Jon Mitchell runs a small, very stable newspaper company in northern Georgia. The paper has been in business for 23 years. The total value of the firm's stock is $2 million, which Jon owns outright. This year the firm earned a total of $500,000 after out-of pocket expenses. Without taking the opportunity cost of capital into account, this means that Jon is earning 25 percent return on his capital. Suppose that risk-free bonds are currently paying a rate of 10 percent to those who buy is them.
a. What meant by the "opportunity cost of capital"?
b. Explain why opportunity costs are "real" even though they do not necessarily involve out-of-pocket expenses.
c. What is the opportunity cost of Jon's capital?
d. How much excess profit is Jon earning?