Exam 17: Investment

Refer to the following figure when answering the next two questions. Figure 17.2: Dow Jones Industrial Average: 2000-2012 (Source: Federal Reserve Economic Data, St. Louis Federal Reserve) -Your uncle asks you to explain stock prices based on the financial capital arbitrage equation. He shows you the graph shown in Figure 17.2. He asks you to explain the cause in the rise of stock prices for the years 2002-2006. What do you tell him?

If the growth rate of the capital stock is 9 percent, the user cost of capital is 13 percent, the capital depreciation rate is 3 percent, and capital gain is 1 percent, the investment rate is about:

Figure 17.4: Capital Arbitrage -Consider Figure 17.4. Write down the equation for the user cost of capital. Discuss what happens to the user cost in the following scenarios: a. the corporate income tax rises; b. the real interest rises; c. there is an increase in capital gains. Graphically show what happens to capital investment.

For the profit-maximizing firm, if the real interest rate is less than the marginal product of capital, the firm should invest in more capital.

The company that was one of the first adopters of supply-chain management was:

From the residential arbitrage equation, a rise in the down payment will reduce the price of the house, all else equal, while an increase in the real interest rate will reduce the house price, all else equal.

The arbitrage condition for capital shows that returns to a bank account are equal to the user cost of capital.

Write down the equation for the stock price. Use this equation to answer the following: a. Your stock broker calls to tell you she has a great deal on a stock. She gives you the following information: the real interest rate is 4 percent, the capital gain on this stock is 3.5 percent, and it pays $2.50 in dividends. How much should you pay for this stock? b. The next day she calls back and tells you about another stock that is for sale (i.e., the market price) for $75. She does not know the dividend growth but she does know the dividend payment, $0.35 per share, and the real interest rate, 4 percent. For you to buy this stock, how much annual dividend growth should you expect at that price? c. A hot stock tip comes from a friend. The price of the stock is $50, the dividend gain is 2.5 percent, and you know the real interest rate from your previous two discussions with your broker. How much of a dividend payment will you want?

In the growth model, we assumed the savings rate was given by ________, which is exogenous, but from the chapter on investment, we know it is equal to ________.

According to the financial asset arbitrage equation, a rise in the capital gain for a stock implies a rise in the real interest rate, all else equal.

The conclusion of a study by Steven Davis and James Kahn is that:

If a stock is just as likely to move up or down, it:

You decide to move to the mountains of Colorado and want to know what would be a good offering price on a home, but you know you will only own it a year. Fortunately, you are armed with the simple residential investment equation. You have the following information: the real interest rate is 4 percent; the depreciation rate of homes is 5 percent; average rent is $1,000; there is no expected capital gain; and you will have a 20 percent down payment. You offer the owner, rounding to the nearest dollar:

A decline in the corporate income tax will ________and the firm will ________.

In the equation $R \times p _ { k } = M P K + \Delta p _ { k } , \Delta p _ { k }$ is the ________ and $p _ { k }$ Is the ________.

If the marginal product of capital is 3 percent, the real interest rate is 4 percent, and the capital depreciation rate is 10 percent, what is the equilibrium stock price?

One reason we are interested in investment is its:

Refer to the following figure when answering Figure 17.1: Capital Arbitrage -Consider Figure 17.1. If there is an increase in the marginal product of capital, then curve ________ would shift to curve ________.

Refer to the following figure when answering Figure 17.3: Change in Private Inventories: 1980-2012 (Source: Federal Reserve Economic Data, St. Louis Federal Reserve) -Consider Figure 17.3, which shows changes in private inventories. Which of the following (approximate) dates is likely to be a period of recession? Given your analysis, inventories are:

If the real interest rate is 4 percent, the depreciation rate is 10 percent, the tax rate is 0 percent, and capital gain is 1 percent, the user cost of capital is 13 percent.