Exam 16: Capital and Financial Markets

Suppose your company owns a computer that cost $10,000 and depreciates $500 per year. If the interest rate is 5 percent, what is the implicit rental price of the computer? When interest rates increase, are firms more or less likely to purchase equipment?

A firm has been making relatively large profits lately and has an extra $20,000 to invest. The firm is choosing among three investment options: improving the training of store employees, buying new computer equipment, or saving the $20,000 in a bank account and using it at a later date. How should the firm decide which option to choose? Which option is least risky? Most risky?

In the long run, the rate of return on a capital investment is, on average, directly related to its risk.

Exhibit 16-1 -Refer to Exhibit 16-1. Suppose that the price of tools is $32. Then a profit-maximizing firm will buy a total of

What is the difference between financial capital and physical capital?

Refer to the table below. Graph the data on risk and expected rate of return for the following securities. Draw the risk-return line through your graph. Which asset will experience a change in price in the near future? In which direction will the price change? Explain.

The amount of principal that will be paid back when a bond matures is called the

On the maturity date, the firm or government that issued a bond must pay

In a competitive market, the rental price of capital

Firms use physical capital markets to raise funds for expansion.

Suppose the news indicates that stock prices have been higher in January than in other months of the year. What would be the likely reaction of the stock market?

The annual return from holding a stock is the

When a firm pays cash for a piece of equipment, the implicit rental price is zero.

A profit-maximizing firm will rent or purchase a quantity of capital such that the

The equilibrium rental price of capital is determined by the

Equity contracts of a corporation represent

A dollar in the future is worth more than a dollar today.

One of the reasons why capitalism works is that managers always act in the best interest of the stock holders.

Calculate the expected return on a $6,000 bond that pays 6 percent of face value and whose price has a 30-percent chance of falling by $1,000 and a 70-percent chance of rising by $1,000.

The amount of money the borrower agrees to pay the bondholder each year is called the