1. You are running a company that is owned by stockholders. Your goal is to maximize shareholder value. Explain how each of the following events is likely to affect shareholder value and identify uncertainties related to their effects.
a. Tariffs on the product you sell are reduced and you face more foreign competition.
b. Tariffs on several of the major inputs you use to produce your product are reduced.
c. New pollution control requirements are implemented.
d. Inflation rates rise.
e. A new technology is available that reduces the cost of production.
2. Use the concepts of marginal cost and marginal revenue to derive an optimal capital budget for Company X, which has identified 7 possible investment projects and determined its cost of capital as shown below.
Table A: Alternative Projects, Required Investments, and Expected Rate of Return
Project Investment Required in Millions of Dollars Expected Rate of Return on Investment
A 150 12%
B 300 15%
C 125 10%
D 75 16%
E 50 20%
F 500 14%
G 250 18%