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Rates of Returns of Stocks Stocks may be categorized by sectors. Go to the book’s website to obtain the data file 11_3_17 using the file format of your choice for the version of the text you are using. The data represent the one-year rate of return (in percent) for a sample of consumer cyclical stocks and industrial stocks for the period December, 2013, through November, 2014. Note: Consumer cyclical stocks include names such as Starbucks and Home Depot. Industrial stocks include names such as 3M and FedEx.

(a) Draw side-by-side boxplots of one-year rate of return by sector. Does there appear to be a difference in the one-year rate of return for these two sectors?

(b) Explain why the methods of this section may be used to test whether the mean rate of return for the two sectors differ.

(c) Test whether the mean one-year rate of return for consumer cyclical stocks is different from that of industrial stocks at the  level of significance.

(d) Construct a 95% confidence interval for the mean difference in rate of return between industrial stocks and consumer cyclical stocks. Interpret the interval.

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Financial statement information is presented below for Hillary Corporation, a producer of mountain climbing gear. The company expects sales to increase by about 20% in 2004.

Hillary’s management is considering automating much of the company’s production process. The automation would result in about half of the company’s cost of goods sold being fixed. Currently, most of these costs vary in proportion to sales, as shown in the financial numbers presented above.

Required

A. Assume that half ($231 million) of Hillary’s cost of goods sold in 2003 is fixed and that the other half increases in proportion to sales, an increase of 20%. Compute the company’s expected cost of goods sold.

B. Using the same assumptions as part A, compute expected net income for 2004. Assume that income taxes are 35% of pretax income. Round to the nearest million.

C. Compare your results with those presented above, which assume that cost of goods sold varies in proportion to sales. What effect would the automation have on Hillary’s profitability? What effect would it have on the company’s risk? Explain your answer.

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Objective-Task Budgeting Your firm operates in a market of 200,000 people. By your estimates, you need an install base (people that are willing to use your product after trial) of approximately 40,000 people. Historically, you know that 40% of the people that try your product become regular users. After speaking with some advertising executives, they explain that it takes roughly 10 advertisements on local television stations to get 60% of the viewers to try a product they see on television in this market. These same executives have quoted a Cost Per Point (CPP) of $100, where they define a Gross Rating Point as 1% of the population seeing 1 advertisement. 4a) How much will it cost to achieve your objective?

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Speelman v. Pascal

FACTS In 1952, the estate of George Bernard Shaw granted to Gabriel Pascal Enterprises, Limited, the exclusive rights to produce a musical play and a motion picture based on Shaw’s play Pygmalion. The agreement contained a provision terminating the license if Gabriel Pascal Enterprises did not arrange for well-known composers, such as Lerner and Loewe, to write the musical and produce it within a specified period of time. George Pascal, owner of 98 percent of Gabriel Pascal Enterprises’ stock, attempted to meet these requirements but died in July 1954 before negotiations had been completed. In February 1954, however, while the license had two years yet to run, Pascal had sent a letter to Kingman, his executive secretary, granting to her certain percentages of his share of the profits from the expected stage and screen productions of Pygmalion. Subsequently, Pascal’s estate arranged for the writing and production of the highly successful My Fair Lady, based on Shaw’s Pygmalion. Kingman then sued to enforce Pascal’s gift assignment of the future royalties. The trial court entered judgment for Kingman.

DECISION Judgment for Kingman affirmed.

OPINION Assignments of rights to sums that are expected to become due to the assignor are enforceable. To make a gift of such an assignment, the donor need only demonstrate a present intent to transfer irrevocably his right to the donee. Although at the time of the delivery of the letter there was no musical play or motion picture in existence, Pascal’s letter was intended to transfer irrevocably by assignment a percentage of the royalties from the future productions to Kingman. Therefore, the assignment is enforceable as a valid gift.

INTERPRETATION A gratuitous assignment becomes irrevocable upon the assignor’s making an effective delivery of the assignment to the assignee.

CRITICAL THINKING QUESTION Should the law enforce assignments of contractual rights not in existence at the time of the assignment? Explain.

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