Economic rents* True or false?
- a. A firm that earns the
opportunity cost of capital is earning economic rents. - b. A firm that invests in positive-
NPV ventures expects to earn economic rents. - c.
Financial managers should try to identify areas where their firms can earn economic rents, because it is there that positive-NPV projects are likely to be found. - d. Economic rent is the equivalent annual cost of operating capital equipment.
a)
To discuss: Whether items are true or false on the bases of economic rents.
Explanation of Solution
When a firm earns the opportunity cost of capital is not comes under the earning economic rents because economic rents are profits which will be more than to cover the cost of capital.
Person X views that it earning opportunity cost of capital is earning economic rents is false.
b)
To discuss: Whether items are true or false on the bases of economic rents.
Explanation of Solution
Given a firm which invests in positive net present value ventures expects to earn economic rents.
Person X views that it is true, whenever a firm expects to invest in a positive-NPV projects to earn economic rents.
c)
To discuss: Whether items are true or false on the bases of economic rents.
Explanation of Solution
Financial managers seeks to identify the areas where firms can earn economic rents.
Person X views that, it is true, firm’s financial manager tries to identify the areas where there is an economic rents because there should be positive net present value.
d)
To discuss: Whether items are true or false on the bases of economic rents.
Explanation of Solution
Given, economic rent is equivalent to annual cost of operating capital equipment.
Person X views that it is false, economic rents are earned by companies, when it has a special competitive advantage over its competitors.
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Chapter 11 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
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