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(equity multiplier and active monitoring).
(i) Derive the equity multiplier in the variableinvestment model. (Reminder: the investment I ∈ [0, ∞) yields income RI in the case of success and 0 in the case of failure. The borrower's private benefit from misbehaving is equal to BI. Misbehaving reduces the probability of success from pH to pL = pH - ?p. The borrower has cash A and is protected by limited liability. Assume that ρ1 = pHR > 1, ρ0 = pH(R - B/?p) < 1 and 1 > pLR + B. The investors' rate of time preference is equal to 0.) Show that the equity multiplier is equal to 1/(1 - ρ0). (ii) Derive the equity multiplier with active monitoring: the entrepreneur can hire a monitor, who, at private cost cI, reduces the entrepreneur's private benefit from shirking from BI to b(c)I, where b(0) = B, b
What is the opportunity cost of one more candy bar? One more bag of peanut? Do these opportunity cost remain the same when you purchase more of the products? Why
you plan to deposit $52000 into a savings account each year for 14 years. how much will be in the account at the time of the final deposit if the interest rates are 7%
By equating this to the price of an ATMF straddle under the normal model with standard deviation ψ, find an equivalence between σ and ψ.
Marcel Co. is growing quickly. Dividends are expected to grow at a 19 percent rate for the next 3 years, with the growth rate falling off to a constant 6 percent thereafter.
You are considering the purchase of an investment that would pay you $34 per year for Years 1-5, $55 per year for Years 6-8, and $83 per year for Years 9 and 10. If you require a 14 percent rate of return
Determine the probability that the lifetime of the system exceeds 10 days. - What is the probability that the lifetime of one component exceeds 10 days?
Mullineaux Corporation has a target capital structure of 65 percent common stock, 10 percent preferred stock, and 25 percent debt. Its cost of equity is 11 percent, the cost of preferred stock is 6 percent
Find the future fund for Kelly, who is saving $350 at the beginning of each month for the next 4 years, if her savings account bears 7 1/2% interest compounded quarterly.
You are given the following information: Stockholders' equity = $2 billion, price/earnings ratio = 12, common shares outstanding = 34 million, and market/book ratio = 2. Calculate the price of a share of the company's common stock.
What is the capital structure decision, how is the market value of a company affected by its capital structure?
Russo's Gas Distributor, Inc. wants to determine the required return on a stock with a beta coefficient of 0.5. Assuming the risk free rate of 6 percent and the market return of 12 percent, compute the required rate of return.
The cost-saving proposal is somewhat riskier than the usual project the firm undertakes; management uses the subjective approach and applies an adjustment factor of 3 percent to the cost of capital for such risky projects.
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