Economics: Private and Public Choice (MindTap Course List)
Economics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN: 9781305506725
Author: James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher: Cengage Learning
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Chapter 21, Problem 12CQ
To determine

The opportunity cost of borrowed funds and equity capital.

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If the marginal personal tax rate imposed on interest income paid to bondholders were to increase, holding the corporate tax rate and the personal tax rate on payments to equity (e.g., taxes on dividends), what is the impact on the marginal benefit of debt to the corporation? How might this effect the optimal amount of debt the firm should have in its capital structure?
Which of the following is most likely to be an implicit cost?*rental income foregone on assets owned by the firmsalaries paid to the firm’s board of directorstransportation cost on raw materialsinterest payments on an outstanding loan of the firm Economic profit is frequently*greater than total revenue.defined as total revenue minus total fixed cost.irrelevant to the owner of a firm who is concerned instead with accounting profits.less than accounting profit. From an economics perspective, accounting methods tend to*overstate profits and losses.overstate profits and understate losses.understate profits and overstate losses.understate profits and losses. Your aunt is thinking about opening a hardware store. She estimates that it would cost $500,000 per year to rent the location and buy the stock. In addition, she would have to quit her $50,000 per year job as an accountant. Your aunt’s opportunity costs comprise*the accounting costs.the accounting costs and the implicit costs.all…
a) The owners of firms in the real world would generally expect (in the long run at least) to have some positive of profits on their accounting statements. However, in economic models we usually assume that firms will be willing to operate for zero economic profits even for the long term. Explain why this is the case.
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