1. Define the following terms, using graphs or equations to illustrate your answers whereverfeasible:a) Portfolio; feasible set; efficient portfolio; efficient frontierb) Indifference curve; optimal portfolio c) Capital Asset Pricing Model (CAPM); Capital Market Line (CML) d) Characteristic line; beta coefficient,e) Arbitrage Pricing Theory (APT) (Brigham, & Ehrhardt, 2014)2. An analyst has modeled the stock of Crisp Trucking using a two-factor APT model. The risk-free rate is 6%, the expected return on the first factor (r1) is 12%, and the expected return on the second factor (r2) is 8%. If bi1 = 0.7 and bi2 = 0.9, what is Crisp’s required return?3. Excel Speadsheet: a. Using the financial statements shown below for Lan & Chen Technologies, calculatenet operating working capital, total net operating capital, net operating profitafter taxes, free cash flow, and return on invested capital for 2010. (Hint: Startwith the partial model in the file and report all dollar figures in thousands to reduceclutter.)b. Assume there were 15 million shares outstanding at the end of 2010, the year-endclosing stock price was $65 per share, and the after-tax cost of capital was 8%.Calculate EVA and MVA for 2010.Lan & Chen Technologies: Income Statements for Year Ending December 31(Thousands of Dollars)2010 2009Sales $945,000 $900,000Expenses excluding depreciation and amortization 812,700 774,000EBITDA $132,300 $126,000Depreciation and amortization 33,100 31,500EBIT $ 99,200 $ 94,500Interest expense 10,470 8,600EBT $ 88,730 $ 85,900Taxes (40%) 35,492 34,360Net income $ 53,238 $ 51,540Common dividends $ 43,300 $ 41,230Addition to retained earnings $ 9,938 $ 10,3102010 2009AssetsCash and cash equivalents $ 47,250 $ 45,000Short-term investments 3,800 3,600Accounts receivable 283,500 270,000Inventories 141,750 135,000Total current assets $476,300 $453,600Net fixed assets 330,750 315,000Total assets $807,050 $768,600Liabilities and equityAccounts payable $ 94,500 $ 90,000Accruals 47,250 45,000Notes payable 26,262 9,000Total current liabilities $168,012 $144,000Long-term debt 94,500 90,000Total liabilities $262,512 $234,000Common stock 444,600 444,600Retained earnings 99,938 90,000Total common equity $544,538 $534,600Total liabilities and equity $807,050 $768,600
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