1. You are running a company that is owned by stockholders. Your goal is to maxi

Question

1. You are running a company that is owned by stockholders. Your goal is to maximize shareholder value. Explain how each of the following events is likely to affect shareholder value and identify uncertainties related to their effects. a. Tariffs on the product you sell are reduced and you face more foreign competition. b. Tariffs on several of the major inputs you use to produce your product are reduced. c. New pollution control requirements are implemented. d. Inflation rates rise. e. A new technology is available that reduces the cost of production. 2. Use the concepts of marginal cost and marginal revenue to derive an optimal capital budget for Company X, which has identified 7 possible investment projects and determined its cost of capital as shown below. Table A: Alternative Projects, Required Investments, and Expected Rate of Return Project Investment Required in Millions of Dollars Expected Rate of Return on Investment A 150 12% B 300 15% C 125 10% D 75 16% E 50 20% F 500 14% G 250 18% Table B: Cost of Capital by Amount Raised Block of Funds (in Millions) Amount of Funds in Block Cost of Capital for Block First Block of Funds $500 10% Second Block of Funds $400 11% Third Block of Funds $300 12% Fourth Block of Funds $200 13% Fifth Block of Funds $100 14% Sixth Block of Funds $100 15%

Explanation / Answer

There are three primary forms of business ownership: 1. Sole proprietorship 2. Partnerships 3. Corporations Corporations distribute ownership stakes in the form of shares, also called stock. In many private corporations, all of the stock is owned by one person or family. That one person or the family members that own the shares are all shareholders. Public corporations, those firms whose share trade on a public stock exchange (i.e. The New York Stock Exchange, NASDAQ, etc.) are also also owned by the people who own the stock. The distribution of the stock of public corporations is usually much, much larger than of private firms. Many large corporations (i.e. Microsoft, GE, Exxon-Mobil) have more than one million stock holders. All of those businesses are owned by the people who own the stock. The more stock one owns, the more of the business that person owns. a. Tariffs on the product you sell are reduced and you face more foreign competition.lower b. Tariffs on several of the major inputs you use to produce your product are reduced.higher c. New pollution control requirements are implemented.lower d. Inflation rates rise. higher e. A new technology is available that reduces the cost of production.lower

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