13 Suppose the growth rate of the firm\'s profit is 3%, the interest rate is 7%,
ID: 1143064 • Letter: 1
Question
13Suppose the growth rate of the firm's profit is 3%, the interest rate is 7%, and the current profits of the firm are 150 million dollars: What is the value of the firm? A) $296 million. B) $3,863 million. C) $4,013 million. D) $5,607 million. 14
Scarce resources are allocated towards the production of goods most valued by society because A) firms have incentive to maximize profits. B) consumers are unwilling to buy expensive good and services. C) of the benevolence of firm owners. D) government mandates resources to be used in certain production combinations. 15
Maximizing the firm's current profits is the same as maximizing the lifetime value of the firm when the A) the growth rate in profits is smaller than the interest rate. B) the period-to-period growth rate in profits is constant. C) the period-to-period interest rate is constant. D) all of the responses must be true.
Explanation / Answer
Ans:
13) Option B
Value of the firm = $3863 million
Analysis
Value of the firm = P(1+G) / (K - G)
where P = profits, G = growth rate, K = interest rate
Value of the firm = $150 million(1+0.03) / (0.07 - 0.03)
= $154.5 million / 0.04
= $3863 million
14) Option A
firms have incentive to maximize profits.
Scarce resources are allocated towards the production of goods most valued by society because the main goal of the firms is to maximize profits.
15) Option D
all of the responses must be true
The interest rate should be larger than the growth rate in profits and both interest rate and growth rate are constant.
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