Finance Practice Midterm #1

Transcription

1 Finance Practice Midterm #1 1) Suppose that you have the opportunity to invest $50,000 in a new restaurant in South Bend. (FYI: Dr. HG Parsa of Ohio State University has done a study that shows that 59% of restaurants fail within the first three years!). a) Given the following data, what is your opportunity cost here? Explain. Asset Annual Return 5 year Government Bond 1.25% DJIA (Stocks) 7% Junk Bonds (CCC or below) 13% Note: CCC bonds have an average default rate of 27% b) Now, suppose that as a part owner, you are allowed to eat for free as often as you like. How does this change your calculation from (a)? 2) Suppose that Amtrak builds a new train line from Chicago to Los Angeles. Unfortunately, the train line passes through thousands of acres of cornfields in Iowa. When the train passes through the cornfields, it throws off sparks that destroy the corn. The corn farmers take Amtrak to court in an attempt to get the train line shut down. a) What would be the right outcome in this case? Explain. b) The Coase theorem states that as long as negotiation between the two parties involved is relative costless, the right outcome will result regardless of how the judge might rule. Explain. 3) Consider the following productivities: United States England Services 6 Units/hr. 3 Units/hr. Manufacturing 2 Units/hr. 6 Units/hr. a) Calculate the opportunity cost of services in the US and England b) Calculate the opportunity cost of manufacturing in the US and England. Who has the comparative advantage in services? c) Suppose that the average price of Services is $20 per unit and the average price of manufact6uring is $20. What trade pattern will emerge? What will wages be in England and the US? d) Suppose that the inflation rate in England is 3% while the inflation rate in the US is 5%. How is your answer in (c) affected

2 4) Suppose that you have the following demand and supply curve for sneakers: Q Q d s 400 3P 200 2P a) Solve for the equilibrium price and quantity. b) Calculate consumer expenditures on sneakers c) Calculate the elasticity of demand at the equilibrium found in (a) d) Would a 5% increase in price cause consumer expenditures to rise or fall? Explain. 5) Suppose that you have the following demand curve: Q 120 4P. 001I You know that the current market price is $10 and average income is $40,000. a) Calculate the market s consumer surplus. b) Calculate the market s total willingness to play. 6) Suppose that you have the following demand curve. Q 400 6P. 005I Q Represents quantity demanded, P represents price and I represents average income. You know that the current market price is $20 and average income is $20,000 a) Calculate current demand. b) Calculate the price elasticity of demand. c) Calculate the income elasticity of demand

3 7) Suppose that you are concerned about drug use in the US. You are interested in what the impact would be if authorities could be more effective at getting drugs off the streets. The DEA has estimated the following data: Elasticity of Demand for Cocaine: -.55 Elasticity of Supply: 1.0 Current Market Price Cocaine: $80 per gram Current Cocaine Sales (annual): 950M grams a) We are using a simply supply/demand framework: Q a bp d Qs c dp Use the data above to find the parameters a,b,c, and d. b) As a check of the estimated model, solve for the equilibrium price and quantity. c) Suppose that the DEA is able to seize 100M grams of cocaine and take it off the market. What will happen to the equilibrium price and quantity? d) How will cocaine revenues for drug dealers be affected? e) What happens to consumer surplus? 8) Suppose that you observed the following set of data: Average Business School tuition: $30,000 Average Salary for non-mba s: $50,000 per year Average MBA salary: $90,000 per year. The length of an MBA program is 2 years and is assumed that and MBA will have a working career of 20 years after graduation. Further, suppose that, instead of going to get an MBA, you could keep your current non-mba job and invest what you could have used to pay for tuition, risk free, at 4% per year. a) Is this set of data consistent with market equilibrium? Explain. b) If your answer to (a) is no, how will markets adjust?

