1. Listed in Descending Order of Numerical Importance, the Business Population Is Comprised Of
Macroeconomics Homework 4 Investment decisions, interest rates
1. Listed in descending order of numerical importance, the business population is comprised of:
A) sole proprietorships, corporations, and partnerships.
B) sole proprietorships, partnerships, and corporations.
C) partnerships, corporations, and sole proprietorships.
D) corporations, partnerships, and sole proprietorships.
2. Suppose you invested in a firm (for example, Apple, Google, Western Union) when it was small and unprofitable. Now the firm has grown considerably and it is profitable. Would you be better off if you had bought the firm’s stock or the firm’s bonds? Explain.
3. True or false? Explain. Google’s stock price increased by 50 cents this week, therefore Google’s profits increased 50 cents per share during this week.
4. What impact would these events likely to have on the price of Google’s stock?
a. competitor launches a similar search engine.
b. corporate income tax is abolished.
c. more and more people use the internet.
d. Google announces a huge profit of $1 billion, exactly what everyone expected.
e. a large investor buys massive number of Google shares.
5. You put $100 in the bank. How much money will you have in 2 years if the interest rate is 5% per year?
6. If the interest rate is 5% per year, how much money do you need to put in the bank today to receive $1,000 two years from now? Show work.
7. A company issues a zero coupon bond that promises to pay $1000 two years from today. Current interest rate is 5%. How much money is this bond worth today?
8. This year you bought $200 worth of shares of stock. Next year you will sell these shares for $212. Compute your capital gain the rate of return on your investment.
9. You are deciding whether to buy a gizmo. The gizmo costs $70; it saves you $30 next year, $60 two years from now, and then explodes. The market interest rate is 8%. Find the present value of your investment. Should this investment be undertaken?
10. You have won $3 million in a lottery which promises to pay you $1 million every year for the next 3 years. Write down the formula you would use to calculate what this grand prize is really worth today, if the discount rate is 10%. Can you calculate it?
11. You are deciding whether you should lease a car or buy a used car. A car can be leased for $2000 per year. If you don’t lease the car, you can invest your money at 10% per year? Given the leasing option and the current interest rate, what is the most you would be willing to pay for a car that lasts for 3 years? Show work.
12. If the interest rate is 7%, what is the present value of a bond that matures in two years, pays $70 one year from now and $1070 two years from now?
13. True or false? Explain. The principal-agent problem that exists between shareholders and managers also exists between managers and workers; there are ways to solve this problem.