Mini Case Write-Up No.1: Chapter 6 Barney Smith Inc.

Mini Case Write-up No.1: Chapter 6 Barney Smith Inc.

Team No.3: Shan Li & Yuchen Zhang

Professor Karen C. Denning

Managerial Finance FIN 6501 81

February 25th 2014

Fairleigh Dickinson University

Executive summary

In this mini-case, I‘m a student which major is finance, and I landed a job in Barney Smith Inc. Now my first job is invest $100,000 dollars for a client. The client plans to start at the end of 1 year, which means I should hold it for 1 year. 

There are three different companies, Alta Industries is an electronics firm; Repo Men Inc. collects past-due debts; and American Foam manufactures mattresses and various other foam products. I have Stand-Alone risk in this situation. In that table, if a company has a high standard deviation (σ), it is a riskier investment than other companies when held alone. Which company has a high expected rate of return (r), which means this company has a high return. The coefficient of variation (CV) shows the risk per unit of return, and it provides a more meaningful basis for comparison than standard deviation (σ) when the expected returns on two alternatives are different. Also when a stock with a high standard deviation (σ), will tend to have a high beta (b).

In this table, the standard deviation (σ) of T-Bills is "0", which means T-Bills has a low risk. No matter recession and boom, the expected return are also 8%.

Financial Theory

Answer Questions

a. What are investment returns? What is the return on an investment that costs $1,000 and is sold after 1 year for $1,100?

Investment returns is the changing in value of the investment over a given period of time.

One way to express an investment's return is in dollar terms.

Dollar return=Amount to return - Amount invested=$1100-$1000=$100

Rate of return = Dollar return / Amount invested = 100/1000 = 10%

b. (1) Why is the T-bill’s return independent of the state of the economy? Do T-bills promise a completely...