Second mutual fund and t-bill


Task1. The president of Worldwide Gadgets would like to offer special, deeply discounted sale prices to worldwide most best and loyal customers under the following terms:

1. The prices will apply only to units bought in excess of the quantity normally bought by any given a customer.

2. The units purchased should be paid for in cash at the time of sale no credit terms to be provided.

3. The total quantity sold under these terms to all customers can’t exceed the excess capability of the firm.

4. The net profit of the firm must not be negatively affected.

5. The prices will be in effect for 10 days only.

Given these conditions, the special sale price must be set equivalent to the:

A. marginal cost of materials only.

B. Average variable cost of the materials only.

C. Marginal cost of each variable inputs.

D. Average cost of all variable inputs.

E. Sensitivity value of the variable costs.

Task2. Powell Plastics, Inc. (PP) currently has zero debt. Its earnings before interest and taxes (EBIT) are $80,000, and it is zero growth company. PP's current cost of equity is 10%, and its tax rate is 40%. The firm has 10,000 shares of common stock outstanding selling at a price per share of $48.00. PP is considering moving to a capital structure that is comprised of 70% equity and 30% debt, based on market values. The debt would have an interest rate of 8%. The new funds would be used to repurchase stock. It is estimated that the raise in risk resulting from the added leverage would cause the needed rate of return on equity to increase to 12%. If this plan were performed, what would be PP's new value of operations?

Task3. An investor has $50,000 in a risky mutual fund and $30,000 invested in t-bills with a return of 5%. The mutual fund has an expected return of 15% and a standard deviation of 25%. Using a second mutual fund with an expected return of 20% and standard deviation of 40% can you enhance the investors position by keeping the risk in the portfolio the same while raising the expected return and if so how much money must the investor put in the second mutual fund and the t-bill respectively.

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Financial Accounting: Second mutual fund and t-bill
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