Question.3048 - 1. You are running a company that is owned by stockholders. Your goal is to maximize shareholder value. Explain how each of the following events is likely to affect shareholder value and identify uncertainties related to their effects. a. Tariffs on the product you sell are reduced and you face more foreign competition. b. Tariffs on several of the major inputs you use to produce your product are reduced. c. New pollution control requirements are implemented. d. Inflation rates rise. e. A new technology is available that reduces the cost of production. 2. Use the concepts of marginal cost and marginal revenue to derive an optimal capital budget for Company X, which has identified 7 possible investment projects and determined its cost of capital as shown below. Hint: Rank the projects according to the rate of return, and continue to invest as long as the ROI is greater than the cost of capital Table A: Alternative Projects, Required Investments, and Expected Rate of ReturnProject Investment Required in Millions of DollarsExpected Rate of Return on Investment A 150 12% B 300 15% C 125 10% D 75 16% E 50 20% F 500 14% G 250 18%Table B: Cost of Capital by Amount RaisedBlock of Funds (in Millions)Amount of Funds in BlockCost of Capital for BlockFirst Block of Funds $500 10% Second Block of Funds $400 11% Third Block of Funds $300 12% Fourth Block of Funds $200 13% Fifth Block of Funds $100 14% Sixth Block of Funds $100 15%3. Compare the three investments below in terms of their riskiness. What is the best way to evaluate the riskiness of an investment given the information you have on them?Project Expected Return Standard Deviation A $100,000 $25,000 B $200,000 $40,000 C $50,000 $20,0004. Find the derivatives of each of the following functions, and their points of maximization or minimization if possible. a. TC = 1500 - 100 Q + 2Q 2 b. ATC = 1500/Q - 100 + 2Q c. MC = -100 +4Q d. Q = 550 – 0.5 P e. Profits = -1500 +1200 Q – 4Q 2
Answer Below:
Answer xx have x Tariffs xx the xxxxxxx you xxxx are xxxxxxx and xxx face xxxx foreign xxxxxxxxxxx If xxx tariffs xx the xxxxxxx we xxxx have xxxxxxx thus xxxxxx more xxxxxxx competition xxx profit xx that xxxxxxx would xxxx reduce xxx due xx this xxx income xxxxxxxxx to xxxxxxxxxxxx would xxx down xxxxxxx a xxxxxxx in xxx shareholder xxxxx s xxxxxx growth x Tariffs xx several xx the xxxxx inputs xxx use xx produce xxxx product xxx reduced xxx to xxxx the xxxxxxx cost xx goods xxxxxxxxxxxx would xxxx down xxxxxxx the xxxxxx margin xx increase xxx to xxxx the xxx income xxxxxxxxx to xxxxxxxxxxx would xxxxxxxx causing xx increase xx shareholder xxxxx s xxxxxx growth x New xxxxxxxxx control xxxxxxxxxxxx are xxxxxxxxxxx New xxxxxxxxx control xxxxxxxxxxx would xxxxxxxx cost xx curb xxxxxxxxx and xxx to xxxx the xxxxxx margin xxxxx go xxxx causing x reduction xx shareholder xxxxx s xxxxxx d xxxxxxxxx rates xxxx Increase xx inflation xxxxx increase xxx cost xx capital xxx this xx turn xxxxx reduce xxx value xx the xxxxxxx and xx the xxxx time xxx shareholder xxxxx s xxxxxx e x new xxxxxxxxxx is xxxxxxxxx that xxxxxxx the xxxx of xxxxxxxxxx This xxxx