Modified True or False: State whether each statement is true or false. If the statement is false, briefly explain why it is so, and then restate it to make it true. A firm that is breaking even, or earning a zero level of profit, is one that is earning exactly a normal rate of return, which implies that new investors are not attracted, but current ones are not running away either.
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Modified True or False: State whether each statement is true or false. If the statement is false, briefly explain why it is so, and then restate it to make it true.
- A firm that is breaking even, or earning a zero level of profit, is one that is earning exactly a normal
rate of return , which implies that new investors are not attracted, but current ones are not running away either.
Step by step
Solved in 2 steps
- Consider a new business that invests $20 million into a plant to manufacture loaves of bread. The market for bread is say around 100 million loaves and the new firm expects that it will be able to obtain a market share of around 5%. At that level of production, the total cost of production is $10 million. Let us say that it targets a 20% return on its investment. What should the price of a loaf of bread be? Use the principle of target rate of return pricing. If the mark-up rate is 10% what will the full-cost price be?QUESTION 20 You borrow $10,000 at an interest rate of 5% to open Movies Galore, a DVD rental store. You will earn an economic profit if the return on your investment is between 0 and 5%. the return on your investment is 5%. the return on your investment is greater than 5%. the return on your investment is 10% or greater.Hua Xing runs a lawn care service. Buying an additional riding lawn mower will cost $3,000 but would allow her firm to earn $1,000 of additional revenue each year for the next four years. She expects marginal efficiency of capital to be at least 10%. Which statement is an accurate description of this investment opportunity? a) Hua Xing should make the investment because turning $3,000 into $4,000 provides a rate of return of 33%. b) Hua Xing should not make the investment because it has a negative net present value. c) Hua Xing should not make the investment because it provides only a 5.16% return on investment. Od) Hua Xing should make the investment because the internal rate of return exceeds 10%.
- 7. Microsoft P= $83.80 Earnings per share (EPS)=$4.05 Price Earnings Ratio (P/E ratio) = Rate of return = 8. Apple P=$178.85 EPS= $10.45 P/E ratio = Rate of return = 9. Based on the rate of return, would you buy Apple or Microsoft ? 10. Based only the rate of return, would you buy Microsoft ( based on problem # 7) or the following bond? PB=$350, Annual Interest Payment = $25Question 2. Consider the financing decision of a new investment opportunity for the four firms. The new investment opportunity yields a return of Rs. 1.2 at the end of the period with an initial investment of Rs. 1 in the beginning of the period. Assume the rate of interest is zero and the investors are competitive. The types of the firms are T1, T2, T3 and T4. Each firm has an existing asset to generate a fixed returns plus a random part Z. The random variable Z follows a Bernoulli distribution as Z= 1.5 or -1.5 with equal probability. The prior belief about the firms type and their fixed returns are given by T1: 0.3 P(TI) = 0.01 T2: 1.5 P(T2)= 0.45 T3: 20 P(T3) = 0.09 T4: 1.6 P(T4) = 0.45 (Note that given the fixed returns any firm say T1 has the total cash flow at the end of the period is 0.30+Z+1.2 if it undertakes the investment; or 0.30+Z if it does not undertake the new investment) 2 Each firm decides whether to finance the new investment with either debt or equity or to pass…Suppose the discount rate is 8%, the expected growth rate of the firms profit is 5%, and the firm is expected to continue forever. If the current profit is $40,000, what is the value of the firm?
- Question An incumbent firm Pilly has a product that works well but has the possibility of causing side-effects to users. Both Pilly and an upstart firm Smirck are having the opportunity to develop a new product without the side effects. The following table shows the expected net return (after considering R&D costs, probability of success in product development, and future profits) for each firm under different scenarios. Smirck Invest Smirck Not Invest Pilly: $2.4 m Smirck: -$0.1 m. Pilly Invest Pilly: $4.9 m Smirck: $0 Pilly Not Invest Pilly: $3 m Smirck: $0.4 m Pilly: $5 m Smirck: $0 Assume that the two firms simultaneously choose whether to invest or not. What is the Nash Equilibrium of this game (that is, the action choices of the two firms in the Nash Equilibrium)? Would your answer be different if Pilly is the first mover and commits to its choice before Smirck makes its response (that is, a sequential-move game)? Equilibrium in the simultaneous-move game (No need for…How would you describe the relationship between a risky investment and the return on that investment (think stocks or retirement accounts)? a casual or limited relationship there is no relationship between the level of risk and the return you get on your investment a direct or positively correlated relationship an inverse or negatively correlated relationshipLyft launched its IPO on April 1st 2019 with a share price of $72. Before the IPO, Lyft’s board of directors was likely trying to decide how to compensate CEO Logan Green to provide an incentive for him to increase the firm’s performance and share price after it went public. Let’s say the board was considering two possibilities such that they were deciding between providing one million dollars worth of shares of the firm stock at $72 per share or one million dollars worth of call options with a strike price of $72 and a maturity and vesting date one year after the IPO. To keep things simple, let’s say CEO Logan Green can choose between providing two levels of effort: regular effort or high effort. He has been exerting regular effort all along. He could switch to high effort which would be much more costly for him as he would have to work even longer hours, but the extra effort would likely result in better performance for the firm. The goal of the board’s incentive compensation is to…
- An investment club has set a goal of earning 15% on the money it invests in stocks. The members are considering purchasing three possible stocks, with their cost per share (in dollars) and their projected growth per share (in dollars) summarized in the following table. (Let x = computer shares, y = utility shares, and z = retail shares.) Stocks Computer (x) Utility (y) Retail (z) Cost/share 30 44 26 Growth/share 6.00 6.00 2.40 (a) If they have $392,000 to invest, how many shares of each stock should they buy to meet their goal? (If there are infinitely many solutions, express your answers in terms of z as in Example 3.) (x, y, z) = ? (b) If they buy 700 shares of retail stock, how many shares of the other stocks should they buy? computer ? shares utility ? shares What if they buy 1400 shares of retail stock? computer ? shares utility ? shares (c) What is the minimum number of shares of computer stock they should buy?? sharesWhat is the…Quick answer please If you are currently a worker earning $60,000 per year but are considering becoming an entrepreneur. You will not switch unless you earn an accounting profit that is on average at least as great as your current Salary. You look into opening a small grocery store. Suppose that the store has annual cost of $150,000 for labor, $60,000 for rent and $30,000 for equipment. There is one-half probability that revenues will be $20,000 and a half probability that revenue will be $420,000 a. WHat is your accounting and economic profit?The objective of a publicly traded company is to make profit for its owners i.e. shareholders. However, there are millions of AIDS victims in this world. Most of these victims are from destitute countries, like African nations. It would be irrational for us to think that these people could afford this medicine at an existing market price. The world organizations, such as WHO (world health organization), provide with assistance by subsidizing AIDS related medicine. However, this is not enough as many people are dying every day. Many argue that this medicine should be free as it is the only way a victim's life could be prolonged or saved. GlaxcoSmithKline already allows license for generic drug production to countries, like South Africa. Should our government be involved in controlling the price of this drug? Or, should thegovernment force Glaxco to share the key knowledge of this product with its competitors (price becomes competitive)? Explain why or why not?