Chapter 21: Q. 2FCT (page 481)
Do you suppose that the degree of randomness in the stock prices indicated by the random walk theory has increased or decreased since early 2007? Explain your reasoning.
A cost of equity or market's trend is used to determine its possible situation.
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The owner of WebCity is trying to decide whether to remain a proprietorship or to incorporate. Suppose that the corporate tax rate on profits is percent and the personal income tax rate is localid="1653216490078" percent. For simplicity, assume that all corporate profits (after corporate taxes are paid) are distributed as dividends in the year they are earned and that such dividends are subject to tax at the personal income tax rate.
a. If the owner of WebCity expects to earn localid="1653216495193" in before-tax profits this year, regardless of whether the firm is a proprietorship or a corporation, which method of organization should be chosen?
b. What is the dollar value of the after-tax advantage of the form of organization determined in part (a)?
c. Suppose that the corporate form of organization has cost advantages that will raise beforetax profits by localid="1653216505277" . Should the owner of WebCity incorporate?
d. Based on parts (a) and (c), by how much will after-tax profits change due to incorporation?
e. Suppose that tax policy is changed to completely exempt from personal taxation the first localid="1653216517393" per year in dividends. Would this change in policy affect the decision made in part (a)?
f. How can you explain the fact that even though corporate profits are subject to double taxation, most business in the United States is conducted by corporations rather than by proprietorships or partnerships?
What likely caused average stock prices to decline even after China's government's efforts to boost the demand for shares of stock? (Hint: Many private individuals and companies continued to seek to sell large amounts of shares of stock.)
Which of the following individuals would you expect to have a high level of economic rent, and which would you expect to have a low level of economic rent? Explain why for each.
a. Bob has a highly specialized medical skill shared by very few individuals.
b. Sally has never attended school. She is 25 years old and is an internationally known supermodel.
c. Tim is a high school teacher and sells insurance part-time.
Which of the following individuals would you expect to have a high level of economic rent, and which would you expect to have a low level of economic rent? Explain why for each.
Take a look at Figure 21-2. Explain why the figure implies that if the amount of accounting profit were to shrink to zero while the normal rate of return on investment remained unchanged, economic profit necessarily would become negative.
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