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ch.1

the form of economics most relevant to managerial decision making ?

microeconomics

In the shareholder wealth maximization model, the value of a firm's stock is equal to the pv of all expected future ? disocunted at the stockholder's required rate of return

profits

What defines the share-holder wealth maximization model?

the timing of future profits is explicity considered, the model provides a conceptual basis for evaluating differential levels of risk

What is profit maximization of the firm?

process that companies undergo to determine the best output and price levels in order to maximize its return.

what is the innovation theory of profit?

above normal profits are the rewards for taking risk

What defines the managerial efficency theory of profit?

above normal profits arise because of high-quality managerial skill.

When does the agency problem occur?

Owners delegate to management

Income tax payments are what type of cost?

explicit cost

what are explicit costs?

clear cut costs the business pays

what is a implicit cost?

opportunity cost not clear cut

what can be said to define turnaround of o.m. scott?

increase in interest rates to earn greater returns on its liquid assets

what are the two problems which cause the principal-agent problem?

unobservability of manager-agent action and presence of random disturbances in team production.

The level of an economic activity should be increased to the point where the __________ is zero.

net marginal benefit

what does the net present value of an investment represent?

the expected contribution of a investment to the goal of shareholder wealth

what type of risk does a project with high expected net present value have?

high risk

what is a risk-free security?

u.s. treasury bills

The standard deviation is appropriate to compare the risk between two investments only if

expected returns are approximately equal

a security which could offer a higher return than a corporate bond?

common stock

The _____ is the ratio of ________ to the ______

coefficient of variation; standard deviation; expected value

what are 3 sources of positive net present value projects?

buyer preferences for established brands, economies of lare-scale production, patent control of superior product design

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