Explain why risk can be insured against but uncertainty cannot. What will be an ideal response? ANSWER The provider of insurance policies can assign probabilities to the occurrences of insurable events and calculate premium rates to charge. With uncertainty, no probabilities can be attached to such events and it isn’t possible to construct the […]
Which of the following would not be considered a synergistic benefit from a merger? A) an improvement in distribution systems B) economies of scale in production C) decreased cost of capital D) None of the above ANSWER D
An example of an activity that is likely to generate benefit (positive) externality is A) a well manicured lawn of your neighbor. B) growing wild flowers on city street islands. C) fireworks on the 4th of July. D) an educated workforce. E) All of the above ANSWER E
A merger between two companies in unrelated fields of business A) will always lead to economies of scale. B) will generally increase the value of the unified firm compared to the value of the two companies before the merger because of the benefits of diversification. C) may not have any synergistic effects. D) will necessarily […]
The supply for products that exhibit cost externalities is generally ________ the supply for products that do not. A) greater than B) less than C) the same as D) greater or less (depending on the market) than ANSWER A
If getting accepted into college is very difficult because of high standards of intelligence and ability, but students learn absolutely nothing while in college, it is most likely that A) they will not be hired upon graduation. B) attendance sends a signal to employers regarding ability. C) nobody will want to go to college. D) […]
You are given risky cash flow data for a three-year project: Year Cash flow 1 $2,000 2 3,000 3 4,000 The initial cash outflow is $6,000; the risk-free interest rate is 6%, and the risk-adjusted discount rate is 10%. Calculate the NPV by both the risk-adjusted discount rate method and the certainty equivalent method in […]
The delay between when a problem occurs and when it is recognized is referred to as the A) recognition lag. B) action lag. C) effectiveness lag. D) policy lag. ANSWER A
Which of the following is an example of a government action to internalize a cost externality? A) a fine imposed on a company that pollutes a stream B) the closing of a public library C) a sales tax on jewelry D) the increase on bridge tolls ANSWER A
What additional sources of risk come from international investments? What will be an ideal response? ANSWER Exchange rate risk, and political risks such as regulation, discrimination, and expropriation
