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Congressman Snowball, having read Chapter 11 of this text, informs his colleagues that people who have higher levels of education have higher earnings capacities. He argues, based on Chapter 17, that one way to reduce the moral hazard of welfare is to pay larger benefits to those with limited earning capacities.
Therefore, according to Congressman Snowball, a way to accomplish this would be to provide large welfare payments to poorly educated Americans. Does this eliminate moral hazard?
An ambitious company, Kentag wants to be a fortune 500 company within 20 years. It expects its sales to increase 20% next year from its current level of $4.7 million. Kentag has current assets of $660,000, net fixed assets of $1.5 million, and curren..
You own a bond with a 5.8 percent coupon rate and a yield to call of 6.7 percent. The bond currently sells for $1,098. If the bond is callable in five years, what is the call premium of the bond?
You have just completed the first year of operation for your business and have the following information: sales, $200,000; cost of goods, $140,000; rent, $18,000; utilities, $8,400; insurance, $2,000; equipment, $3,500; and interest, $10,000. By what..
A manufacturer is sourcing a component for a new product. Expected monthly demand is 705 units. The component can be purchased from either supplier A or supplier B, with the following price breaks: What order quantity is optimal if the objective is t..
An oil company is drilling a series of new wells that are adjacent to an existing oil field. About 20% of the new wells will be dry holes and will produce zero oil. If the wells do, in fact, strike oil, they have different expected values. What is th..
What is insolvency risk? How can liquidity risk and credit risk cause insolvency? What actions can a financial institution take to best protect itself against insolvency?
Your firm has an average receipt size of $130. A bank has approached you concerning a lockbox service that will decrease your total collection time by two days. You typically receive 7,200 checks per day. What is the NPV of accepting the lockbox agre..
You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $50,000. The truck falls into the MACRS 3-year class, and it will be sold after three years for $19,100. What will the cash f..
Which of the following statements about project cash flow estimation is false?
When choosing where to locate a new business, some businesses will look at the tax rates in different areas to make their decision. Why do you think they consider this? What impact do you think the tax rate would have on the company’s profits? What a..
An investment is expected to produce $2,281 at the end of each year for the next 13 years. Other investments of similar riskiness available to you are yielding 9.7 percent return. What is the maximum you should be willing to pay for this investment?
Each business day, on average, a company writes checks totaling $41,500 to pay its suppliers. The usual clearing time for the checks is six days. Meanwhile, the company is receiving payments from its customers each day, in the form of checks, totalin..
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