Please HELP!!! I did all of these but i am not sure if i did them correctly. 6.
ID: 1229708 • Letter: P
Question
Please HELP!!! I did all of these but i am not sure if i did them correctly.
6. Suppose that you own a small portfolio of stock. Your holdings are from mature firms who have a long history of paying a $1000 dividend each year on February 1. You expect this pattern to continue indefinitely. If the interest rate is 5%, what is the minimum amount you would need to consider selling this portfolio on February 2?
a) $952.82
b) $1050
c) $20,000
d) $21,000
7. After receiving good reviews for her work at a series of art shows, Jean Rodin considers quitting her job as a management consultant to pursue full time her hobby of sculpting. Jean figures that she can sell $90,000 worth her art each year. She found a studio that she can rent for $2,000 per month and know that materials will cost her $10,000 per year. She now earns $70,000 per year. If her calculations are correct, Jean’s annual economic profits from the venture will be.
a) $56,000
b) $20,000
c) $10,000
d) -$14,000
8. Consider again the situation in problem 7 above. What difference would it make in Jean’s calculations of economic and accounting profits if rather than having to find a studio, she owns a space that she could rent for $2,000 per month if she did not use it herself?
a) Both accounting and economic profits would increase
b) Economic profits would increase but accounting profits would remain unchanged
c) Accounting profits would increase, but economic profit would remain unchanged
d) Neither economic nor accounting profits would change.
Explanation / Answer
6. This question requires that you find the present discounted value of a perpetuity. The formula for this is given simply by PV = C/i where PV is the present value, C is the amount of the cash flow (the dividends paid) and i is the interest rate, so here: PV = 1000/.05 = 20,000 This is the minimum amount you should accept to sell the portfolio, since any less than this is less than the (present) value of the portfolio 7. So first calculate her accounting costs. The cost of the studio for the year is 24,000, and the cost of her materials is 10,000 for a total cost of 34,000. Her accounting profit would then be 90,000 - 34,000 = 56,000. However, the economic profit must include her opportunity cost, in this case, the cost of giving up her $70,000 salary. Now her economic profit becomes 56,000 - 70,000 = -14,000 (D) 8. If she already owns it, her accounting profits would increase, since she does not need to pay for the rent, so her accounting profits would increase, but her economic profits would remain unchanged, since by using it herself, she would be giving up the 24,000 she could make each year by renting it out.