Please help me answer these three questions.

Question 1

It is 2006 and you notice that there are a lot of television programs about people that ?flip? houses. That is, programs in which people buy houses, remodel them, and hope to sell them at a profit. You think that this sounds intriguing and consider buying a house to sell one year later.

Assume that this house costs $2M today. The house, after you remodel it, will take on one of five market values next year: $1.40M, $1.70M, $2M, $2.30M, or $2.60M. Assume that remodeling the house is costless.

1. a) Suppose you have $2M in cash and decide to buy the house. What is your percentage return for each of the five possible house values next year? Graph your percentage return on the y-axis versus the percentage change in the value of the house on the x-axis. Draw a straight line through the five points. Hint: this is a trivial case where your percentage return exactly equals the percentage change in the value of the property.
2. b) Suppose you only have $1.50M in cash. Your friend agrees to lend you the remaining $0.50M that you need, but only if you pay him back with 10 percent interest as soon as you sell the house one year later. You get the cash that is left over after selling the house and repaying your friend. Graph your percentage return on your personal $1.50M investment on the y-axis versus the percentage change in the value of the property on the x-axis. Draw a straight line through the five points.
3. c) Now suppose you only have $0.75M in cash. Your friend agrees to lend you the remaining $1.25M that you need, but only if you pay him back with 10 percent interest as soon as you sell the house one year later. You get the cash that is left over after selling the house and repaying your friend. Graph your percentage return on your personal $0.75M investment on the y-axis versus the percentage change in the value of the property on the x-axis. Draw a straight line through the five points.
4. d) Comment on the slopes of the lines from the previous three questions. Which scenario appears riskiest for your personal cash investment?
5. e) Stock returns are more risky when a firm has a higher percentage of debt on its balance sheet. Briefly comment on how this statement relates to your results.

Question 2

You are the financial manager of General Electric Company (symbol: GE) and are considering the purchase of an independent home appliance manufacturer. GE will benefit by not only receiving the net cash flows generated by this company, but also via synergies produced by having the companies combine forces. You want to figure out the maximum you are willing to pay for this manufacturing company.

GE has determined that the hypothetical cash flows generated by this purchase would be of similar riskiness to its own total asset cash flows. Therefore, GE will use its asset expected return to discount the future cash flows it expects to receive from the manufacturing company. Your challenge is to calculate GE?s asset expected return, which will be used as the independent manufacturer?s discount rate.

1. a) First, calculate GE?s equity beta. Go to Yahoo! Finance and click on ?Get Quotes? for GE. Click on ?Historical Prices? and download monthly GE price data from August. 1, 2012 to August 3, 2015. Do the same for the S&P500 (symbol: ^GSPC), our underlying proxy for the market return. Next, calculate monthly returns for each security using the equation

Finance 320 Problem Set 1 Due: Sept. 11, 2015 Question 1 It is 2006 and you notice that there are a lot of television programs about people that \"flip\" houses. That is, programs in which people buy houses, remodel them, and hope to sell them at a profit. You think that this sounds intriguing and consider buying a house to sell one year later. Assume that this house costs $2M today. The house, after you remodel it, will take on one of five market values next year: $1.40M, $1.70M, $2M, $2.30M, or $2.60M. Assume that remodeling the house is costless. a) Suppose you have $2M in cash and decide to buy the house. What is your percentage return for each of the five possible house values next year? Graph your percentage return on the y-axis versus the percentage change in the value of the house on the x-axis. Draw a straight line through the five points. Hint: this is a trivial case where your percentage return exactly equals the percentage change in the value of the property. b) Suppose you only have $1.50M in cash. Your friend agrees to lend you the remaining $0.50M that you need, but only if you pay him back with 10 percent interest as soon as you sell the house one year later. You get the cash that is left over after selling the house and repaying your friend. Graph your percentage return on your personal $1.50M investment on the y-axis versus the percentage change in the value of the property on the x-axis. Draw a straight line through the five points. c) Now suppose you only have $0.75M in cash. Your friend agrees to lend you the remaining $1.25M that you need, but only if you pay him back with 10 percent interest as soon as you sell the house one year later. You get the cash that is left over after selling the house and repaying your friend. Graph your percentage return on your personal $0.75M investment on the y-axis versus the percentage change in the value of the property on the x-axis. Draw a straight line through the five points. d) Comment on the slopes of the lines from the previous three questions. Which scenario appears riskiest for your personal cash investment? e) Stock returns are more risky when a firm has a higher percentage of debt on its balance sheet. Briefly comment on how this statement relates to your results. Question 2 You are the financial manager of General Electric Company (symbol: GE) and are considering the purchase of an independent home appliance manufacturer. GE will benefit by not only receiving the net cash flows generated by this company, but also via synergies produced by having the companies combine forces. You want to figure out the maximum you are willing to pay for this manufacturing company. GE has determined that the hypothetical cash flows generated by this purchase would be of similar riskiness to its own total asset cash flows. Therefore, GE will use its asset expected return to discount the future cash flows it expects to receive from the manufacturing company. Your challenge is to calculate GE's asset expected return, which will be used as the independent manufacturer's discount rate. a) First, calculate GE's equity beta. Go to Yahoo! Finance and click on \"Get Quotes\" for GE. Click on \"Historical Prices\" and download monthly GE price data from August. 1, 2012 to August 3, 2015. Do the same for the S&P500 (symbol: ^GSPC), our underlying proxy for the market return. Next, calculate monthly returns for each security using the equation = ( 1 ) 1 , where is the return in month t, and is the adjusted closing price in month t. When calculating returns, make sure your data are sorted so that time is in ascending order, not the default descending order. Convert all of your returns into excess returns ( ) by subtracting the monthly risk-free rate, which we will assume as 0.03/12. You will not have a return observation for the first month of your time series. Then, run a linear regression of GE excess returns (your Y variable) on S&P500 excess returns (your X variable). You can find \"Regression\" in Microsoft Excel in \"Data Analysis\" under the \"Data\" tab.1 If the X-variable coefficient is positive and statistically significant (t-statistic greater than 1.95), then we conclude (with 95% confidence) that if S&P500 returns are 1 percent higher, then GE returns are (Coefficient multiplied by 1 percent) higher. Report the X-variable coefficient along with its t-statistic. The X-variable coefficient is the equity beta for GE. This was derived by fitting data to the CAPM. b) Next, we need GE's market values of debt and equity. Go back to the GE page in Yahoo! Finance. The market value of equity is also known as \"market capitalization\" and can be found on the \"Summary\" page. 1 If \"Data Analysis\" does not appear, do the following: click \"File\