CEE_594_problem_set_2_F072 - CEE 594/Econs 494 Problem Set...

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CEE 594/Econs 494 Problem Set #2 (Due Wed. October 10, in lecture) 1. In the exercises you have been performing in the Laboratory with three teams each making a sequence of investment decisions to acquire additional production capacity, and then of price and quantity offers into the market, some teams have been arriving late which has delayed the whole group of three teams in starting their exercises. a. One solution is to start the exercise without the late arrivals (e.g. no investment and no offers into the market for that particular team until they arrive; the market clears based upon the offers of the other one or two teams that are there on time). Describe the likely consequences of this solution, both on those teams present and the late team. b. Lay out an alternative penalty scheme for late arrivals and explain if it is better or worse than the mechanism in part (a.) and why. 2. In many instances elected officials pressure utilities that they regulate (e.g. privately-owned water, telephone, gas or electric companies) to keep their capital carrying costs low so they can charge lower prices to their customers by financing their operations with a much larger percentage of debt. The typical utility supports its assets with approximately 50% debt and 50% equity, but some public officials have pressed for as high as 80% debt since interest rates on bonds are much lower than the return on equity required by stockholders. Explain why or why not, and under what circumstances, stockholders might resist these proposals even though it should “leverage” their investment. 3. As the financial Vice President of your company that is about to embark on a major new acquisition of an unrelated business, you have been asked to update your estimates of the company’s cost of capital for fine-tuning of the investment decision. Your company plans to continue it’s 80% equity, 20% debt financial structure, and your investment banker tells you your
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This note was uploaded on 03/29/2009 for the course CEE 5940 taught by Professor Schuler during the Fall '07 term at Cornell University (Engineering School).

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CEE_594_problem_set_2_F072 - CEE 594/Econs 494 Problem Set...

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