|Name: Lauren Reed |Date: 3/31/15 | Graded Assignment Practice: The Loan Ranger Answer the following questions based on what you have learned. You may need to search for an online loan calculator to answer the questions. (10 points) |Score | | | 1. The owners of a successful restaurant want a loan for $50,000 to renovate the kitchen and expand the dining room. They expect that the extra tables will add between $2,000 and $5,000 to the restaurant’s monthly revenue.
Everything being equal, the WACC of a firm increases as the beta and rate of return on equity increases, as an increase in WACC means a decrease in valuation and a higher risk. A firms WACC is a very important both to the stock market for stock valuation purposes and to the company's management for capital budgeting purposes. In an analysis of a potential investment by the company, investment projects that have an expected return that is greater than the company's WACC will generate additional free cash flow and create positive NPV for stockholders. Since the WACC is the minimum rate of return required, the managers in the company should invest in the projects that generate returns in excess of the WACC. WACC is set by the investors (or markets), not by managers.
City University London Intermediate Macroeconomics 1 Coursework Joe Pearlman Question 1: Consider a representative agent with a utility function: U (C, l) = C 1/2 + l1/2 that he or she maximises subject to a constraint: C = w (h − l) − T + π where w, h, l, C, T , and π are wages and hours of time available, leisure, consumption, taxes, and dividend income. The production function for this economy is linear so that in equilibrium w = z, and the Production Possibilities Frontier is C = z (h − l) − G . To make the calculations easier assume h=1, z = 1. a) Find the Marginal Rate of Substitution. (4 marks) b) Find the Marginal Rate of Transformation. (4 marks) c) Setting MRS=MRT, solve the resulting equation algebraically for l as a function of G. (6 marks) d) What happens to consumption, wages and output as G increases?
a. Companies’ production opportunities decline, leading to a decline in the demand for funds. b. Households save a larger portion of their income. c. Households increase the amount of money they borrow from their local banks. d. Statements a and b are correct.
In valuing a company whose CFROI is higher than average, HOLT assumes those returns will gradually fade toward the market norm because of competitive pressures. The rate of fade is determined in part by the volatility of the company's historic CFROI levels. That's important because HOLT's valuation
Market Value of Business Asset 41,058 Cash 2,564 US Government Securities 20,024 Value of Financial Investment 22,588 Total Asset Value 63,646 2. Terminal Value Terminal value based on book value of invested capital is not valid assumption because this is a backward looking method of assessing terminal value. It does not take into account future value creation of the firm. Instead, we used the FCF method where we assumed that FCF grows at a constant rate “g” after the forecast period. This method is superior to the book value method since it is forward looking.
Accelerated depreciation does increase the value of an investment, however before it is explained how, it is important to define and point out the relevance of depreciation, book value, market value, inter-period tax allocation and deferred tax liability. Depreciation is a non-cash expense that lowers the value of assets over a period of time. Assets are depreciated for two reasons – wear and tear and old models becoming obsolete. Depreciation’s relevance to accelerated depreciation is that accelerated depreciation is taking base depreciation and accelerating it to report more depreciation earlier in the depreciation cycle. Book value is the value that an asset is on the balance sheet.
The GDP value would then decrease, due to the move from Point A to C, and increase employment which would decrease savings. In addition, there is an inverse relationship to both bond prices and interest rates because as one increase in value, the other decreases, and vice versa. 2. IS-LM Model--Suppose that you have the following equations for the IS-LM model. The following are the equations of the IS-LM model, here including a feature that taxes are not simply given but depend on income through a tax function, T(Y).
The long run average cost curve is explained by the economies of scale, and diseconomies of scale. It explains why LRAC goes down, and then goes up.As production increases, there are two basic influences at work: Economies of scale, and Diminishing marginal returns.Economies of scale cause average cost to decrease as production increases.Diminishing marginal returns causes average cost to increase as production increases. If Economies of scale outweighs diminishing marginal returns at low volumes, and eventually diminishing marginal returns outweighs economies of scale at high volumes the curve will be a U shape. A typical average cost curve will have a U-shape, because fixed costs are all incurred before any production takes place and marginal costs are typically increasing, because of diminishing marginal productivity.There is an indication of economies of scale if marginal costs are below average costs and average costs decreasing as quantity increase. An increasing marginal cost curve will intersect a U-shaped average cost curve at its minimum, after which point the average cost curve begins to slope upward.
Unique goods such as diamonds that have fewer substitutes tend to be inelastic. Income available to spend is another factor. All things equal if prices go up while income stays the same consumers will be forced to reduce their demand of the product. This represents an elastic reaction in demand. Another factor is time.