Economics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN: 9781305506725
Author: James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher: Cengage Learning
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Chapter 21, Problem 4CQ
To determine
Principal agent problem.
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Chapter 21 Solutions
Economics: Private and Public Choice (MindTap Course List)
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- Describe the principal-agent problem between firm owners and managers. Make sure you identify the principal and the agent and discuss the information asymmetries and different goals of the two players.arrow_forwardYou have two roommates who invest in the stock market. a. One roommate says she buy shares only in companies that everyone believes will experience big increases in profits in the future. How do you suppose the price-earnings ratio of these companies compares to the price-earnings ratio of other companies? What might be the disadvantage of buying shares in these companies? b. Another roommate says she only buys shares in companies that are cheap, which she measures by low price-earnings ratios. How do you suppose the earnings prospects of these companies compare to those of other companies? What might be the disadvantage of buying shares in these companies?arrow_forwardDuring 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.arrow_forward
- Can the principal agent problem be avoidedarrow_forwardIn chapter 7, "Financial Markets," of the book Naked Economics, the author, Charles Wheelan, states, that, "...all financial instruments - no matter how complex the bells and whistles - are based on four simple needs." Which of the below is NOT of these "simple needs"? Raising Capital. Assumption of risk. Insuring Against Risk.arrow_forwardApple Corporation requires its top managers to own shares of stock in Apple equal in value to three times their annual salary. Explain what problem Apple is trying to solve with this requirement, and explain whether this requirement does indeed solve the problem.arrow_forward
- What happens to interest rates in the market if the stock brokerage commission declines? Explain the reason for your answer!arrow_forwardConsider two firms (a) Firm A has profits twice as large as Firm B's profits. The firms do not differ in any other way. Which firm's stock should you buy if Firm A's stock price is PA = $50 and Firm B's stock price is PB = $30? What would you expect to happen to stock prices in equilibrium? Explain your answer (b) Suppose stock prices are in equilibrium. Explain what happens to the stock prices of these two firms if the interest rates increase? (c) Suppose stock prices are in equilibrium. Does the Efficient Market Hypothesis suggest to %3D buy one stock or the other stock? Explain.arrow_forwardImagine you overhear two of your colleagues talking and one says to the other, "Companies should use investment entry modes whenever possible because they offer the greatest control over business operations." Do you agree or disagree with this statement? Explain. Are there times when other market entry modes offer greater control? Explain.arrow_forward
- In 350 words or less Explain how Random Walk Theory makes it difficult for investors to make short run decisions. Create an example to illustrate this difficulty.arrow_forwardA company has announced a profit, but why is the price of stock still falling? Is the market inefficient? Explain.arrow_forwardSuppose that you have bought a total of 3400 shares of stock of a particular company. You bought 1300 shares of stock at $17 per share, 1000 shares of stock at $12 per share, and the remaining shares at $22 per share. What is the average price you paid per share of stock? (please round your answer to 2 decimal places)arrow_forward
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