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Risk Analysis

In managerial economics, risk refers to a situation where there are different outcomes and the probabilities of these outcomes cannot be measured with complete certainty. Risk incorporates the measurement of probability. When engaging in investment projects, there are three different types of risks. The first is stand-alone risk, which is the risk of a project in isolation and can be seen as the first level of risk analysis¹. Within-firm risk is the risk of a project in terms of a firm’s portfolio of investment projects¹. The project’s impact on the variability of the firm’s total cash flow is assessed. Market risk (or systematic risk) is the risk of a project from a shareholder’s perspective and pertains to factors that impact the entire market¹.

In risk analysis, there are three ways to measure probability. The first is theoretical where there is no need for observation because the variables are estimated from a theoretical point of view. Another way to measure probability is the empirical approach which is estimation from a historical perspective¹. Subjective probability estimation is another measure that is done when dealing with new occurrences¹.

Risk analysis is heavily employed in the financial sector. Individuals who want to make an investment need to look at the potential negative outcomes that may occur. Governments will use risk analysis for projects or activities that would create large changes in specific sectors, such as agreeing to new trade partners or building new highways. Risk analysis is used to verify the opportunity cost of a project or activity and then determine the immediate impacts, as well as the economic indicators that may appear over time.  



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Elasticity of Demand and Taxation..

Suppose a local coffee shop knows that its elasticity of demand is 0.2. Would you recommend that the coffee shop increase its price by 20%? Why or why not? Suppose a cigarette manufacturer knows that its elasticity of demand is 1.3. Would you recommend that they raise price by 20%? Why or why not? Would government be b

determining the probability of success at a game show

In the final round of a TV game show, contestants have a chance to increase their current winnings of $1million to $2million. If they are wrong, their prize is decreased to $500,000. A contestant thinks his guess will be right 50% of the time. Should he play? What is the lowest probability of a correct guess that would make play

Best and Worst Estimate

You are planning the manufacture of a new product. Your project estimate results in a net projectCost of US $400,000 and 224 days. In addition, your analysis has come up with the following (keep in mind that the real world will probably have many more risks than the five listed here): a.) A 5% probability of a stakeholder

Indifference Curves, Utility Maximizing Conditions, and Demand Curves

1. Using Indifference Curve and Budget Line analysis, graphically demonstrate the equilibrium of a consumer who is maximizing utility. Briefly explain. 2. Using Indifference Curve and Budget Line analysis, graphically demonstrate how you can derive a demand curve. Briefly explain. Note: In the above questions, assume a bun

Calculating HHI in an Unconcentrated Market

You are the manager in a market composed of 12 firms, each of which has a 8.33 percent market share. In addition, each firm has a strong financial position and is located within a 100-mile radius of its competitors. Instruction: Round to the nearest penny (two decimal places). Calculate the premerger Herfindahl-Hirschman i

Trigger Strategies and Collusive Level of Advertising

At a time when demand for ready-to-eat cereal was stagnant, a spokesperson for the cereal maker Kellogg's was quoted as saying, " . . . for the past several years, our individual company growth has come out of the other fellow's hide." Kellogg's has been producing cereal since 1906 and continues to implement strategies that make

Risk aversion by executives

Have major corporations been unwilling to adapt to the times and meet competition head on? Are corporate executives better described as risk-averse managers than entrepreneurs willing to take a chance?

Variable Rates of Return

Looking for 4-5 paragraphs with references to explain, "why investors demand higher expected rates of return on stocks with more variable rates of return."

Calculate the betas and required rate of returns.

You have observed the following returns over time. Assume that the risk free rate is 6% and the market risk premium is 5%. Year Stock X Stock Y Market 2006 14% 13% 12% 2007 19% 7% 10% 2008 -16% -5% -12% 2009 3% 1% 1% 2010 2

Three Factor Model

Suppose stock returns can be explained by the following three factor model: Ri = Rf + B1(F1) + B2(F2) - B3(F3) Assume there is no firm-specific risk. The information for each stock is presented here: Beta1 (B1) Beta2 (B2) Beta3 (B3) Stock A 1.45 0.80

Managerial Economics: Six Steps to Decision Making

The Six Steps to Decision Making are: 1. Define the Problem 2. Determine the Objective 3. Explore the Alternatives 4. Predict the Consequences 5. Make a Choice 6. Perform Sensitivity Analysis. The following questions need to be answered: (a) Mr. and Mrs. A recently bought a house, the very first one they viewed.

