Assignment:
1. In the context of the shareholder weather-maximization model of a firm, what is the expected impact of each of the following events on the value of the firm? Briefly explain why.
a. New trade barriers are put in the place that reduce the amount of foreign competition (assume the firm sells only in the firm's home country and never had plans to expand to foreign countries)
b. A new source of the firm's inputs is discovered, reducing the costs of the firm's raw materials
2. Briefly describe why the principle-agent problem would exist between a manager and a salesperson working for the manager. How might the issue be minimized (what sort of policies/incentives could be implemented)?
3. Suppose you have the following projects you could undertake and certain funding sources available. The expected rate of return for the projects and the interest rates for the funding sources are listed below. Which projects would you do and what would the total amount of borrowed money be?
Briefly explain your answers.
|
Project
|
Expected Rate of Return
|
Investment Required (in millions)
|
Funds Available
|
Interest rate/marginal cost
|
|
A
|
9.5%
|
$50
|
First $100
|
9%
|
|
B
|
15%
|
$75
|
Next $50
|
10%
|
|
C
|
12%
|
$50
|
Next $100
|
11.5%
|
|
D
|
13%
|
$100
|
Next $50
|
13%
|
|
E
|
17%
|
$25
|
Next $100
|
15%
|
4. In the below supply and demand diagrams, illustrate what happens in the market for gasoline automobiles if:
a. There is a government tax rebate, effectively lowering the price of electric cars.
b. The price of steel increases because of trade war with China.
5. Consider a company considering a project that will last three years.
a. If the project will return $20 million a year for the next three years and the opportunity cost interest rate is 10%, what is the worth of these cash flow?
b. Suppose instead the project will return $10 million at the end of the first year, $20 million at the end of the second year and $30 million at the end of the third year. No other cash flows will be generated. If the opportunity cost interest rate is 10%, what is the worth of these cash flows?
c. Why are the values of the cash flows different even though there is a total of $60 million being generated in both projects?
6. Ballreich's has observed that its quantity of sales in a small town increase from 10,000 bags per week to 12,000 bags per week when it increases advertising expenditures from $50,000 to $55,000. It has also noticed in the same market that the number of sales increases from 12,000 to 13,000 bags per week when its competitors raise their prices from $2.50 per bag to $2.75 per bag.
a. Calculate the advertising elasticity of demand
b. Calculate the cross-price elasticity of demand
c. If Ballreich's knows that its price elasticity of demand is -0.7, by what percent would it need to change its price to maintain the same quantity of sales if it decreased its advertising from $55,000 to $45,000?
7. In 2015, SCAT (Seneca County Area Transportation) charges $2 each way for a trip inside Tiffin city limits (that's actual data). Assume it provides 150 such trips per day on average. When it charged $1.50 each way, it provided 180 such trips. SCAT also knows that the income elasticity of demand for its service is -1.5.
a. Suppose that a recession is predicted for 2016 that will decrease the income of Tiffin citizens by 5%. What is the predicted level of ridership per day in 2016?
b. Suppose that SCAT decides to raise its prices to $2.50 in 2017 and income remains the same as in 2016. What is the predicted level of ridership in 2017?