Filmore Enterprises

FILMORE ENTERPRISES - Questions

1. Calculate the expected rate of return for each of the financial assets listed in Table 1, and complete the expected return row for Table 1. Based solely on the expected returns, which of the investments appears the best and worst? Discuss the impact on returns for general changes in the economy for CPC, Morely, and EAT.

The best return would be CPC. The worst return would be T-Bills. CPC and EAT have direct correlation with the economy, while Morley has an inverse correlation with the Economy. Basically as the economy moves from a recession to a booming market, CPC and EAT possible returns increase as well. With that being said, as the economy strengths Morley’s returns decrease.

2. Considering U.S. Treasuries are guaranteed by the U.S. government, answer the following questions.

a. Is the Tbill return independent of the state of the economy? Briefly explain. Do Tbills promise completely risk free returns? Explain.

The T-Bill return is independent of the state of the economy because it maintains a constant 4.5% return regardless of the economies state. However T-bills only promise completely risk-free returns as long as the government does not default. You must consider the default risk involved with any security.

b. Why do Tbond returns vary? Why are Tbond returns high when the market returns are low?

T-Bond's returns vary because their rates are inversely correlated with the market. For example, if the market is in a recession T-Bond rates are higher because more people demand T-bonds.

c. How would returns on corporate bonds that Filmore Enterprises might issue compare with those for T-bonds? Would your answer be dependent on the potential bond rating of Fillmore Enterprises?

The corporate bonds that Fillmore enterprise might issue carries a higher default risk than T-bonds, because they are not back by the U.S government. If you were to invest in corporate bonds, you would first check the company’s credit rating...