Assume you have been asked to help Mr. Agirich determine the optimal leverage fo
ID: 2720990 • Letter: A
Question
Assume you have been asked to help Mr. Agirich determine the optimal leverage for his firm. Mr. Agirich provides you with the following probability distribution for ra and you determine that his level of risk aversion is 2. Assume that i is 10%, and t=15%. Calculate the optimal leverage, expected re, the standard deviation of re and the coefficient of variation of re.
ra
Probability
0
0.05
0.05
0.30
0.12
0.30
0.19
0.30
0.24
0.05
What is the expected rate of return to assets?
A. 12%
B. 0.33
C. 6.65%
D. 10.76%
E. None of the above
What is the standard deviation of the rate of return to assets?
A. 12%
B. 0.33
C. 6.65%
D. 10.76%
E. None of the above
What is the optimal leverage?
A. 12%
B. 0.33
C. 6.65%
D. 10.76%
E. None of the above
What is the expected rate of return to equity?
A. .33
B. 7.5%
C. 0.698
D. 10.76%
E. None of the above
What is the standard deviation of the rate of return to equity?
A. .33
B. 7.5%
C. 0.698
D. 10.76%
E. None of the above
What is the coefficient of variation for the rate of return to equity?
A. .33
B. 7.5%
C. 0.698
D. 10.76%
E. None of the above
Unused credit (credit reserves) has no value because it isn't being used for investments.
a)True
b)False
Which of the following methods does not help reduce production risks?
a)Invest in excess machinery capacity
b)Diversify crops and/or business
c)Buy disease resistant seed varieties
d)Sell crops to a farmer's market
e)Select stable enterprises
Which of the following methods does not help reduce marketing risks?
a)Know your competitors
b)Prepare a marketing plan
c)Stockpile production inputs
d)Integrate vertically to insure a market or form a marketing alliance
e)Recognize comparative marketing advantage
Which of the following method does not help reduce risk in financial decisions?
a)Expand markets for your product
b)Develop a realistic financial plan
c)Use fixed-interest rate loans
d)Improve record keeping system to increase credit availability
e)Invest in less risky enterprises
ra
Probability
0
0.05
0.05
0.30
0.12
0.30
0.19
0.30
0.24
0.05
Explanation / Answer
1)expected return on assets=sum of (ra*probability)
=(0*0.05)+(0.05*0.3)+(0.12*0.3)+(0.19*.3)+(.24*0.05)=12%
2)mean of Ra= average(0,0.05,0.12,0.19,0.24)=0.12
variance=0.05*(0-0.12)^2+0.3*(0.05-0.12)^2+0.3*(0.12-.12)^2+0.3*(.19-.12)^2+0.05*(.24-.12)^2
=0.00438
std=variance^0.5=6.65%
Unused credit (credit reserves) has no value because it isn't being used for investments. (True)
4)option D
5)Option C
6)option A
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.