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Henke Malfoy, CFA, is an analyst with a major manufacturing firm. Currently, he is evaluating the replacement of some production equipment. The old machine is still functional and could continue to serve in its current capacity for three more years. Tf the new equipment is purchased, the old equipment (which is fully depreciated) can be sold for $50,000. The new equipment will cost $400,000, including shipping and installation. If the new equipment is purchased, the company's revenues will increase by $175,000 and costs by $25,000 for each year of the equipment's 3-year life. There is no expected change in net working capital.
The new machine will be depreciated using a 3-year MACRS schedule (note: the 3-year MACRS schedule is 33.0% in the first year, 45% in the second year, 15% in the third year, and 7% in the fourth year). At the end of the life of the new equipment (i.e., in three years), Malfoy expects that it can be sold for $10,000. The firm has a marginal tax rate of 40%, and the cost of capital on this project is 20%. In calculation of tax liabilities, Malfoy assumes that the firm is profitable, so any losses on this project can be offset against profits elsewhere in the firm. Malfoy calculates a project NPV of-$62,574.
Suppose for this question only that Malfoy has forgotten to reflect a decrease in inventory that will result at the beginning of the project. The most likely effect on estimated project NPV of this error:

Yi Tang updates several economic parameters monthly for use by the analysts and the portfolio managers at her firm. If economic conditions warrant, she will update the parameters even more frequently. As a result of an economic slowdown, she is going through this process now.
The firm has been using an equity risk premium of 5.6%, found with historical estimates. Tang is going to use an estimate of the equity risk premium found with a macroeconomic model. By comparing the yields on nominal bonds and real bonds, she estimates the inflation rate to be 2.6%. She expects real domestic growth to be 3.0%. Tang does not expect a change in price/earnings ratios. The yield on the market index is 1.7% and the expected risk-free rate of return is 2.7%.
Elizabeth Trotter, one of the firm's portfolio Managers, asks Tang about the effects of survivorship bias on estimates of the equity risk premium. Trotter asks, 'Which method is most susceptible to this bias, historical estimates, Gordon growth model estimates, or survey estimates?'
Tang wishes to estimate the required rate of return for Northeast Electric (NE) using the Capital Asset Pricing Model (CAPM) and the Fama-French three factor model. She is using the following information to accomplish this:
* The risk-free rate of return is 2.7%.

Mary Andrews and Drew McClure are economists for Gasden Econometrics. Gasden provides economic consulting and forecasting services for governments, corporations and small businesses. Andrews and McClure are currently consulting for the developing country of Wakulla, which is considering imposing new regulations on its businesses.
Due to increases in industrial production in the country, the demand for electricity has increased. Unfortunately the cost of electricity has increased as well, and the Wakullian government is considering regulating the electrical utility industry by limiting the amount producers can charge. The price limits would be established so that the utilities can set their own prices as long as they do not earn a return on invested capital that is higher than the average Wakullian business.
The Wakullian government has also proposed stiffer environmental regulations on its firms because the level of air quality has declined in its largest cities. Andrews advises that this regulation is likely to increase production costs that will burden smaller businesses more than larger businesses, and thus can adversely affect competition within an industry. The higher production cost from the environmental regulation will ultimately be borne by consumers, she asserts.
One of the concerns of the Wakullian government is that previous regulation of the economy has been ineffective. For example, when the automobile industry was required to increase the fuel efficiency of passenger vehicles, they increased the weight of some vehicles so more could be classified as trucks, instead of passenger vehicles. The trucks were not subject to the regulation and as a result, fuel efficiency actually declined in the country due to the heavier weight of trucks. McClure comments that the regulation should have been written so that the regulation would be more effective.
McClure gives another example of an ineffective regulation from the automobile industry. When airbags were required in automobiles, consumers started wearing their seat belt less often and driving at higher speeds because the airbags gave them a feeling of greater safety. Consequently, driving fatalities and injuries did not decline as much as expected.
Some regulation, Andrews states, is limited in effectiveness when the regulators are chosen from the industry that is regulated. For example, Andrews states that, due to the level of scientific knowledge needed, many regulatory bodies for the pharmaceutical industry are dominated by former drug company executives and scientists. She states that, according to the share-the-gains, share-the-pains theory, regulatory decisions tend to favor the drug industry because of the close relationship between the industry and the regulator.
McClure adds that another example of regulatory ineffectiveness is when telephone companies go before their regulatory bodies to ask for rate increases. He states ihat according to the capture hypothesis, telephone companies will have greater economic resources and more at stake than individual consumers. As a result, the regulatory decisions tend to favor the telephone industry.

General Investments is considering the purchase of a significant stake in Pacific Computer Components (PCC). Although PCC has stable production output, the company is located in a developing country with an uncertain economic environment. Since the monetary environment is particularly worrisome. General has decided to approach the valuation of PCC from a free cash flow model using real growth rates. In real rate analysis, General uses a modified build-up method for calculating the required real return, specifically:
required real return = country real rate + industry adjustment +
company adjustment
Elias Sando, CFA, an analyst with General, estimates the following information for PCC:
Domestic inflation rate = 8.738%
Nominal growth rate = 12.000%
Real country return = 3.000%
Industry adjustmen = 3.000%
Company adjustment = 2.000%

Michelle Norris, CFA, manages assets for individual investors in the United States as well as in other countries. Norris limits the scope of her practice to equity securities traded on U .S . stock exchanges. Her partner, John Witkowski, handles any requests for international securities. Recently, one of Norris's wealthiest clients suffered a substantial decline in the value of his international portfolio. Worried that his U .S . allocation might suffer the same fate, he has asked Norris to implement a hedge on his portfolio. Norris has agreed to her client's request and is currently in the process of evaluating several futures contracts. Her primary interest is in a futures contract on a broad equity index that will expire 240 days from today. The closing price as of yesterday, January 17, for the equity index was 1,050. The expected dividends from the index yield 2% (continuously compounded annual rate). The effective annual risk-free rate is 4.0811%, and the term structure is flat. Norris decides that this equity index futures contract is the appropriate hedge for her client's portfolio and enters into the contract.
Upon entering into the contract, Norris makes the following comment to her client:
'You should note that since we have taken a short position in the futures contract, the price we will receive for selling the equity index in 240 days will be reduced by the convenience yield associated with having a long position in the underlying asset. If there were no cash flows associated with the underlying asset, the price would be higher. Additionally, you should note that if we had entered into a forward contract with the same terms, the contract price would most likely have been lower but we would have increased the credit risk exposure of the portfolio.'
Sixty days after entering into the futures contract, the equity index reached a level of 1,015. The futures contract that Norris purchased is now trading on the Chicago Mercantile Exchange for a price of 1,035. Interest rates have not changed. After performing some calculations, Norris calls her client to let him know of an arbitrage opportunity related to his futures position. Over the phone, Norris makes the following comments to her client:
'We have an excellent opportunity to earn a riskless profit by engaging in arbitrage using the equity index, risk-free assets, and futures contracts. My recommended strategy is as follows: We should sell the equity index short, buy the futures contract, and pay any dividends occurring over the life of the contract. By pursuing this strategy, we can generate profits for your portfolio without incurring any risk.'
If the expected growth rate in dividends for stocks increases by 75 basis points, which of the following would benefit the most? An investor who: