Post-investment hold-up.

Question

Want to see the full answer?

Answer 1

Question

Chapter 5, Problem 5.3IP

To determine

Post-investment hold-up.

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Students have asked these similar questions

Probably the most important source of capital is human capital. For example, most medical doctors spend years learning to practice medicine. Doctors are willing to make large investments in their human capital because they expect to be compensated for doing so when they begin work. In Canada, the government nationalized the health-care system and reduced doctors’ compensation. Is this a form of post-investment hold-up?

When computing economic profit, we assume that capital gains a: A. zero rate of return B. average rate of return C. Risk-free rate of return D. Positive rate of return E. None of the answers above are correct

As an example of a company that did not ignore its cost of capital, consider Coca-Cola in the 1980’s. It had very little debt because it preferred to raise equity capital from its stockholders. It also had a diversified product line, including products like aquaculture and wine. But none of these activities earned as much as its soft drink division. The opportunity cost of investing in these unrelated businesses was the forgone opportunity to expand the soft drink division, which at the time was earning a 16 percent return on capital. Although, these other businesses were earning a positive 10 percent rate of return on capital, the opportunity cost of that capital was 16 percent. CEO Robert Goizueta correctly decided to sell off these under-performing divisions and invest the capital in its soft drink division. By making decisions whose benefits were greater than their costs, the topic of this chapter, Coca-Cola increased its profitability.