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Chapter 21: Q.20 (page 484)
Reconsider Figure 21-1 and the data provided in Problem 21-19, and suppose that per acre. By how much do economic rents change when the rental rate on land rises from in the figure?
The economic rents change by
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Take a look at Table 21-1. Suppose that you are planning your retirement. The appropriate interest rate for computing the present values of future dollars to be received is 8 per cent, and you plan to "cash in" all of what you save for retirement this year in exactly 30 years. How many dollars would you have to save this year to ensure being able to have a total of $50,000 accumulated 30 years from now?
Suppose that you are tryang to dectoe whether to spend on stocks issued by WildWeb or on bonds issued by the same company. There is a 50 percent chance that the value of the stock will rise to at the end of the year and a 50 percent chance that the stock will be worthless at the end of the year. The bonds promise an interest rate of 20 percent per year, and it is certain that the bonds and interest will be repaid at the end of the year.
a. Assuming that your time horizon is exactly one year, will you choose the stocks or the bonds?
b. By how much is your expected end-of-year wealth reduced if you make the wrong choice?
c. Suppose the odds of success improve for WildWebi Now there is a 60 percent chance that the value of the stock will be at year's end and only a 40 percent chance that it will be worthless, Should you now choose the stocks or the bonds?
d. By how much did your expected end-of-year wealth rise as a result of the improved outlook for WidWeb?
Outline the differences between common stock and preferred stock.
The owner of WebCity is trying to decide whether to remain a proprietorship or to incorporate. Suppose that the corporate tax rate on profits is percent and the personal income tax rate is localid="1653216490078" percent. For simplicity, assume that all corporate profits (after corporate taxes are paid) are distributed as dividends in the year they are earned and that such dividends are subject to tax at the personal income tax rate.
a. If the owner of WebCity expects to earn localid="1653216495193" in before-tax profits this year, regardless of whether the firm is a proprietorship or a corporation, which method of organization should be chosen?
b. What is the dollar value of the after-tax advantage of the form of organization determined in part (a)?
c. Suppose that the corporate form of organization has cost advantages that will raise beforetax profits by localid="1653216505277" . Should the owner of WebCity incorporate?
d. Based on parts (a) and (c), by how much will after-tax profits change due to incorporation?
e. Suppose that tax policy is changed to completely exempt from personal taxation the first localid="1653216517393" per year in dividends. Would this change in policy affect the decision made in part (a)?
f. How can you explain the fact that even though corporate profits are subject to double taxation, most business in the United States is conducted by corporations rather than by proprietorships or partnerships?
Why do you think that people have experienced even more difficulties than usual in predicting the prices of shares of stock issued by individual companies?
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