Question 1

Why does it seem to be more difficult for investors to measure the capital stock of a firm like eBay rather than a firm like Ford Motor Company? Explain.

Accepted Answer

Ford Motor Company is likely to have more physical assets like factories, machines and equipment that are easy to measure in market terms. However, a company like eBay may have few such physical assets since a large part of the value of their business is their good will - their reputation for conducting honest transactions and minimizing fraud.

Question 2

Why might stockholders be upset to find out that their company's profits that otherwise would have been distributed as dividends are instead invested in U.S. Treasury bonds?

Accepted Answer

They would be upset because those same investors could have taken those profits and done the same thing with them on their own or better. The only instance when it would be appropriate for the company to retain the earnings is when the rate of return on the profit is likely to be higher than what investors could reasonably be expected to earn on their own had the profits been distributed as dividends instead.

Question 3

Why is knowledge considered a type of capital?

Accepted Answer

Knowledge is human capital. Knowledge is considered capital because it yields valuable services to a firm over time in the same way that other types of capital (such as machinery) do.

Question 4

What is human capital?

Accepted Answer

The answer of What is human capital?...

Question 5

What is depreciation?

Accepted Answer

The answer of What is depreciation?...

Question 6

What is the most important dimension of capital and how does that relate to its value?

Accepted Answer

The answer of What is the most important dimension of...

Question 7

An Internet start-up company consists of three people with an idea that they wish to use in pursuing a patent for a product. What type of capital does this company have and what is its value?

Accepted Answer

The answer of An Internet start-up company consists of three...

Question 8

Explain what is meant by capital.

Accepted Answer

The answer of Explain what is meant by capital....

Question 9

What role do households play in the capital market? What role do firms play?

Accepted Answer

The answer of What role do households play in the...

Question 10

In economics, what is meant by investment?

Accepted Answer

The answer of In economics, what is meant by investment?...

Question 11

Give three examples of ways in which financial markets channel household savings into investment projects.

Accepted Answer

The answer of Give three examples of ways in which...

Question 12

What is the difference between stock and flow measures?

Accepted Answer

The answer of What is the difference between stock and...

Question 13

Suppose that you and your four siblings are given an opportunity to purchase a video rental store. Each of you would put up $50,000. The revenue from the store is expected to remain $350,000 per year for the next several years. The costs (not including the opportunity costs of your investment) of operating the store are expected to remain steady at $320,000 for the next several years. The current market rate of interest is 5 percent per year. Should you go in on this deal? Explain.

Accepted Answer

The answer of Suppose that you and your four siblings...

Question 14

What is meant by capital stock?

Accepted Answer

The answer of What is meant by capital stock?...

Question 15

Why does capital depreciate?

Accepted Answer

The answer of Why does capital depreciate?...

Question 16

Assume an attorney who has worked with a large law firm decides to leave to establish his own practice. Even though he is not leaving the company with any physical assets what might be his most important asset? What factors might impede his ability to use this asset and why?

Accepted Answer

The answer of Assume an attorney who has worked with...

Question 17

What is the financial capital market? Who are the suppliers in the market? Who are the demanders?

Accepted Answer

The answer of What is the financial capital market? Who...

Question 18

Why is the manager of a company typically not the same person as an entrepreneur?

Accepted Answer

The answer of Why is the manager of a company...

Question 19

Explain how a firm makes an investment decision.

Accepted Answer

The answer of Explain how a firm makes an investment...

Question 20

Name two conditions that can cause a capital asset to depreciate.

Accepted Answer

The answer of Name two conditions that can cause a...

Exam 11: Input Demand: the Capital Market and the Investment Decision