Question 1

If the corporation had cash on hand of $25,000 before raising any capital for the investment and the financial market rate is 9%.How much will the current shareholders earn.?

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The answer of If the corporation had cash on hand...

Question 2

Suppose that the market interest rate falls to 5%.What is the maximum possible consumption in period 1 if the individual takes on the optimal set of investment projects?
D.
Period 1 consumption is $1,620 + $2,400 + $910 = $4,930

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The answer of Suppose that the market interest rate falls...

Question 3

An individual has income of $15,000 in period 0 and $20,000 in period 1.An investment opportunity that costs $10,000 in period 0 is worth $11,500 in period 1.The market interest rate is 8%.What is the maximum possible consumption in period 0 if the individual consumes $26,000 in period 1?

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The answer of An individual has income of $15,000 in...

Question 4

Diagrams illustrating the consumption choices for a corporation show the two period trade-off as originating in the northwest quadrant,or (-X,Y),because:

Accepted Answer

The two-period trade-off originates in the northwest quadrant because corporations, unlike individuals, have no initial consumption endowment. They must allocate their resources between present and future periods to maximize their utility. This creates a budget constraint that defines the feasible consumption choices for the corporation.

Question 5

Graph and explain the investment choice the corporation should make.(Hint: Determine the NPV.)

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The answer of Graph and explain the investment choice the...

Question 6

The financial market rate is 5%.Graph and explain the investment choice the corporation should make.(Hint: Determine the NPV.)NPV = -42,000 + (46,900/1.05)= -

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The answer of The financial market rate is 5%.Graph and...

Question 7

Shareholders of corporations generally do not vote on every investment decision but depend on managers to maximize value by:

Accepted Answer

Following the NPV (Net Present Value) rule to choose investments is the best choice. This method takes into account the time value of money and compares the present value of the expected cash flows from an investment to the initial cost of that investment. The investment with the highest positive NPV should be chosen as it will increase the value of the company for shareholders.

Question 8

If the corporation had cash on hand of $25,000 before raising any capital for the investment and the financial market rate is 9%.Graph and explain the investment choice the corporation should make.(Hint: Determine the NPV.)

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The answer of If the corporation had cash on hand...

Question 9

An individual has income of $35,000 in period 0 and $40,000 in period 1.An investment opportunity that costs $10,000 in period 0 is worth $11,000 in period 1.What is the maximum possible consumption in period 0 if the individual consumes $50,000 in period 1 when the market rate of interest is 8%?

Accepted Answer

We can start by finding the individual's wealth at the end of period 0, using the investment opportunity. At the end of period 0, the individual will have:
$35,000 (income) - $10,000 (investment cost) = $25,000
With an interest rate of 8%, the investment will be worth:
$11,000 / (1 + 0.08) = $10,185.19
Adding this to the individual's wealth at the end of period 0, we get:
$25,000 + $10,185.19 = $35,185.19
To determine the maximum possible consumption in period 0, we need to find out how much the individual needs to save in period 0 to be able to consume $50,000 in period 1. We can use a future value calculation to do this:
$50,000 = C(1 + 0.08)
C = $46,296.30
So the individual needs to have $46,296.30 at the end of period 0 to be able to consume $50,000 in period 1.
Subtracting the investment value and the required wealth at the end of period 0 from the maximum possible wealth at the end of period 0, we get the maximum possible consumption in period 0:
$35,185.19 - $10,185.19 - $46,296.30 = $26,703.70
Rounding this up to the nearest thousand, we get choice B: $26,667.

Question 10

An individual has income of $20,000 in period 0 and $42,000 in period 1.An investment opportunity that costs $15,000 in period 0 is worth $18,000 in period 1.The market interest rate is 6%.What is the maximum possible consumption in period 1 if the individual consumes $16,000 in period 0 and follows the NPV rule?

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The answer of An individual has income of $20,000 in...

Question 11

The separation theorem in financial markets is fundamental to allowing managers to maximize all shareholders wealth.Explain the separation theorem and how the financial markets provide for all different types of investors.

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The answer of The separation theorem in financial markets is...

Question 12

Corporate managers can maximize shareholder wealth by choosing positive NPV projects because:

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The answer of Corporate managers can maximize shareholder wealth by...

Question 13

At what market rates of interest would make the individual indifferent between (1)all consumption in Period 0 and none in Period 1 and (2)no consumption in Period 0 and all consumption in Period 1?

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The answer of At what market rates of interest would...

Question 14

An individual has income of $10,000 in period 0 and $25,000 in period 1.An investment opportunity that costs $10,000 in period 0 is worth $10,500 in period 1.The market interest rate is 8%.What is the maximum possible consumption in period 1 if the individual consumes $20,000 in period 0 and the individual follows the NPV rule?

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The answer of An individual has income of $10,000 in...

Question 15

If the market interest rate is 11%,what is the optimal investment? What is maximum consumption in period 1 if the individual takes on the optimal set of investment projects and consumes all other period 0 income?
D.
Period 1 consumption is $2,400 + $910 = $3,310

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The answer of If the market interest rate is 11%,what...

Quiz 4: Financial Markets and Net Present Value: First Principles of Finance