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Unformatted text preview: 4.4 There would be too much borrowing. The borrowers would have to be given limited access to the market. This would also be an irresistible arbitrage opportunity that could not last long and a new equilibrium would be set. 4.5 a. Since the PV of labour income is $70, and $70 = $50 + $44 / (1 + r), r must be equal to 120%. b. NPV = $85 $70 = $15 c. Her wealth is $85. Letting C denote consumption, she wants $85 = C + C/(1 + r) where r = 1.20. Solve for C; C = $58.44 4.6 a. $91,500 / $76,250 1 = 0.20 or 20% b. He will invest $10,500 in financial assets and $32,500 in productive assets today. c. NPV = $32,500 + $52,500 / 1.2 = $11,250 4.7 a. AE. b. CF / BD. The equity will appreciate to BE on the announcement. c. AF / AB. Answers to EndofChapter Problems B20...
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This note was uploaded on 07/18/2010 for the course ECONMICS ECM359 taught by Professor Matazi during the Summer '10 term at University of Toronto- Toronto.
- Summer '10