HFU ECO 103 - The Business-Investment Sector Answers to Multiple-Choice Questions

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Answers to Multiple-Choice QuestionsAnswers to ProblemsCHAPTER 6The Business-Investment SectorAnswers to Multiple-Choice Questions1. d2. b3. c4. a5. c6. b7. c8. c9. d10. a11. c12. c13. d14. d15. a16. c17. d18. a19. b20. d21. a22. c23. d24. b25. d26. c27. d28. d29. b30. a31. aAnswers to Problems1. a. $100 million + $150 million + $250 million = $500 million.b. $75 million plus $1.c. $7.5 million–$15 million2. Gross investment ($150 million) – Depreciation ($40 million) = Net investment ($110 million).3. –$15 million4. DisposableIncome Consumption Saving Investment(a) 1,000 1,000 0 400(b) 2,000 1,200 800 400(c) 3,000 1,400 1,600 4005. a. $7 billionb. $1 billion plus $1c. $100 million–$200 million396. 5757. $.3 billion or $300 million8.15% 203000,200$000,30investedMoney profits Expected RateProfit Expected 9. (a) $100,000,001(b) $10 million–$20 millionAnswers For Questions For Further Thought And Discussion1. What are the advantages and disadvantages of the corporation as a form of business organization?Advantages: Unlimited liability; perpetual life; ease in raising capital by selling stock to the public. Disadvantages: Going to the trouble and expense of having papers drawn up and getting a charter; paying federal, and possibly state corporate income tax.2. Explain how the capacity utilization rate and the interest rate affect the level of investment.If the capacity utilization rate is high, then business firms are more likely to investin new plant and equipment. But if that rate is low, then firms would need to use all that excess capacity before investing in still more plant and equipment.A high interest rate will discourage investment, since it would add to costs and reduce profits. A low interest rate would encourage investment. 3. Explain why building up capital takes a great deal of sacrifice.To raise money for capital, you would need to cut back on your own consumption,work harder and longer, or both. Each of these involves sacrifice. For a nation, it could produce less consumer goods and more capital goods, again sacrificing some consumption and possibly working longer hours to produce more capital goods.4. The Carolina Textile Corporation is capitalized at $200 million. If you wanted to buy control of this company, how much money would you have to invest? Since you don’t have nearly enough information to make this decision, just make some reasonable assumption about its bonds, preferred stock, and common stock.We’ll assume the company has $100 million in bonds, $50 million in preferred stock, and $50 million in common stock. To control the company you would probably need about 5 – 10 percent of the common stock. That would require an investment of $2.5 - $5 million.405. What has happened to our personal savings rate in recent years and how has thataffected our level of investment?Our personal savings rate, which had long been below 10 percent, fell below 5 percent in 1996, and is currently less than 3 percent. This has tended to depress our level of investment. However, this decline has been more than compensated for by the rapid decline of the federal government budget deficit and the currently growing surplus, as well as by a huge inflow of dollars from foreigners.6. If you owned a business and were considering increasing your level of investment,what would be the most important factor you would consider in determining how much you planned to invest? Explain why you chose that factor.Three factors you should definitely consider are the expected rate of profit, theinterest rate, and your expected sales. Which is the most important factor? I wouldsay, the expected rate of profit. If it were below about 4 percent, you would notwant to increase your level of investment no matter how low the interest rate andno matter how high expected sales. Were the expected rate of profit, say, 20percent, then you would probably want to invest as much as you could, assuming,of course, that the interest rate would much lower than 20 percent.7. Why are virtually all large business firms corporations?They are large because of the three advantages mentioned in the answer to question 1. It would be virtually impossible to run a large corporation if the owners were liable to law suits, if it could not sell stock to the public, and if it needed to reorganize each time an owner


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HFU ECO 103 - The Business-Investment Sector Answers to Multiple-Choice Questions

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