Chapter 21 Assignment

Jill took $50,000 that she had in savings and started her own business. If left in investments she would have earned $5,000 this year. Jill also left a job that paid her $70,000 a year and plans on paying herself $40,000. Materials and other labor costs will be $80,000. The company is located in a building that Jill owns. She could have rented the building out for $40,000 but plans on charging the company only the insurance and mortage payment of $20,000. What do the accounting and economic costs equal?

Accounting costs = $140,000; Economic costs = $195,000 (The economic cost includes the accounting cost ($140,000) plus the implicit cost of net forgone wages ($70,000-$40,000) plus foregone interest earnings ($5,000), plus net foregone rental earnings ($40,000-$20,000).

If financial markets are efficient, which of the following is true?

All public information is rapidly reflected in stock prices, so there no profit opportunities that can be forecast.

Suppose that the nominal interest rate in Japan is only 5.0 percent, while the comparable rate in the United States is 7.0 percent. Japan's rate of inflation is 2.0 percent while the U.S inflation rate is 6.0 percent. Which economy has the higher real interest rate?

Japan. (The real interest rate is the nominal interest rate minus the inflation rate.) Japan: 5.0-2.0=3.0 US: 7.0-6.0=1.0

Which of the following is true regarding the differences between common stock and preferred stock?

Owners of preferred stock generally must receive at least a certain amount of dividends in each period before the owners of common stock can receive any dividends.

Economic rent is defined as

a payment for the use of a resources above its opportunity cost.

What is the present value of $200 received one year from now if the interest rate is 4%? Suppose that your discount rate rises to 5 percent. What is the present value of the payment to be received?

$192 ($200/(1+4%)=192.31 ($200/(1+5%)=190.48

A business organization that is owned by many Business organizations that are easy to form Corporations are subject to ___, but sole proprietorships and partnerships ___ double taxation.

corporation. are proprietorships and partnerships. double taxation, do not face

Making stock trades based on "inside information"

is illegal.

An individual leaves a college faculty, where she was earning $70,000 a year, to begin a new venture. She invests her savings of $42,000, which were earning 6 percent annually. She then spends $25,000 renting office equipment, hires two students at $18,000 a year each, rents office space for $10,000, and has other variable expenses of $38,000. At the end of the year, her revenues are $250,000. Her accounting profit is $__.

141,000 Accounting profits =total revenues ($250,000) -total explicit costs of all inputs ($109,000=25,000+38,000+(2x18,000)+10,000) Economic profits =total revenues-total opportunity cost of all inputs used - (explicit + implicit costs). $250,000-($109,000+$72,520)=$68,450

After graduation, you face a choice. One option is to work for a multinational consulting firm and earn a starting salary (benefits included) of $60,000. The other option is to use $7,000 in savings to start your own consulting firm. You could earn an interesting return of 7 percent on your savings. You choose to start your own consulting firm. At the end of the first year, you add up all of your expenses and revenues. Your total includes $14,000 in rent, $900 in office supplies, $18,000 for office staff, and $4,000 in telephone expenses. Your explicit costs are $__.

36,900 (14,000+900+18,000+4,000=36,900) 60,490 60,000+(7,000)(.07)=60,490

The PE ratio measures

the stock price divided by the earnings per share

If the closing price of a stock traded on a particular day is $46 per share, and the dividend paid is $2.84 per share

the yield is 6.2% $2.84/$46=6.2%

According to the random walk theory of stock market pricing,

there are no predictable trends in stock prices.

All of the following are advantages of proprietorships except:

unlimited liability (The proprietor faces unlimited liability for the debts of the firm.)

An investor wishes to own a part of a company and desires preferential treatment in the distribution of dividends. The investor should purchase

preferred stock.

An important difference between common stock and preferred stock is that

preferred stockholders are entitled to their dividends before common stockholders.

A firm can obtain funds for investing by

selling stocks, selling bonds, reinvesting profits. (All of the above.)

Income of a partnership is taxed only once as personal income, while the dividend paid out by a corporation is

subject to double taxation: once as corporate profit and once as income of shareholders.

Economic rent is

the amount paid for a resources over and above its opportunity cost.

The real rate of interest is

the nominal rate of interest minus the expected rate of inflation.