Exam 11: Input Demand: the Capital Market and the Investment Decision

Explain why some small start-up companies choose not to pay dividends even though they make very large profits. Why might investors still be happy with this arrangement?

Why might two Fortune 500 companies borrow the same amount of money for the same term at the same time yet both pay a very different interest rate even when the same banks makes both loans?

Why do U.S. government loans generally pay a low interest rate?

Before investing what should investors evaluate first?

Why do school districts sell bonds to the public when they are financing a new school building program rather than sell stock?

You start your own business selling boating equipment. To start the business you sell 5,000 shares of stock at $50 each. This year the revenues from the business are $300,000, and total costs of operating the business are $200,000. All profits are paid out as dividends to the shareholders. If the current interest rate is 20%, what is the economic profit being earned by the shareholders? What will happen to the amount of economic profits earned if the interest rate decreases? Explain your answer.

A government wants to build a hydroelectric dam to reduce flooding in a region and provide electricity to its people. What type of investment is this? In order to make a decision about whether or not to make the investment, how should the government evaluate this project?

Why might a country like Brazil have to offer a much higher interest rate on its government bonds than those offered by the Great Britain?

What is capital income?

List and define two types of capital income.

What does the investment demand curve show?

When economists say that mortgages are "securitized" what do they mean by this description?

Many reporters in the media were critical of the high interest rates that many banks charged to lenders in the so-called sub-prime market. Using economic reasoning what was the likely justification for these high interest rates.

Comment on the following statement: "In economics, investment means a wide variety of things including purchases of stocks, bonds, and other financial assets."

What is a bond?

Explain why using a firm's profits to reinvest in the company is really not "free borrowing"?

Comment on the following statement: "When a firm retains earnings for investment purposes, it is actually saving on behalf of its shareholders."

How can lack of investment in social capital affect private firms' profits?

What is meant by the expected rate of return?

What is an entrepreneur?