problem1key

problem1key - ECON 303 Spring 2005 Davis Problem Set #1 1....

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ECON 303 Spring 2005 Davis Problem Set #1 1. To attract Walt Snore to the job of CEO of Good Sleep Inc. Walt is given the following (a) a signing bonus of $750,000. (b) a bonus of $750,000 in any year that company return on revenues exceeds 7%. Also (c) Walt receives 500 shares per annum of the stock, which he may not sell for 5 years. Which of these components best mitigates the principle-agent problem? Which is does the least? Why?. Most Likely:__ Stock _____ Least Likely:__ Signing Bonus _____ Reason: _The signing bonus doesn’t induce effort. Restricted stock, on the other hand, should encourage attention to the long run value of the firm. 2. Good Sleep Inc. is considering the purchase of a new mattress assembler that allows the construction of multiple firmness levels in the same mattress. Good Sleep anticipates the following 5-year earnings stream from the sale of this mattress. Years in the Future Anticipated Profit 1 22 2 24 3 26 4 28 5 30 If the discount rate is 10% and the machine costs $90 (000), payable at once, what is the
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This note was uploaded on 04/12/2010 for the course ECON 303 taught by Professor Shrestha during the Fall '08 term at VCU.

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problem1key - ECON 303 Spring 2005 Davis Problem Set #1 1....

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