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1. King, Inc., a successful Midwest firm, is considering opening a branch office on the west coast. Under normal economic conditions, with a 35% probability of occurring, King can expect to earn a net income of $70,000 per year. In a mini-recession, at 20% probability, King will earn $20,000. In a severe recession, at a 20% probability, King will lose $15,000. There is also a slight probability (10%) that King will lose $300,000 if the expansion fails and the branch office must be closed. Should King open a branch office in California based on these assumptions?

2. Christensen & Assoc. is developing an asset financing plan. Christensen has $1,000,000 in current assets, of which 15% are permanent, and $700,000 in fixed assets. The current long-term rate is 9%, and the current short-term rate is 6.5%. Christensen's tax rate is 30%. a) Construct two financing plans-one conservative, with 80% of assets financed by long-term sources, and the other aggressive, with only 60% of assets financed by long-term sources. If Christensen's earnings before interest and taxes are $525,000, calculate net income under each alternative.

b) What are some of the risks associated with each plan?

c) If the yield curve is steeply inverted, which financing plan should Christensen choose?

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