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WAAC and Market Weights

Webster Company has compiled the information show in the following table. Source of Capital Book Value Market Value After-Tax Cost Long-Term Debt $4,000,000 $3,840,000 6.0% Preferred Stock 40,000 60,000 13.0% Common Stock Equity 1,060,000

Six common short-answer questions on economics tests, along with sample answers.

a. Describe an externality created by a firm in your state. b. What are the social costs associated with the externality? c. List three remedies that the federal, state, or local government could introduce to reduce the problem. d. Why is it important for a profit maximizing firm to consider market structure in determin

How adverse selection leads to market failure

One important case of market failure is caused by imperfect information. Adverse selection occurs when buyers and sellers have different amounts of information about the good for sale. A common example is when individuals have more information about an automobile. Give another example of adverse selection and describe at leas

Managerial Economics

Three college students consider the option of forming a lawn care and landscaping business during their summer vacation. They estimate the following costs: Insurance $2,600 Equipment Rental Fees 1,000 Fuel and Supplies $4 per lawn Miscellaneous

Keynsian economics within America's economic crisis

When the United States economy slides into a recession Keynsian economics states the government should engage in fiscal policy measures, tax reduction and spending, to help the economy recover. Would you advocate doing one, both, or neither?

problem 7.4 in Nicholson

This corresponds to problem 7.4 in Nicholson (notes are available online from the publisher, SW learning, but they are not necessary). Suppose there is a 50-50 chance that a risk-averse individual with a current wealth of $20,000 will contract a debilitating disease and suffer a loss of $10,000. A. Calculate the cost of ac

As vice president of sales for a rapidly growing company, you are grappling with the question of expanding the size of your direct sales force (from its current level of 60 national salespeople). You are considering hiring 5 to 10 additional personnel. How do you go about hiring.

As vice president of sales for a rapidly growing company, you are grappling with the question of expanding the size of your direct sales force (from its current level of 60 national salespeople). You are considering hiring 5 to 10 additional personnel. How would you estimate the additional dollar cost of each additional sale

Depreciation and amortization.

Pearson Brothers recently reported an EBITDA of $8.0 million and net income of $2.8 million. It had $2.88 million of interest expense, and its corporate tax rate was 30%. What was its charge for depreciation and amortization?

Insurance calculation: Auto insurance price prediction example

Consider a state in which automobile drivers are divided equally into two types of drivers: careful and reckless. The average annual auto-insurance claim is $400 for a careful driver and $1,200 for a reckless driver. Suppose that the state adopts an insurance system under which all drivers are placed in a common pool and allo

Typical Travelers and Taxes

A city has announced plans to widen a radial highway. The demand curve for the typical traveler is T=40 -P, where T is the number of trips per month and P is the cost per trip (in cents). For example, if the cost is 10 cents, the typical traveler will make 30 trips per month. If the new highway is built, the cost per trip would

NPV and IRR for Capital Budgeting in a Project

Coffee retailer Roasted Bean, is looking into expanding into the midwest by opening several new stores. The company spent $500,000 on a marketing study that suggested significant demand for the company's coffee products. You are asked to evaluate the project over a 5-year period. You estimate the cost of construction of $40 mill

Obama's health care bill

Obama's health care bill is projected to cost over $1 trillion over the next decade. Medicare, Medicaid, and Social Security are bankrupt. The projected federal deficit for next year is $1.3 trillion. Can we afford such programs? Can we keep on borrowing? Should the federal budget be balanced every year? Discuss.

Insurance Policy Accrual and Cash Basis

Please see attached. Thank you. On March 1, 2003, a company paid a $16,200 premium on a 36-month insurance policy for coverage beginning on that date. Refer to that policy and fill in the blanks in the following table: Check 2005 insurance expense: Accrual, $5,400; Cash, $0. Dec. 31, 2005, asset: Accrual, $900; Cash, $0.

Adjusting journal entries

Prepare adjusting journal entries for the year ended (or date of) December 31, 2005, for each of these separate situations. Assume that prepaid expenses are initially recorded in asset accounts. Also assume that fees collected in advance of work are initially recorded as liabilities. a. Depreciation on the company's equip

Economic Value Added (EVA) statements

How can Economic Value Added (EVA) statements be used to improve financial statement reporting, results, and success? What are some problems found with EVA?

Finding Optimal Combination of Engineers and Researchers

See the attached file. A manager in charge of the development of new products could hire engineers and market researchers. The annual salary for an engineer is $ 40,000 while a market researcher receives $ 20.000. The marginal contribution of both is given in the table below. Determine what combination of engineers and market R

Rent vs. buying

Can you help me with applying concepts to making this decision between renting or buying a home? I need to address the following topic: "Consider whether renting or buying a home is the best approach to achieving your long-term financial goals. Use various data (housing rental costs, home sale prices, mortgage rates, etc.

Life Insurance and Future Risk

Please help understand the following: "Life insurance can be used as hedge against future risk of financial loss to others (beneficiaries) due to your (policy holder's) death. But, do you need life insurance, and if you do, how much?" It would be helpful if you can include at least one resource.

Cash Budget and External Funds Needed

Of Redbird's sales, 20% is for cash, another 60% is collected in the month following sale, and 20 percent is collected in the second month following sale. November and December sales for 20X1 were $220,000 and $175,000, respectively. Redbird purchases its raw materials two months in advance of its sales equal to 70% of its fi

Calculating NPW and IRR

The Stefinho De Rio company is evaluating two alternatives X and Y to invest for their travel business. Alternative X Alternative Y Initial investment $ 1.2 million $1 million Net annual savings $ 300,000 $250,000 Salvage value $200,000

Calculating IRR by interpolation

Hoboken Ferry is elevating two different ferries. The Weehawken and the Hoboken. The economic data is as follows. Weehawken Hoboken Initial Investment $6 million $8 million Yearly Revenue $4 million $6 million Annual Maintenance Cost

Finance: Capital structure.

This part of the project is to analyze the following capital structure plans. You will use the EBIT-EPS analysis to evaluate the two plans. One plan is all equity and one has debt and equity. Plan 1: All Equity Plan Shares of Equity - 80,000 Debt - 0 Cost of debt - 0 Interest Expense - 0 Tax Rate - 34% P

Value of firm/market value of equity

Alpha Corporation and Beta Corporation are identical in every way except their capital structures. Alpha Corporation, an all-equity firm, has 5,000 shares outstanding, currently worth $20 per share. Beta Corporation uses leverage in its capital structure. The market value of Betaâ??s debt is $25,000. The cost of his debt is 1

Calculation of company value (perpetual earnings/debt structure)

Gibson Inc. expects perpetual earnings before interest and taxes of $1.2 million per year. The firmâ??s pretax cost of debt is 8 percent per annum, and its annual interest expense is $200,000. Company analysts estimate that the unlevered cost of Gibsonâ??s equity is 12 percent. Gibson is subject to a 35 percent corporate t