# Supply and Demand for Investment Capital

California clinics, an investor-owned chain of ambulatory care clinics, just paid a dividend of $2 per share. The firm's dividend is expected to grow at a constant rate of 5% per year, and investors require a 15% rate of return on the stock.

1. Explain how each of the four fundamental factors that affect the supply & demand for investment capital, and hence, interest rates, (namely productive opportunities, time preferences for consumption, risk, & inflation) affects the cost of money

2. Explain the 3 techniques for solving time value problems.

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#### Solution Preview

California clinics, an investor-owned chain of ambulatory care clinics, just paid a dividend of $2 per share. The firm's dividend is expected to grow at a constant rate of 5% per year, and investors require a 15% rate of return on the stock.

Factors affecting the supply & demand for investment capital and interest rates

Supply for investment capital is the volume or amount of money inventors are willing to invest given certain factors that are considered critical. Demand for investment capital is the amount of capital needed by companies/corporations to finance their operations, particularly their plans for growth and expansion.

On the supply side, the following are the factors affecting the investors' willingness to invest their money in a particular company and industry:

1. Productive opportunities

To investors, their willingness to invest is very much affected by their opportunities to earn or further expand the amount of capital invested. To them, investment would provide them the opportunity to get returns or yield. Expected opportunities for high returns would encourage them to invest. This would add to the supply of invested capital.

2. Time preferences for consumption

Investors of funds are affected by their consumption needs and the time involved in filling such needs. Disposable income is supposed to be divided between consumption and savings; to maintain an equilibrium level, savings must be equal to investment. Hence, assuming a constant disposable income, an increase in consumption would result to lower savings and consequently lower investment. The amount of savings is therefore affected by a person's level as well as ...

#### Solution Summary

This solution discusses the four fundamental factors that affect supply and demand, and 3 techniques for solving time value problems.