The Lancer Leasing Company

The Lancer Leasing Company has agreed to lease a hydraulic trencher to the Chavez Excavation Company for 20 ,000 a year over the next eight years . Lease payments are to be made at the begining of each year Assuming that Lancer invests these payments at an annual rate of 9 percent , how much will it have accumulated by the end of the eighth year

Answer

The future value (A ) of an investment

growing at a rate r (compounding annually ) after n years is given as In this case a sum

of 20 ,000 is being invested at the beginning of every year , therefore , future value of such an investment will be Here ,

20 ,000 r 9 0 .09 A

Using the given values , the accumulated amount at the end of eighth year will be ,2 ) An investor currently has all of his wealth in Treasury bills . He is considering investing one-third of his funds in General Electric , whose beta is 1 .30 , with the remainder left in Treasury bills . The expected risk-free rate (Treasury bills ) is 6 percent and the market risk premium is 8 .8 percent . Determine the beta and the expected return on the proposed portfolio

Answer

Composition of the proposed portfolio is following

Fraction invested in GE i .e . XGE 1 /3

Fraction invested in Treasury bills i .e . XTB 2 /3 ?GE 1 .3 (given

Beta Treasury bills i .e ?TB 0 (as this is risk free security

Beta of a portfolio is weighted average of those of individual securities of the portfolio . Therefore ?portfolio XGE ?GE XTB ?TB (1 /3 1 .3 (2 /3 0 1 .3 /3 0 .43

Expected return of a security is given as its beta multiplied by risk premium plus the risk free rate . Therefore

Expected return of the GE stock i .e . RGE 6 1 .3 8 .8 6 11 .44 17 .44

Return of the Treasury bill i .e . RTB 6 (given ?RGE XTB ?RTB (1 /3 17 .44 (2 /3 6 5 .81 4 9 .81

3 ) The return expected from Project No .542 is 22 percent . The standard deviation of these returns is 11 percent . If returns from the project are normally distributed , what is the chance that the project will result in a rate of return above 33 percent ? What is the profitability that the project will result in losses (negative rates of return

Answer

Given 22 and 11

Value of a variable X is given as X - z ?3

4

5

6

7

Q

7

U

s

`

D

n ?f

j -

ng return above 33 , X 33

i .e . z (33 - 22 /11

i .e . z 1

The required probability will correspond to the area under normal distribution curve beyond z 1 i .e . from z 1 to z infinity . From normal distribution table , this area comes out to be 0 .5 - 0 .3413 0 .1587

Therefore , the desired probability is Pprofit 33 0 .1587 15 .87

Similarly

For the project...