Exercise 6.
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? Explain why New foreign competitors enter the market
This would decrease the value of firm because the entry of new foreign competitors means there will be no monopoly market and the firm will have competitors thus reduce it shareholder wealth maximization.

Strict pollution control requirements are enacted
This would decrease the value of firm because strict pollution control requirements means the increasing of the cost thus the reduce the shareholder wealth maximization.

A previously nonunion workforce votes to unionize.
This would decrease the value of the firm because the unionization of the workforce would increase the union strike threats with uncertainty of operation. The firm may have to stop it’s operation if the unionization of workforce getting worse thus reduce it shareholder wealth maximization

The rate of inflation increases substantially
This would decrease the value of firm because increasing of the rate of inflation means the buyer power will reduce thus the sales of the firm also will reduce so the shareholder wealth maximization will decrease.

A major technological breakthrough is achieved by the firm, reducing its cost of production
This would increase the value of firm because a major technological breakthrough can save a lot of dollar thus increase the firm profit. The increasing of the value of firm will increase the shareholder wealth maximization.

Exercise 4

The demand for MICHTEC’s products is related to the state of the company. If the economy is expanding next year (an above-normal growth in GNP), the company expects sales to be $90 million. If there is a recession next year (a decline in GNP), sales are expected to be $75 million. If next year is normal (a moderate growth in GNP), sales are expected to be $85 million. MICHTEC’s economists have extimate the chances thet the economy will be either expanding, normal. Or in a recession next year at 0.2, 0.5 and 0.3, respectively.

Compute expected annual sales.

When economy is expanding r ̅ = ∑▒〖r_i P_i 〗
= (0.2)(90)
= 18

When economy is normal r ̅ = ∑▒〖r_i P_i 〗
= (0.5)(85)
= 42.5

When economy is recession r ̅ = ∑▒〖r_i P_i 〗
= (0.3)(75) = 22.5 Compute the standard deviation of annual sales

When economy is expanding

σ = √(∑▒〖〖(r_i- (r)) ̅〗^2.P_i 〗) = √(〖(90-18)〗^2 (0.2))
= 32.19 When economy is normal

σ = √(∑▒〖〖(r_i- (r)) ̅〗^2.P_i 〗) = √(〖(85-42.5)〗^2 (0.5)) = 30.05

When economy is recession σ = √(∑▒〖〖(r_i- (r)) ̅〗^2.P_i 〗) = √(〖(75-22.5)〗^2 (0.3)) = 28.75

Compute the coefficient of variation of annual sales

When economy is expanding
C.V = σ/r ̅ = 32.19/18 = 1.78

When economy is normal

C.V = σ/r ̅
= 30.05/22.5 = 1.33

When economy is recession
C.V = σ/r ̅
= 28.75/22.5
= 1.27