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valentina_108 [34]
3 years ago
12

Mrs. Smith operates a business in a competitive market. The current market price is $8.10. At her profit-maximizing level of pro

duction, the average variable cost is $8.00, and the average total cost is $8.25. Mrs. Smith should
Business
1 answer:
Luba_88 [7]3 years ago
3 0

Answer:

Mrs Smith either shut down the business or invest in efficient equipements that lowers the total cost to below $7

Explanation:

The reason is that the you can not make profit if you product is sold in the market at a higher price than the competitor who offers the same product with the same features. So here, Smith can not make profits by selling the product at $8 because here total cost is $8.25 per unit.

So either she should invest in the business equipments which bring efficiencies and keeps the total costs to below $7 or she should shut down her business because the business is turned into loss making machine.

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First Expected Dividend will come in at the end of Year 3 or t=3 assuming current time is t=0.

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Therefore, Current Stock Price = Present Value of Expected Dividends = [6.59459 / (0.136-0.0408)] x [1/(1.136)^(5)] + 4.25 / (1.136)^(3) + 5.18925 / (1.136)^(4) + 6.33607 / (1.136)^(5) = $ 45.979 ~ $ 45.98

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Total Required Return = 14. 6 %

Therefore, Required Capital Gains Yield = 14.6 % - 7.612 % = 6.988 %

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