Fin 360 Homework 4-6 Solutions

Fin 360 Homework 4-6 Solutions - Fin 360 Fall 2009 Homework...

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Fin 360 – Fall 2009 Homework Assignments 4 through 6 Solutions Assignment #4 Chapter 12 1) Expansionary (i.e., looser) monetary policy to lower interest rates would help to stimulate investment and expenditures on consumer durables. Expansionary fiscal policy (i.e., lower taxes, higher government spending, increased welfare transfers) would directly stimulate aggregate demand. 3) A depreciating dollar makes imported cars more expensive and American cars cheaper to foreign consumers. This should benefit the U.S. auto industry. 5) a. The robotics process entails higher fixed costs and lower variable (labor) costs. Therefore, this firm will perform better in a boom and worse in a recession. For example, costs will rise less rapidly than revenue when sales volume expands during a boom. b. Because its profits are more sensitive to the business cycle, the robotics firm will have the higher beta. 8) c. General Autos. Pharmaceutical purchases are less discretionary than automobile purchases. d. Friendly Airlines. Travel expenditures are more sensitive to the business cycle than movie consumption. Chapter 13 1. P = $2.10/0.11 = $19.09 2. (a) and (b)
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a. g k D P 1 0 - = g 16 . 0 2 $ 50 $ - = % 12 12 . 0 50 $ 2 $ 16 . 0 g = = - = b. 18 . 18 $ 05 . 0 16 . 0 2 $ g k D P 1 0 = - = - = The price falls in response to the more pessimistic forecast of dividend growth. The forecast for current earnings, however, is unchanged. Therefore, the P/E ratio decreases. The lower P/E ratio is evidence of the diminished optimism concerning the firm's growth prospects. 5) c. g = ROE × b = 0.20 × 0.30 = 0.06 = 6.0% D 1 = $2(1 – b) = $2(1 – 0.30) = $1.40 33 . 23 $ 06 . 0 12 . 0 40 . 1 $ g k D P 1 0 = - = - = P/E = $23.33/$2 = 11.67 d. PVGO = P 0 k E 0 = $23.33 – 66 . 6 $ 12 . 0 00 . 2 $ = e. g = ROE × b = 0.20 × 0.20 = = 0.04 = 4.0% D 1 = $2(1 – b) = $2(1 – 0.20) = $1.60 00 . 20 $ 04 . 0 12 . 0 60
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This note was uploaded on 01/12/2010 for the course FIN FIN 360 taught by Professor Shimmin during the Fall '09 term at University of Dayton.

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Fin 360 Homework 4-6 Solutions - Fin 360 Fall 2009 Homework...

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