problem1keyS06

problem1keyS06 - ECON 303 Sprint 2006 Davis Problem Set #1...

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Sprint 2006 Davis Problem Set #1 KEY 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) In addition to his salary Walt will be paid a bonus of $750,000 in any year that company return on assets exceeds 7%. Also (c) Walt receives 500 shares per annum of the stock, which he may not sell for 5 years. Comment on the likely effectiveness of each of these components of as a means to mitigate the principle-agent problem. Most Likely: Stock Least Likely: Signing Bonus Reason: The signing bonus doesn’t induce effort. The earnings bonus helps some, but is imperfect, the restricted sale stock does promote attention to the long term value of the firm. 2. Good Sleep anticipates the following earnings for the next 5 years. 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), what is the net present value of the machine? Is it a good purchase? PV =
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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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problem1keyS06 - ECON 303 Sprint 2006 Davis Problem Set #1...

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