1. ) Consider the following investments and their expected returns and standard deviations of expected returns:

Investment Expected Return Standard Deviation

1 10% 10%

2 11% 10%

3 9% 9%

4 11% 9%

If you a risk averse investor, which investment would he or she prefer from each of the following pairs? a. 1 and 2

b. 2 and 4

c. 3 and 4

d. 1 and 4

2.) Consider the following common stocks and their return characteristics:

Stock Expected Return Standard Deviation Security Beta

1 10% 5% 1.00

2 8% 5% 1.20

3 10% 6% 0.80

Which stock would a risk averse investor prefer between:

a. 1 and 2?

b. 1 and 3?

c. 2 and 3?

3.) The Gearing Company has provided you with the following information regarding their operating and financing costs:

Price per unit = $50

Variable cost per unit = $30

Fixed operating cost = $100,000

Fixed financing cost = $50,000

a. Calculate its degree of operating leverage at 10,000 units sold.

b. Calculate its degree of financial leverage at 10,000 units sold.

c. Calculate its degree of total leverage at 10,000 units sold.

d. If there is a 1% increase in units sold, what do you expect to be the change in operating cash flows?

e. If there is a 3% decrease in units sold, what do you expect to be the change in cash flows to owners?

4. The Jonhaux Company produces a product that has a contribution per unit of $40. Fixed operating costs are $140,000. The Jonhaux Company currently has $10 million of bonds outstanding with a coupon rate of 5%.

a. What is the current break-even number of units for Jonhaux considering all fixed costs?

b. The board of Jonhaux is considering a proposal to issue $1 million additional bonds, with aa coupon rate of 6%. How would this proposed financing affect the break-even point?

c. If 20,000 units are produced and sold, what is the degree of operating leverage, the degree of financial leverage, and the degree of total leverage under the current and proposed financial structures?

Answer the following and show your solution!