Name: Noor Arzieana binti Ismail

Student ID: 2022605038

Date: 27th March 2023

Assignment 1: ECO 740: Introduction and Goals of the Firm

MULTIPLE CHOICE

1. D

2. D

3. A

4. D

5. B

6. B

7. A

8. E

9. A

10. B

11. B

12. D

13. C

14. D
Assignment 1 - CTD

EXERCISES

Question 1.

In the context of the shareholder wealth-maximization model of a firm, what is the expected impact
of each of the following events on the value of the firm?

a. New foreign competitors enter the market.

The entry of new foreign competitors into the market can have different effects on a
company's value, depending on various factors such as the degree of product differentiation
of the company, and the size and growth potential of the market. Low cost, superior
technology, or improved reputation. This can generally reduce a company's market share,
pricing power, and profitability.

On the other hand, if a company can respond effectively to new competition, for example by
improving its products, reducing costs, or enhancing its marketing efforts, it can maintain or
increase its market share and profitability. This could increase the company's expected future
cash flows and, in turn, increase the company's stock price.

b. Strict pollution control requirements are implemented by the government.

If environmental protection requirements lead to a reduction in the company's production or

sales, it could further reduce the company's revenues and profitability, thereby lowering its
expected future cash flows and share price.

For example, if environmental regulations apply to all companies in an industry, increased

compliance costs can lead to fewer competitors in the market, less competition, and higher
prices for companies' products. This may improve the company's earnings and profitability
and increase expected future cash flows and stock price.

c. A previously non-union workforce votes to unionize.

Companies may face increased labor costs as they may have to negotiate with unions for
wages, benefits, and job security. This could reduce the company's profitability and future
cash flows and cause the company's stock price to decline.

It can also be profitable for the company. For example, an organization can increase employee
satisfaction, productivity, and loyalty, reduce turnover and training costs, and ultimately
improve company efficiency and profitability.
d. The rate of inflation increases substantially.

Inflation increases input costs such as raw materials, labor, and energy, and can reduce a
company's profitability and future cash flows. This is because the company is unable to pass
these higher costs on to its customers in the form of higher prices, which can hurt its profit
margins.

Inflation can affect the nominal value of a company's assets such as: It may make the company
appear more valuable to investors. In addition, inflation can increase the prices of
commodities such as metals and energy, which can benefit companies that produce or sell
these commodities.

e. A major technological breakthrough has been achieved by the firm, reducing its costs of
production.

Reducing production costs can improve a company's profit margins, improving profitability
and future cash flow. This can lead to an increase in the company's stock price as investors
become more confident in the company's ability to generate future profits and dividends.

Secondly, technological breakthroughs can lead to improved product quality, increased

efficiency, and greater flexibility in production processes, all of which can benefit a company's
competitiveness in the market.
Question 2.

How would each of the following actions be expected to affect shareholder wealth?

a. RJR Nabisco sells its Del Monte division for over Monte division for over $1 billion.

Selling business units at a premium increases the company's cash reserves, which can be used
for a variety of purposes, including paying dividends, investing in new projects, and buying
back stock. This increases the company's expected future cash flow and stock price value, as
investors may view the company as more financially stable and capabilities.

Selling business units allows companies to focus on their core competencies and streamline
their operations, which can lead to increased efficiency, productivity, and profitability.
Depending on the details of the sale, such as the price received and how the proceeds are
used. Overall, the sale of business units in excess of $1 billion is expected to generate expected
future cash flows and stock price value for the company.

b. Ford Motor Company pays $2.5 billion for Jaguar.

The acquisition will provide Ford with access to Jaguar's technology, expertise, and
distribution channels, potentially increasing the efficiency and productivity of Ford's
operations.

There are also potential risks associated with acquisitions. If Ford overpays Jaguar, or if the
acquisition does not deliver the expected profits, it could reduce the company's expected
future cash flows and cause Ford's stock price to fall. In addition, the acquisition could increase
Ford's debt, increase the company's financial risk, and limit its ability to pay dividends and
invest in new projects.

c. General Motors offers large rebate to stimulate sales of its automobiles.

Offering deep discounts can increase sales volume, which can increase a company's revenue
and market share. This could potentially increase the company's expected future cash flows
and share price, as investors may view the company as better positioned to generate future
earnings. On the one hand, it can also reduce profit margins and overall company profitability.
This may lead investors to perceive the company as less financially stable and less capable.

The rebate, including the amount of the rebate, its impact on sales volume and margins, and
its impact on the company's financial position. If the rebate leads to increased company sales
and long-term profitability, it may increase expected future cash flows.

d. Rising interest rates cause the required returns of shareholders to increase.

As interest rates rise, the required return for shareholders increases because they can earn
higher returns by investing in other securities such as bonds and other bonds. As a result,
shareholders may demand higher returns from the company to offset the increased
opportunity cost of investing in the company's stock.
 Depends on the specific interest rate increases, including the extent and duration of interest
rate increases, and the overall impact on the cost of capital and financial position of the
company. If the rise in interest rates is gradual and temporary, the impact on shareholder
wealth may be limited. However, if interest rates rise significantly and over the long term, this
could have a negative impact.

e. Import restrictions are placed on the Japanese competitor laced on the Japanese competitors of

Chrysler.

Imposing import restrictions on Chrysler's Japanese competitors could reduce the level of
competition Chrysler faces in the market, which could result in an increase in Chrysler's
market share, sales volume, and profits. Import restrictions could also provide Chrysler with
an opportunity to raise prices, which could improve profit margins and overall profitability.

It could also lead to retaliation from the Japanese government, which could otherwise affect
Chrysler's business. It could also affect relationships with Chrysler's customers who rely on
imports from Japan, which could result in a negative public perception of Chrysler. These
factors may offset some of the positive impact on shareholder wealth that import restrictions
may bring.

f. There is a sudden drop in the expected future rate of inflation.

A drop in the expected future inflation rates could lead to lower interest rates, lower future
inflation expectations could lead to higher private consumption and investment as consumers
and investors are less concerned about inflation-induced erosion of purchasing power. This
may increase demand for the company's products and services, leading to increased sales and
profits.

A sharp decline in expected future inflation rates could also cause the value of some assets,
such as real estate, to fall, which could adversely affect the economy as a whole and the
financial condition of companies. Moreover, if lower inflation expectations reflect lower
economic growth prospects, it could hurt the profitability of the company.

g. A new, labor-saving machine is purchased by Wonder Bread and results in the layoff of 300

employees.

Purchasing a new labor-saving machine can save money for your business by increasing
productivity and reducing labor costs. In addition, if labor cost reductions lead to lower prices
for consumers, demand for the company's products and services may increase, resulting in
increased sales volumes and profits.

Laying off 300 employees can have a negative impact on the company and its stock price.
Layoffs can lead to decreased employee morale, decreased productivity and reduced quality
of our products and services. This can damage the company's reputation and reduce sales and
profits.