Economics: Private and Public Choice
16th Edition
ISBN: 9781337642224
Author: James D. Gwartney; Richard L. Stroup; Russell S. Sobel
Publisher: Cengage Learning US
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Chapter 21, Problem 4CQ
To determine
Principal agent problem.
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Economics: Private and Public Choice
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- During the early 2000's, energy giant Enron was shaken by financial mismanagement and scandal. It filed for bankruptcy and, after losing virtually all of it's customers, went out of business. What would have been the extent of stockholders' liabilities? Explain.arrow_forwardIn chapter 7, "Financial Markets," of the book Naked Economics, the author, Charles Wheelan, states, that, "...all financial instruments - no matter how complex the bells and whistles - are based on four simple needs." Which of the below is NOT of these "simple needs"? Raising Capital. Assumption of risk. Insuring Against Risk.arrow_forwardApple Corporation requires its top managers to own shares of stock in Apple equal in value to three times their annual salary. Explain what problem Apple is trying to solve with this requirement, and explain whether this requirement does indeed solve the problem.arrow_forward
- What effect might a fall in stock prices have on businessinvestment?arrow_forwardWhat happens to interest rates in the market if the stock brokerage commission declines? Explain the reason for your answer!arrow_forwardConsider two firms (a) Firm A has profits twice as large as Firm B's profits. The firms do not differ in any other way. Which firm's stock should you buy if Firm A's stock price is PA = $50 and Firm B's stock price is PB = $30? What would you expect to happen to stock prices in equilibrium? Explain your answer (b) Suppose stock prices are in equilibrium. Explain what happens to the stock prices of these two firms if the interest rates increase? (c) Suppose stock prices are in equilibrium. Does the Efficient Market Hypothesis suggest to %3D buy one stock or the other stock? Explain.arrow_forward
- In 350 words or less Explain how Random Walk Theory makes it difficult for investors to make short run decisions. Create an example to illustrate this difficulty.arrow_forwardA company has announced a profit, but why is the price of stock still falling? Is the market inefficient? Explain.arrow_forwardSuppose that the initial dividend on a stock is £1. The interest rate is 3 percent and the growth rate of dividends is constant at 2 percent. What is the price of the stock?arrow_forward
- On the golf course, John was playing near a group of four golfers. One of the four golfers was a director of Company ABC. The director was telling the three other golfers in his group that his company made much higher profits in the past year than in the previous year. When John went back to the office after the golf game, he checked with his broker regarding the stock and found that, two weeks earlier, the company had made an announcement similar to what the director had told his friends. John went ahead to buy the stock and was very pleased that the stock earned him abnormal returns over the next month. (i) Discuss the type of information that John heard on the golf course. Appraise which one (1) of the three forms of market efficiency is most relevant to this situation. (ii) Analyse and discuss whether the above situation describes a violation of the efficient markets hypothesis.arrow_forwardDiscuss how corporations can use equity financing by issuing stock through an investment banker. Describe the various securities markets in the United States.arrow_forwardMany workers hold large amounts of stock issued by the firms at which they work. Why do you suppose companies encourage this behavior? Why might a person not want to hold stock in the company where he works?arrow_forward
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