4 9) Suppose that a busy restaurant charges $9 for its octopus appetizer. At this price, an average of 48 people order the dish each night. When it raises the price to $12, the number ordered per night falls to 42. a) Assuming that demand is linear, find the demand curve the restaurant faces. b) What price should the restaurant charge to maximize revenues? 10) Suppose that you are a cattle rancher. You are deciding when to take your cattle to market to sell. You currently have a herd of 100 cattle. Each cow currently weighs 650 pounds and is gaining 50 pounds per month. Your feed costs are $40 per month per cow. Cattle prices are currently $8 per pound, but have been falling at the rate of $0.10 per month. If you are maximizing profits, how many month from now should you sell your cows? 11) Suppose that you are a pizza shop. Your profits depend on your sales of pizza and beer. Specifically, your profits as a function of Pizza sales (P) and beer sales (B) is given by: 2 2 Profits P 140B 8P 12B 4PB Solve for the profit maximizing choices for gasoline and heating oil. 12) Suppose that your sales are a function of both price (P) and advertising expenses (E) given by Q 3,000 8p 25A 2 pa.5 p 3A 2 2 Solve for the combination of price and advertising that maximizes sales. 13) We need to enclose a field with a fence. We have 500 feet of fencing and a building is on one side and so won t need any fencing. Determine the dimensions of the field that will enclose the largest area. Building Field 14) Suppose that Apple is selling IPads in both the US and Europe. Sales in each country are a function of the level of advertising and given by

5 S 12 6A 1.2A 2 US US US S 8 2 A.2A 2 E E E Solve Apples maximization problem; maximize total sales across the two districts subject to a total advertising budget of $4M. How would a $1M increase in Apples advertising budget influence sales? 15) In the game blackjack, face cards are worth 10 points, aces are worth 1 or 11, and all other cards are worth their face value. You are dealt two cards with the objective of getting more points than the dealer. A Blackjack is 21. Assuming a fresh deck (i.e. no cards have been dealt), what are the odds of getting blackjack? 16) Assuming two decks of cards (again, assume a fresh deck), if the dealer is showing an ace, what are the odds that the dealer has blackjack? 17) Suppose that you are playing craps. If you roll the dice 10 times, what are the odds that 4 of your rolls come up with a total of seven? 18) Consider the following regression analysis of player performance measures and average winnings per tournament in the PGA (Professional Golf). a) First, let s consider driving distance (Note: The average driving distance is 287 yards with a variance of 68): W D Where W is average winnings and D is driving distance in yards. SUMMARY OUTPUT

6 Regression Statistics Multiple R 0.20 R Square 0.04 Adjusted R Square 0.03 Standard Error Observations Regression Residual Total Coefficients Standard Error t Stat Intercept Average Drive a) What would be the impact on a player s average winnings of a 20 yard increase in his average driving distance? What would be a 95% confidence interval for the impact of a 20 yard increase in a player s average drive? b) Calculate a forecast with a 95% confidence interval for a player with a 300 yard drive. c) How far must a player be able to drive the ball on average to expect to have positive earnings? Now, suppose that I altered the regression by taking the natural log of winnings. lnw D.

7 SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations Regression Residual Total Coefficients Standard Error t Stat Intercept Average Drive a) Now, what impact would a 20 yard increase in driving distance have on average winnings? b) Calculate forecast for average winnings for a player with an average drive of 300 yards. 19) Consider the following time series regression: P t Where P is total non-farm payrolls in the US and t is time in months. The data used is monthly data from Jan 1939 until August 2016 (t = 0 is Jan 1939). We have 931 observations (so, the average for time is 466 and the variance is 72,463) SUMMARY OUTPUT

8 Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations Regression Residual Total Coefficients Standard Error t Stat Intercept Time a) On average, how many jobs do we create per year in the US? b) Calculate a forecast for Non-farm payrolls for December 2016 ( t = 935) with a 95% confidence interval. Now, suppose that I added seasonal dummies for the first three quarters SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations 932 Regression Residual Total Coefficients Standard Error t Stat Intercept Time D D D a) Is there evidence for seasonality in employment in the US? b) Calculate a new forecast for Dec (don t worry about the Standard Dev.)

9 20) Suppose that I repeated the above analysis, but I converted payrolls to logs. Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations 932 Regression Residual Total Coefficients Standard Error t Stat Intercept Time D D D How does this change the analysis above?