BUSI 620 Module 7 QUESTIONS FOR CRITICAL THINKING 7

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Questions for Critical Thinking 7

Salvatore Chapter 14:

Discussion Questions: 12 and 15.

Question 12: What is the rationale behind the minimax regret rule? What re some less formal and precise methods of dealing with ncertainty? When are these useful?

Question 15: How does the adverse selection problem arise in the credit card market? Ho do credit card companies reduce the adverse selection problem that they face? To what complaint does this give rise

Problems: spreadsheet problems 1 and 2.

Problem 1: An investor has two investment opportunities., each involving an outlay of $10,000. The present value of possible outcomes and their perspective probabilities are.

Investment I

Investment II

Outcome

(a) Calculate the expected value of each investment.

(b) Draw a bar chart for each investment.

(d) Determine which of the two investments the investor should choose.

Problem 2: Using Table C-1 in the Excel attachment above for the standard normal distribution. (a) that 68.26 percent of the area under the standard normal curve is found within plus or minus 1 standard deviation of the mean, 95.44 percent within+/- 2a, and 99.74 percent within +/- 3a (b)the probability that profit will fall between $500 and $650 for project A in Section 14-2 of the text (with expected value of $500 and standard deviation $ 70.71); (c) the probability that profit for project A will fall between $300 and $650, below $300, and above $650.

Note:

Spreadsheet problem 1: Use table 14-4 as reference.

Spreadsheet problem 2: Use tables 14-5 and 14-6 as reference.

Froeb et al. Chapter 17:

Individual problems: 17–1 and 17–4.

17-1: You are the manager for of global opportunities for a U.S. manufacturer, who is considering expanding to Asia. Your market research has identified the market potential in Malaysia, Philippines, and Singapore as described as next. The product sells for $10 and has a unit cost of $8. If you can enter only one market, and the cost of entering the market (regardless of which market you select) is $250,000, should you enter one of these markets? If so, which one? If you enter, what is your expected profit?

Success Level

Big

Mediocore

Failure

Mylaysia

Philippines

Probability

17-4: Your company has a customer who is shutting down a production line, and it’s your responsibility to dispose of the extrusion machine. The company could keep it in inventory for a possible future product and estimates that the reservations value is $250,000. Your dealings on second hand market lead you to believe that there is a 0.4 chance a random buyer will pay $300,000, a 0.25 chance the buyer will pay $350,000, a 0.1 chance the buyer will pay $400,000, and a 0.25 chance it will not sell. If you must commit to a posted price, what price maximizes profits?

Froeb et al. Chapter 19:

Individual problems: 19–5 and 19–6.

19-5: Soft selling occurs when a buyer is skeptical of usefulness of a product and the seller offers to set a price that depends on realized value. For example, suppose you’re trying to sell a company a new accounting sysem that will reduce costs by 10%. Instead of naming a price, you offer to give them the product in exchange for 50% of their cost savings. Describe the information asymmetry, the adverse selection problem, and why soft selling is a successful signal.

19-6: You need to hire some new employees to staff your start-up venture. You know that potential employees are distributed throughout the population as follows, but you can’t distinguish among them:

Employee Value

P19-6: Need to consider the adverse selection.

Note: 19–6: Consider with and without the adverse selection.Salvatore Chapter 15:

Discussion Questions: 7.

Question 7: (a) When can the NPV and the IRR methods of evaluating investment projects provide contradictory results? (b) How can this arise? (c) Which method should then be used? Why?

Problems: 8, 10, and spreadsheet problem 1.

Problem 8: John Piderit, the general manager f the Western Tool Company, is considering introducing some new tools to the company’s product line. The top management of the firm has identified three types of tools (referred to as projects A, B,and C). The various divisions of the firm have provided the data given in the following table on these three possible projects. The company has a limited apital budget of $2.4 million for the coming year. (a) Which project(s) would the firm undertake if it used the NPV investment criterion? (b) Is theis the correct decision? Why?

Problem 10: The MacBurger Company, a chain of fast food restaurants, expects to earn $200 million after tzxes for the current year. The company has a policy of paying out half of its net after-tax income of common stoc. A share of the common stoc of the company currently sells for eight times the current earnings. Mangement and outside analysts expect the growth rate of earnings and dividends for the growth rate of earnings and dividends for the company to be 7.5 percent per year. Calcuate the cost of equity capital to the firm.

Spreadsheet Problem 1:

The benefits and costs of a investment project (the purchase of a piece of machinery( are those given in the attached table. In Excel, calculate net revenue, or therevenue from the investment minus the costs; the present value coefficient for every year; and the present value of the net value of the net revenue. Add together column G to get the net present value of the project. Should the firm purchase machine?

Note: P8: Remember the firm has a limited capital budget of $2.4 million for the coming year.In other words, the firm faces the capital rationing and should use the profitability index as its investment criterion (pp. 654–655).

P10: Use the dividend valuation model (pp. 657–658). “A share of the common stock of the company currently sells for eight times current dividends.”

Submit this assignment by 11:59 p.m. (ET) on Sunday of Module/Week 7.