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

Suppose that you are the president of a small printing company and you are considering the purchase of new machinery. What factors must you consider in making this decision?

Explain why lower interest rates can stimulate investment by businesses. Show this on a graph.

How is capital valued?

Typically when firms talk about depreciation they are usually referring to the deprecation of physical capital assets. However, how any why might it be possible for there to be deprecation in human capital?

What is venture capital?

What is the primary source for capital available to businesses? Name four methods of channeling these funds.

Explain the difference between financing investment with a business loan versus with venture capital. What are the pros and cons of each?

Explain what occurs in the capital market.

List and define the two categories of after-tax corporate profits.

What functions does capital income serve in the economy?

Comment on the following statement: "Capital investment decisions always involve risk."

Suppose that Mighty Mike's Sandwich Shop was started in 1998 and 100 percent of the $250,000 needed to start up the company was raised by selling shares of stock. In 2000, the company distributed its entire profit of $15,000 to shareholders. If the market interest rate is 5 percent, what is the level of economic profit earned by the firm's stockholders?

An engineer with a major power company decides to leave his job because he believes he has found a way to deliver Internet service across the electrical grid and he wants to start up his own business. He doesn't have very much cash or collateral. Which method of financing do you believe he will most likely use and why?

Who makes investment decisions in most modern industrial societies? Discuss the roles played by firms, households, and the capital market.

What is social capital? Give an example.

Suppose that Fred's Bed Company was started in 1999 and 100 percent of the $500,000 needed to start up the company was raised by selling shares of stock. In 2000, the company distributed its entire profit of $35,000 to shareholders. If the market interest rate is 8 percent, what is the level of economic profit earned by the firm's stockholders?

Define capital. Explain the relationship between investment and capital.

List the major categories of tangible capital.

Why do mortgage companies begin to require larger down payments from their borrowers when housing prices begin to fall?

Oftentimes when a company's share price is very "high" it will choose to split the stock price and offer each shareholder one share for each they currently hold. Explain why companies might do this and what the effect is on shareholder wealth.