Essentials of Economics (MindTap Course List)
8th Edition
ISBN: 9781337091992
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Chapter 19, Problem 7PA
To determine
When the shareholder will
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During the early 2000's, energy giant Enron was shaken by financial mismanagement and scandal. It filed for bankruptcy and, after losing virtually all of it's customers, went out of business. What would have been the extent of stockholders' liabilities? Explain.
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True or False?
What will happen if two assets are earning the same expected return, but one is riskier than the other?
Chapter 19 Solutions
Essentials of Economics (MindTap Course List)
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- You are thinking about purchasing an elegant shirt by mail. Shirts Galore offer an unlimited return policy while Over the Tops will refund 80 percent of the value of the shirt if you return it. Which of the following statements is most likely to be true? Select one: Shirts Galore's shirts are more likely to be high quality, while Over the Top's shirts are less likely to be high quality a. b. Both companies' shirts are more likely to be high quality С. Shirts Galore's shirts are less likely to be high quality, while Over the Top's shirts are more likely to be high quality d. neither company's shirts are more likely to be high qualityarrow_forwardHow would each of the following actions be expected to affect shareholder wealth?a. Southern Company adopts fuel-switching technology at its largest power plants.b. Ford Motor Company pays $2.5 billion for Jaguar.c. General Motors offers large rebates to stimulate sales of its automobiles.d. Rising interest rates cause the required returns of shareholders to increase.e. Import restrictions are placed on the French competitors of Napa wineries.f. There is a sudden drop in the expected future rate of inflation.g. A new, labor-saving machine is purchased by Wonder Bread and results in the layoff of 300 employees.arrow_forwardWhat will happen if two assets are earning the same expected return, but one is more risky than the other?arrow_forward
- Your bank account pays an interest rate of 4 percent. You are considering buying a share of stock in XYZ Corporation for $110. After 1, 2, and 3 years, it will pay a dividend of $5. You expect to sell the stock after 3 years for $120. Is XYZ a good investment?arrow_forwardWhy might a company’s stock price fall after record earnings are announced? Conversely, why might the stock price increase after losses are disclosed?arrow_forwardTwo restaurants are on the same block. One has been opened for 10 years and is a thriving business. The other one has been open for only a year. They both want to expand. When the two owners go to the local bank looking for a loan, which one is likely to get a lower interest rate? Explain in terms of the risk-return principle.arrow_forward
- What are the typical types of risk faced by a firmarrow_forwardSuppose you have just inherited $10,500 and are considering different options for investing the money to maximize your return. If you are risk-neutral (that is, neither seek out or shy away from risk), which of the following options should you choose to maximize your expected return? A. Hold the money in cash and earn zero return. B. Invest the money in a corporate bond, with a stated return of 4%, but there is a chance of 9% the company could go bankrupt. C. Put the money in an interest-bearing checking account, which earns 3%. The FDIC insures the account against bank failure. D. Loan the money to one of your friends' roommates, Mike, at an agreed upon interest rate of 7%, but you believe there is a 5% chance that Mike will leave town without repaying you.arrow_forwardDividends paid to policy holders on participating policies are treated by the IRS as a return of premium and are not subject to income tax. Dividends to shareholders in a stock company, however, are taxable income to the recipients. Do you believe this difference in treatment is justified? Why or why not?arrow_forward
- Robert Shiller and Eugene Fama who were jointly awarded the Nobel Prize in Economics in 2013 for their work on asset prices strongly disagree on whether I. stocks can be over or under priced. II. investors are rational. III. asset bubbles exist. Multiple Choice Only II I, II, and III Only I I and II Only IIIarrow_forwardSuppose that all investors have the disposition effect. A new stock has just been issued at a price of $50, so all investors in this stock purchased the stock today. A year from now the stock will be taken over, for a price of $60 or $40 depending on the news that comes out over the year. The stock will pay no dividends. Investors will sell the stock whenever the price goes up by more than 10%. a. Suppose good news comes out in 6 months (implying the takeover offer will be $60). What equilibrium price will the stock trade for after the news comes out, that is, the price that equates supply and demand? b. Assume that you are the only investor that does not suffer from the disposition effect and your trades are small enough to not affect prices. Without knowing what will actually transpire, what trading strategy would you instruct your broker to follow?arrow_forwardHow 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 relationshiparrow_forward
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