1) State and explain hedging principle. How can this principle be used in management of working capital?
2) There are 3 main sources of unsecured short-term credit other than accrued wages and taxes. Write down and describe the distinctive characteristics of each. What is meant by net working capital?
3) (Cost of trade credit) compute effective cost of given trade credit terms when payment is made on net due date. Now suppose a 30 day month and 360 day year. Use approximate cost of credit formula
a) 4/10, net 60
b) 3/15, net 30
c) 4/15, net 75
d) 2/10, net 45
4) Let us suppose that CAPM suppositions are all satisfied. Research analysts at your securities firm have identified 4 well-diversified investment funds that have no unique risk. Characteristics of funds are as given:
Fund Name Expected Return Beta
Alpha 34% 1.2
Beta 40% 1.5
Gamma 48% 1.7
Delta 58% 2.4
i) Three of the funds are accurately priced, and one of the funds is mispriced. Determine the investment fund which is being mispriced by market?
ii) Is expected return of mispriced fund too high, too low, or exactly right, given its beta?