ECON 301 - HW 1 Exam 2025 Questions
and Answers
What is the maximum amount you would pay for an asset that generates an
income of $250,000 at the end of each of five years, if the opportunity cost of
using funds is 8 percent? - --CORRECT ANSWER--250,000/(1+0.08)^5
A firm's current profits are $450,000. These profits are expected to grow
indefinitely at a constant annual rate of 3 percent. If the firm's opportunity cost of
funds is 6 percent, determine the value of the firm:
A. The instant before it pays out current profits as dividends.
b. The instant after it pays out current profits as dividends. - --CORRECT
ANSWER--a.
Value of firm before pay out = 450000 * (1 + 0.06) / (0.06 - 0.03)
= 450000 * (1.06) / (0.03)
= 15900000 ~ 15.9 million
b.
Value of firm before pay out = 450000 * (1 + 0.03) / (0.06 - 0.03)
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, = 450000 * (1.03) / (0.03)
= 15450000 ~ 15.45 million
What is the value of a preferred stock that pays a perpetual dividend of $90 at the
end of each year when the interest rate is 6 percent? - --CORRECT ANSWER--
PV preferred = CF/(1+i) + CF/(1+i)^2 +...+ = CF/i
PV = CF/i = 90/0.06 = $1,500
It is estimated that over 100,000 students will apply to the top 30 MBA programs
in the United States this year.
a. Using the concept of net present value and opportunity cost, when is it rational
for an individual to pursue an MBA degree?
- When the net present value of attending graduate school is greater than zero.
- When the costs of attending school are near zero.
- When the benefits of attending school are greater than zero.
- When the net present value of attending graduate school is at least $100,000.
b. What would you expect to happen to the number of applicants if the starting
salaries of managers with MBA degrees remained constant but salaries of managers
without such degrees increased by 22 percent?
- It would decrease.
....COPYRIGHT ©️ 2025 ALL RIGHTS RESERVED...TRUSTED & VERIFIED 2
and Answers
What is the maximum amount you would pay for an asset that generates an
income of $250,000 at the end of each of five years, if the opportunity cost of
using funds is 8 percent? - --CORRECT ANSWER--250,000/(1+0.08)^5
A firm's current profits are $450,000. These profits are expected to grow
indefinitely at a constant annual rate of 3 percent. If the firm's opportunity cost of
funds is 6 percent, determine the value of the firm:
A. The instant before it pays out current profits as dividends.
b. The instant after it pays out current profits as dividends. - --CORRECT
ANSWER--a.
Value of firm before pay out = 450000 * (1 + 0.06) / (0.06 - 0.03)
= 450000 * (1.06) / (0.03)
= 15900000 ~ 15.9 million
b.
Value of firm before pay out = 450000 * (1 + 0.03) / (0.06 - 0.03)
....COPYRIGHT ©️ 2025 ALL RIGHTS RESERVED...TRUSTED & VERIFIED 1
, = 450000 * (1.03) / (0.03)
= 15450000 ~ 15.45 million
What is the value of a preferred stock that pays a perpetual dividend of $90 at the
end of each year when the interest rate is 6 percent? - --CORRECT ANSWER--
PV preferred = CF/(1+i) + CF/(1+i)^2 +...+ = CF/i
PV = CF/i = 90/0.06 = $1,500
It is estimated that over 100,000 students will apply to the top 30 MBA programs
in the United States this year.
a. Using the concept of net present value and opportunity cost, when is it rational
for an individual to pursue an MBA degree?
- When the net present value of attending graduate school is greater than zero.
- When the costs of attending school are near zero.
- When the benefits of attending school are greater than zero.
- When the net present value of attending graduate school is at least $100,000.
b. What would you expect to happen to the number of applicants if the starting
salaries of managers with MBA degrees remained constant but salaries of managers
without such degrees increased by 22 percent?
- It would decrease.
....COPYRIGHT ©️ 2025 ALL RIGHTS RESERVED...TRUSTED & VERIFIED 2
