You are evaluating a farm with a return on assets of 10%, a debt-to-equity ratio of 1, interest rate on debt of 5%, a tax rate of 20%, and consumption of 50%.

a. (4 points) Find the growth rate.

b. (8 points) Now assume that the return on assets of 10% is the expected return and the standard deviation of r is .06. Find the growth rate and standard deviation of growth.

c. (8 points) Now assume that you also have a variable rate loan and the 5% interest rate is only the expected rate. Interest also has a standard deviation of .03. Find the growth rate and standard deviation of growth.

1. True or False If you take a smaller risk, your profits will more likely be smaller.

2. True or False Achieving less flexibility in a business enables the manager to respond more quickly as new information becomes available.

3. What is one advantage and possible disadvantage to diversification in agriculture?