competitors. The project proposal is summarized in Table 6.7. a.
Read the notes to the table careful

Describe the real option in each of the following cases: a. Deutsche Metall postpones a major
plant expansion. The expansion has positive NPV on a discounted-cash-flow basis but top
management wants to get a better fix on product demand before proceeding. b. Western Telecom
commits to production of digital switching

In footnote 4 we noted that the minimum-risk portfolio contained an investment of 21.4 percent
in Reebok and 78.6 in Coca-Cola. Prove it.

Percival Hygiene has $10 million invested in long-term corporate bonds. This bond
portfolio’s expected annual rate of return is 9 percent, and the annual standard deviation is 10
percent. Amanda Reckon with, Percival’s financial adviser, recommends that Percival
consider investing in an index fund which closely tra

See Full Questions And Answers at solutionrank.com

Otobai’s staff has come up with the following revised estimates for the electric scooter
project: Conduct a sensitivity analysis. What are the principal uncertainties in theproject?

Lonesome Gulch Mines has a standard deviation of 42 percent per year and a beta of + .10.
Amalgamated Copper has a standard deviation of 31 percent a year and a beta of + .66. Explain
why Lonesome Gulch is the safer investment for a diversified investor.

Each of the following statements is dangerous or misleading. Explain why. a. A long-term

United States government bond is always absolutely safe. b. All investors should prefer stocks to
bonds because stocks offer higher long-run rates of return. c. The best practical forecast of future
rates of return on the stock

Look back at the calculation for Coca-Cola and Reebok in Section 8.1. Recalculate the expected
portfolio return and standard deviation for different values of x1 and x2, assuming the correlation
coefficient ρ12 = 0. Plot the range of possible combinations of expected return and standard
deviation as in Figure 8.4. Rep

See Full Questions And Answers at solutionrank.com

For what kinds of capital investment projects do you think Monte Carlo simulation would be
most useful? For example, can you think of some industries in which this technique would be
particularly attractive? Would it be more useful for large-scale investments than small ones?
Discuss.

Return to the start of Section 6.3, where we calculated the equivalent annual cost, in cents per
gallon, of producing reformulated gasoline in California. Capital investment was $400 million.
Suppose this amount can be depreciated for tax purposes on the 10-year MACRS schedule from
Table 6.4. The marginal tax rate, inc

Ms. Magna has thought of another possibility. She could abandon the venture entirely by selling
the plane at the end of the first year. Suppose that the piston-engine plane can be sold for
$150,000 and the turboprop can be sold for $500,000. a. In what circumstances would it pay for
Ms. Magna to sell either plane? b.

Compare typical compensation and incentive arrangements for (a) Top management, for
example, the CEO or CFO, and (b) Plant or division managers. What are the chief differences?
Can you explain them?

See Full Questions And Answers at solutionrank.com

“There may be some truth in these CAPM and APT theories, but last year some stocks did
much better than these theories predicted, and other stocks did much worse.” Is this a valid
criticism?

You are asked to value a large building in northern New Jersey. The valuation is needed for a
bankruptcy settlement. Here are the facts: • The settlement requires that the building’s
value equal the PV value of the net cash proceeds the railroad would receive if it cleared the
building and sold it for its highest a

Look again at your calculations for question 18 above. Suppose that technological change is
expected to reduce costs by 10 percent per year. There will be new machines in year 1 that cost
10 percent less to buy and operate than A and B. In year 2 there will be a second crop of new
machines incorporating a further 10 pe

Suppose all plant and division managers were paid only a fixed salary—no other incentives or
bonuses. a. Describe the agency problems that would appear in capital investment decisions. b.
How would tying the managers’ compensation to EVA alleviate these problems?

See Full Questions And Answers at solutionrank.com

“There’s upside risk and downside risk. Standard deviation doesn’t distinguish
between them.” Do you think the speaker has a fair point?
Lambeth Walk invests 60 percent of his funds in stock I and the balance in stock J. The standard
deviation of returns on I is 10 percent, and on J it is 20 percent. Calculate the variance of
portfolio returns, assuming a. The correlation between the returns is 1.0. b. The correlation is .5.
c. The correlation is 0.

Look back at the Vegetron electric mop project in Section 9.6. Assume that if tests fail and
Vegetron continues to go ahead with the project, the $1 million investment would generate only
$75,000 a year. Display Vegetron’s problem as a decision tree.

You own an unused gold mine that will cost $100,000 to reopen. If you open the mine, you
expect to be able to extract 1,000 ounces of gold a year for each of three years. After that, the
deposit will be exhausted. The gold price is currently $500 an ounce, and each year the price is
equally likely to rise or fall by $5

See Full Questions And Answers at solutionrank.com

Which of the 17 therbligs are classed as effective, and usually cannot be removed from the work
cycle?

Complete a flow process chart for a press operator: 1) Removes completed widget from press 2)
Feels widget edges for roughness 3) Walks to a work bench and gets file 4) Files rough edges on
widget 5) Uses compressed air to blow away filing 6) Walks back to press, places widget on
conveyor 7) Reaches for blank sh

What symbols are used in constructing the flow process chart?

What is meant by 'tight' tolerances?

See Full Questions And Answers at solutionrank.com

The Borstal Company has to choose between two machines that do the same job but have
different lives. The two machines have the following costs: These costs are expressed in real
terms. a. Suppose you are Borstal’s financial manager. If you had to buy one or the other
machine and rent it to the production manager

The Dorben Company is designing a cast-iron part whose strength T is a known function of the
carbon content C, where: T=2C2+¾C-C3+k. To maximize strength, what carbon content
should be specified?

How can you best handle a material?

How is the travel chart related to Mother's SLP?

See Full Questions And Answers at solutionrank.com

Compare and contrast operations analysis with the lean manufacturing approach.
Why is it necessary to construct process charts from direct observation as opposed to information
obtained from the foreman?

How many machines should be assigned to an operator for lowest cost operations when: a.
Loading and unloading time one machine, 1.41 minutes. b. Walking time to next facility, 0.08
minutes. c. Machine time (power feed), 4.34 minutes. d. Operator rate, $13.20 per hour. e.
Machine rate, $18.00 per hour.

Consider a worker standing on the ground lifting crates of vegetables (10 in. high and 10 in.
deep, 30 lbs) from the ground to the flat bed of the truck where another worker will move the
box and position it properly in the truck. Assume that the lift from the ground is fairly optimal,
but that the reach onto the truck

See Full Questions And Answers at solutionrank.com

The finish tolerance on the shaft in Figure 3-4 was changed from 0.004 inches to 0.008 inches.
How much cost improvement resulted from this change?

Why do costs vary little with distance in connection with automated guided vehicles?

The machining time per piece is 0.164 hours and the machine loading time is 0.038 hours. With
an Operator rate of $12.80 per hour and a machine rate of $14 per hour, calculate the optimum
number of machines for lowest cost per unit of output.