Managerial Economics - Econ 351M Fall 2015 - Homework 1
1. Some definitional questions.
a. Explain the difference between a secured creditor and a general creditor.
b. Explain how a non-recourse loan for capital to invest in a business limits a sole proprietor's personal liability.
c. A bank loans $15,000 to the sole proprietor of a business at an interest rate of %8, and unexpectedly, a competitor goes out of business. Explain the subsequent divergence between the book value and market of the bank's note.
2. A sole proprietor invests $120,000 in a small business, $80,000 of their own money and $40,000 borrowed from a bank at a %10 rate of interest (so that $4,000 must be paid to the bank at the end of the fiscal year).
a. If, net after all expenses and allowances, including a reasonable amount for her own services but before interest payments, the sole proprietor makes a fiscal year profit of $18,000 (or a %15 rate of return on investment). What is the proprietor's rate of return on her own investment?
b. If, net after all expenses and allowances, including a reasonable amount for her own services but before interest payments, the sole proprietor makes a fiscal year profit of $6,000 (or a %5 rate of return on investment). What is the proprietor's rate of return on her investment?
c. Give the word used to describe the financial consequences of the use of debt and equity that you have just found.