1. Suppose that a small firm observes that large firms borrow directly from capital markets at a rate of 5%. However, for this firm the search costs for finding a lender is 2%. A small lender looking to place their funds directly (and hoping to earn 5%) with this small firm would need to underwrite the borrowing, potentially secure an interest in collateral, and monitor its performance afterward. These activities would cost 2.5% on an annual basis. A financial intermediary can make the borrower and lender both better off if they:
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Lend below 7% and borrow above 2.5%
Lend above 7% and borrow at 4.5%
Lend below 7% and borrow below 2.5%
2. Jacob is a participant in JJ’s defined benefit plan. Jacob is 37 years old and earns $160,000. He has 4 years of service for purposes of the plan and has worked at the firm for 5 years. The plan provides a benefit of 1.5% for each year of participation. The plan has the least generous vesting schedule possible. Almost 70 percent of the accrued benefits are attributable to the fifteen equal owners, who have all been working at the company for decades. If Jacob were to leave today, what percent of his salary (as defined by the plan) could he expect to receive at normal retirement?
a. 3.6%. b. 4.8%. c. 6.0%. d. 6.4%.