reduce xxx cost xx production xxx this xx turn xxxxx increase xxx profit xxxxxx causing xx increase xx shareholder xxxxx s xxxxxx growth xxxxx of xxx we xxxx all xxx projects xx per xxx Expected xxxx of xxxxxx with xxx company xxxxxx highest xxxxxx i x E xxxx rank xxx the xxxxxxx having xxxxxx return x e x gets xxxx Now xxxxxxx at xxx next xxxxx which xxxxx the xxxx of xxxxxxxx at xxxxx the xxxxxxx could xxxxx capital xx have xxxxxxx would xxxxx million xx cost xx capital xxx company xxxxx fund xxx investments xxxx has xxxx return xxxxxxxx and xxxx return xxxx than xx equal xx Therefore xxx company xxxxx choose xxxxxxx E xxxxxxx G xxxxxxx D xxx part xx project x After xxxx the xxxxxxx would xxxxx at xxxx of xxxxxxx to xxxx project x and xxxx of xxxxxxx F xxx at xxx end xx will xxxxx at xx fund xxxx of xxxxxxx F xxx in xxx ranking xxx next xxxxxxx is xxxxxxx A xxxxx needs xx investment xx million xxx provides x return xx which xx less xxxx the xxxx thus xxx company xxxx not xxxxxx in xxx further xxxxxxxx The xxxxxxxxxxx of xxxxxxxxx represents xxx ratio xx the xxxxxxxx deviation xx the xxxx and xx is x useful xxxxxxxxx for xxxxxxxxx the xxxxxx of xxxxxxxxx from xxx data xxxxxx to xxxxxxx even xx the xxxxx are xxxxxxxxxxx different xxxx each xxxxx The xxxxxxx for xx efficient xx variation xxxx the xxxxxxxxx world xxx coefficient xx variation xxxxxx you xx determine xxx much xxxxxxxxxx risk xxx are xxxxxxxx in xxxxxxxxxx to xxx amount xx return xxx can xxxxxx from xxxx investment xxxx we xxx say xxx lower xxx co xxxxxxxxx of xxxxxxxxx the xxxxxx your xxxxx return xxxxxxxx ProjectExpected xxxxxxxxxxxxxx DeviationCV x B x Thus xxxxx we xxxx calculated xx efficient xx variation xxx we xxx how xxx risk xx associated xxxx each xxxxxxxxxx to xx made xxxxx that x We xxxx Derivative xx this xxxxxxxx is x We xxxx Derivative xx the xxxxxxxx c xx have xxxxxxxxxx of xxx equation x We xxxx Or xxxxxxxxxx of xxx equation x We xxxx Derivative xx the xxxxxxxx For xxxx minimization xxx profit xxxxxxxxxxxx Or xx Or xxxx Answer xxxxx that xxxxx A xxxxxxxxxxx Projects xxxxxxxx Investments xxx Expected xxxx of xxxxxx Project xxxxxxxxxx Required xx Millions xx Dollars xxxxxxxx Rate xx Return xx Investment xxxx A x C x E x G xxxx Table x Cost xx Capital xx Amount xxxxxx Block xx Funds xxxxxx of xxxxx Cost xx Capital xxx Block xx Millions xx Block xxxxx Block xx Funds xxxxxx Block xx Funds xxxxx Block xx Funds xxxxxx Block xx Funds xxxxx Block xx Funds xxxxx Block xx Funds xxxx We xxxx First xx all xxxxxxx would xxxxx million xx cost xx capital xxx company xxxxx fund xxx investments xxxx has xxxx return xxxxxxxx and xxxx return xxxx than xx equal xx Therefor xxx company xxxxx choose xxxxxxx E xxxxxxx G xxxxxxx D xxx part xx project x nbsp xxxx After xxxx the xxxxxxx would xxxxx at xxxx of xxxxxxx to xxxx project x and xxxx of xxxxxxx F xxx at xxx end xx will xxxx at xx fund xxxx of xxxxxxx F xxxx nbsp xxxxx that xxxx Project xxxxxxxx Return xxxxxxxx Deviation xx A x C xxxx Hence xx can xxx that xxxxxxx C xxx highest xxxx per xxxx of xxxxxxMore Articles From Economics
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