Estimate the current value of stocks in the given cases.

Problem 1 Suppose a dividend of $1.25 was paid. The stock has a required rate of return of 11.2% and investors expect the dividend to grow at a constant rate of 10%. Complete parts (a) through (e) below. a) Compute D0, D1, D2, D3 and D7. b) Compute the present value of the dividends for t = 3 years. c) Compute the current ma

Incorporation of Risk into the Decision-Making Process

Your company has asked you to analyze two mutually exclusive projects for the coming year. Project A will have an initial outlay of $7,200. Project B will cost $6,800. Both projects will last for three years. On the basis of the information regarding the risk involved in the two projects, you came up with the following probab

Finance Queries

A firm has an expected dividend next year of $1.20 per share, a 4 percent growth rate of dividends, and a required return of 10 percent. The value of a share of the firm's common stock is A) $120 B) $10 C) $12 D) $20 Sterling Corporation has a beta of 1.2. If the market return is 14 percent and the risk-fre

estimate WACC

No. 1 Based on its growth prospects, a private investor values a local bakery at $750,000. She believes that cost savings having a present value of $50,000. can be achieved by changing staffing levels and store hours. Based on recent empirical studies, she believes that appropriate liquidity discount is 20%. A recen

What is the suitable investment option, stock or bond?

An investment fund is considering two long term investments. Which is the best investment assuming equal risks and a 10 year investment? Bond : Coupon bond with a face value of $100,000 that can be purchased today for $70,000 that matures in 10 years. Its annual coupon rate is 8% paid quarterly. Stock: A stock whose s

Controlled Debt Levels

1. How would a more controlled access to credit by firms and individuals have reduced the over leveraging of businesses and individuals and decreased the likelihood of the recent economic downturn? 2. Is the long term survival of the United States economy at risk because of the United States government's level of debt and t

Business and Financial Risk of Assets

Understanding Business and Financial Risk The two firms have the same level of total assets and expected net operating profit after tax (NOPAT) But they differ on two critical characteristics: Total Debt and standard deviation of expected NOPAT. The information below outlines some of the Company A and Company B characteristics

Determining Optimal Capital Structure

Determining Optimal Structure SBC Corp. Has capital structure of 30% debt and 70% equity. The firm current Beta is 1.25, but management wants to understand SBC market risk without effect of leverage. If SBC corp. has a 45% tax rate, what is the unlevered beta., A. 0.86 B. 0.96 C. 1.11 D. 1.01 DOM company has current c

Copy Makers Inc (CMI)

Copy Makers Inc (CMI) has just received a credit request from a new customer who wants to purchase a copying machine. As input to its decision of whether to grant credit, CMI has made the following estimates and assumptions: - If CMI denies the customer credit, there is a 20 percent chance that the customer will buy the copy

Portfolio Theory on Risk

Assume that the risk free rate of return is 3% and the market portfolio on the capital market line (CML) has an expected return of 11% and a standard deviation of 14%. How should you invest $100 000 if you are only willing to accept a total portfolio risk of 8%?

Cost of capital, discount rate and true NPV

The total market value of the common stock of the Okefenokee Real Estate Company is $6 million, and the total value of its debt is $4 million. The treasurer estimates that the beta of the stock is currently 1.5 and that the expected risk premium on the market is 6%. The Treasury bill rate is 4%. Assume for simplicity that Okefen

Toby Amberville's Manhattan Café, Inc

Hello, I have been struggling with a problem that deals with the selection of investment projects. Any help with this matter would be greatly appreciated. Thanks you! Please see the attached word doc. for details.

Cash Flow Analysis

** Please see the attached file for the complete problem description ** Hello, I have been having difficulties with a problem relating to cash flow analysis. Your assistance in the matter would be greatly appreciated. Dunder-Mifflin, Inc. is analyzing the potential profitability of three printing jobs put up for bid by th

Managerial economics in the restaurant business.

A local restaurateur who had been running a profitable business for many years recently purchased a three-way liquor license. This license gives the owner the legal right to sell beer, wine, spirits in her restaurant. The cost of obtaining the 3-way liquor license was about $75,000, since only 300 licenses are issued by the st