Answer:
Required rate of return is 6.97%
Explanation:
The required rate of return can be ascertained from the price formula below when the subject of the formula is changed to rate of return instead of stock price:
Stock price =dividend/required rate of return
stock price is $80.40
required rate of return is unknown
the dividend on the preferred stock is $5.60
required rate of return=dividend/stock price
required rate of return =$5.60/$80.40=6.97%
The required rate of return based on the stock price and dividend information provided is 6.97%
Answer: The answers are given below
Explanation:
a. What is its percentage rate of return?
From the question, we are told that the firm is earning $5.50 on every $50 invested by its founders. The percentage of return will now be:
= $5.50/$50 × 100%
= 0.11 × 100%
= 11%
b. Is the firm earning an economic profit? If so, how large?
The economic profit will be the difference that exists between the percentage of return which is 11% and the normal rate of profit which is 5%. This will be:
= 11% - 5%
= 6%
The firm is earning economic profit of 6%.
c. Will this industry see entry or exit?
There will be entry into the industry. This is because the percentage of return which is 11% is greater than the normal rate of profit which is 5%.
d. What will be the rate of return earned by firms in this industry once the industry reaches long-run equilibrium?
The rate of return earned by firms in this industry once the industry reaches long-run equilibrium will be 5% which is the normal rate of profit in the economy.
Answer:
c. cease production immediately, because it is incurring a loss.
Explanation:
When a business engages in production it looks to make profit. That is for the production price to be higher than cost incurred in producing the good.
However when the price is lower than the average variable cost as is indicated in the scenario then the firm needs to shut down production in the short term.
Factors that will adversely affect a firm in the short term are price, average total cost, and average variable cost.
Once price is less than average total cost or average variable cost it is better to stop production.
As they are incurring an economic loss
Answer:
c. Erie s ROE will remain the same
Explanation:
As the return on asset is calcualte using the asset figure it will not change with a financial leverage measurement.
As the financial leverage acts in the composition of other side of the accounting (assets = liabilitis + equity) it will change the return on equity, the debt ratio and other metric related to this side but, not the return on assets.
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