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Profit maximization, exchange rates, share price, forward contracts

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1. Discuss the four main factors that determine rates of return in a market economy.

2. Briefly list the problems associated with profit maximization as the chief goal of corporate managers.

3. Suppose that the exchange rate is $0.2970 to the Israeli shekel. How could you make arbitrage profits with $10,000 if the dollar price of gold is $200 per ounce and the shekel price is 750 ILS per ounce?

4. Does growth per se add value to the current price of a share? If not what does add value to a share's current price?

5. Describe the main features of forward contracts. How do forward contracts differ from futures contracts?

6. Explain why the market price of a company's stock does not necessarily equal its book value.

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Answer 1
Following are the factors, which determines the rate of return in an economy -
? Labor market conditions - the division of labor plays an important role in market economy and change in the labor market condition determines the rate of return for the investors as well as for business.
? Intensity of government regulations - The price system in market economy is free and change in the government regulation to determine price determine the rate of return,
? Demand & supply - The gap between demand and supply is the other factor, which determines the rate of return. An increase in supply than demand would cause decrease in the prices of goods and services, which would reduce the rate of return in an economy and vice versa.
? Industrial structure- The change in the industrial structure also a factor, which determines the rate of return in market economy. A less effective industrial structure or the lack of proper facilities for the companies in an industry would ...

Solution Summary

The expert discusses the four main factors that determine rates of return in a market economy. Profit maximization as the chief goal of corporate managers are examined.

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