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.
Tariffs on the product you sell are reduced and you face more foreign competition.
Tariffs on several of the major inputs you use to produce your product are reduced.
New pollution control requirements are implemented.
Inflation rates rise.
A new technology is available that reduces the cost of production.
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%
Compare the three investments below in terms of their riskiness. What is the best way to evaluate the riskiness of an investment given the information you have on them?
Project
Expected Return
Standard Deviation
A
$100,000
$25,000
B
$200,000
$40,000
C
$50,000
$20,000
Find the derivatives of each of the following functions, and their points of maximization or minimization if possible.
TC = 1500 – 100 Q + 2Q2
ATC = 1500/Q – 100 + 2Q
MC = -100 +4Q
Q = 550 – 0.5 P
Profits = -1500 +1200 Q – 4Q2