PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
7th Edition
ISBN: 9781260110920
Author: Frank
Publisher: MCG
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Chapter 11, Problem 3RQ
To determine
Determine whether stocks are a good financial investment for a risk-averse person.
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Compute the expected intrinsic price of each stock in year 5. Assume that
All stocks are fairly priced such that the intrinsic and market values are equal.
Dividends are paid at the beginning of the year
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What will be the total investment cost for shares? Show appropriate calculations.
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What will be the total cost of investment in bonds?
Do the stock and bond investments fall within Stephanie’s investment guidelines? Show appropriate computations in support of your response.
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Recently the pharmaceutical company Mylan attempted a hostile takeover of generic drugmaker Perrigo. Perrigo reported a net loss the year before the attempted takeover, which was partially driven by a spike in administrative expenses. Suppose that Mylan perceives there is a 70 percent probability that Perrigo’s loss is merely the transitory result of administrative expenses needed to fight the takeover. In this case, the present value of Perrigo’s stream of profits is $30 billion. However, Mylan perceives that there is a 30 percent chance that Perrigo’s net loss stems from long-term structural changes in the demand for Perrigo’s services, and that the present value of its profit stream is only $6 billion. You are a decision maker at Mylan and know that your current takeover bid is $21 billion. You have just learned that a rival bidder-Abbott Laboratories-perceives that there…
Stephanie Carter has been gifted a sum of $50,000 by her grandparents on completing her graduation successfully. She is a fresh finance graduate and is excited to invest some money in the capital market, for which she intends to use the gifted sum of $50,000. However, instead of committing this money to the market immediately, she decides to wait for some time, work in the field and acquire some experience before proceeding with her intended investment. She thus contemplates an extremely conservative investment in a portfolio of stocks and bonds, at the start of year 5 from now. For now, she will leave the $50,000 in a fixed deposit with the bank which promises an interest rate of 6% per annum. She will require a return of at least 9% on her stock investments and 4% on bond investments. Stephanie would have to pay 25% taxes on any interest income. Dividends will be tax-free. Stephanie’s research has allowed her to narrow down on the following investment candidates:
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Chapter 11 Solutions
PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
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- You are the manager of Taurus Technologies, and your sole competitor is Spyder Technologies. The two firms’ products are viewed as identical by most consumers. The relevant cost functions are C(Qi) = 4Qi, and the inverse market demand curve for this unique product is given by P = 160 – 2Q. Currently, you and your rival simultaneously (but independently) make production decisions, and the price you fetch for the product depends on the total amount produced by each firm. However, by making an unrecoverable fixed investment of $200, Taurus Technologies can bring its product to market before Spyder finalizes production plans. Should you invest the $200? Explain.arrow_forwardDetermine which of the two investment projects of Problem 5 the manager should choose if the discount rate of the firm is 30 percent. Additional information. Problem 5 states determine which of two investment projects a manager should choose if the discount rate of the firm is 10 percent. The first project promises a profit of $100,000 in each of the next four years, while the second project promises a profit of $75,000 in each of the next six years.arrow_forwardWhich of the following statements is most correct? If you add enough randomly selected stocks to a portfolio, you can completely eliminate all of the market risk from the portfolio. If you form a large portfolio of stocks each with a beta greater than 1.0, this portfolio will have more market risk than a single stock with a beta = 0.8. Company-specific risk can be reduced by forming a large portfolio, but normally even highly diversified portfolios are subject to market risk. Answers a, b, and c are correct. Answers b and c are correct.arrow_forward
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