3. Suppose the portfolio of a large institutional investor ‘Animal has a beta of 1.25, and the standard deviation of the rate of return on its portfolio is 15 percent and its expected rate of return is 15 percent. The portfolio of another institutional investor Beast’ has a beta of 0.75. The market portfolio may be expressed as a portfolio comprising the portfolios of Animal and Beast. Suppose there is a firm called Cunning corporation’, whose stock’s beta is 2 and it can borrow at the risk free rate, which is 2.5 percent. Cunning’s equity value is £1.5 million and its debt is £1 million. The present value of Cunning’s tax shield is £0.3 million. Assuming that both CAPM and the Modigliani-Miller theorem with corporate taxes hold, answer the following questions. a) What is the expected return on the market portfolio? [5 marks] b) What is the standard deviation of the rate of return on Beast’s portfolio? [5 marks] c) What is the weight attached to Beast if we express the market portfolio as a portfolio [5 marks] [5 marks] Total 20 marks] comprising the portfolios of Animal and Beast? d) What is the after-tax WACC of Cunning? 2. A firm ‘Kappa Industries’ is a very young business, which is growing rapidly and to which intangible assets are very important. In contrast, another firm ‘Gorgeous Food’, whose business is profitable and stable, but has limited growth opportunities and most of its assets are tangible. With this setup, answer the following questions. a) Assuming that the predictions of the pecking order theory hold, which firm should have [20 marks] b) Assuming that the predictions of the trade-off theory hold, which firm should have a [20 marks] a higher payout ratio? Explain concisely why. higher debt-equity ratio? Explain concisely why.

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3. Using the IS-LM graphs, show that a decrease in government spending will cause output and interest rates to fall. 4. Using the IS-LM graphs, show what will happen to output and the interest rates if there is a balanced budget increase in spending—that is higher spending financed by higher taxes. 5. Using IS-LM graphs, predict what will happen to output and the interest rate if the central bank reduces the money supply.

 

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3.Use the following payoff matrix for a simultaneous-move one-shot game to answer the accompanying questions.

Player 2

Strategy

C

D

E

F

Player 1

A

15, 7

10, 11

19, 15

18, 20

B

8, 12

19, 7

12, 3

15, 16

a. What is player 1’s optimal strategy?

Strategy A.

Player 1 does not have an optimal strategy.

Strategy B.

b. Determine player 1’s equilibrium payoff.

4. Use the following payoff matrix for a simultaneous-move one-shot game to answer the accompanying questions.

Player 2

Strategy

C

D

E

F

Player 1

A

10, 23

14, 20

20, 16

22, 14

B

14, 26

8, 5

20, 9

19, 14

a. What is player 1’s optimal strategy?

Player 1 does not have an optimal strategy.

Strategy B.

Strategy A.

b. Determine player 1’s equilibrium payoff.

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3. There are two types of firms in an industry. Type 1 firms have the costs TC(n) = 625+ 0.25qi and type 2 firms have costs TC(2) 50000.52 The fixed costs for both types of firms are NOT sunk. (a) Derive each firm’s ATC(g), AVC() and MC() functions and plot the curves on separate diagrams (b) Derive each firm’s supply function q(p) and show the corresponding curves in the diagrams (c Suppose that there are 10 firms of each type. What is the industry’s supply curve? Plot the industry’s supply curve and indicate price ranges at which no firms operates, only 10 firms operate, all firms operate (d) If consumers demand is Q (p4800 10p what is the short-reiibrium price and quantity? Is each firm making positive profits? Calculate the producer surplus the consumer surplus, and the total surplus in the market. What are the long-run equilibrium price, quantity, and number of firms? (e) If consurners demand is QD(p) 2400-10p what is the short-run equilibrium price and quantity? What are the long-run equilibrium price, quantity, and number of firms?

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3) The Telecommunications Regulatory Authority (TRA) is the UAE’s independent industry regulator. Since its launch in 1976, Etisalat has held a monopoly in the market. That changed in 2006 with the emergence of du, which was awarded a 20-year concession to operate fixed-line, wireless, internet and international telecoms services. Assume after the 20 years period, du license was terminated. You are required to –

a.Apply your understanding and concepts from microeconomics, to investigate and summarize the major characteristics of the above market form in the telecom industry.?

b. Describe and analyze the economic and pricing policies that you would expect to find in this industry.?

c.Explain the profit maximization strategy of this market form with the help of a suitable graph.?

d. Also, write your policy recommendations for the healthy growth of the industry keeping customer interests and innovation in mind.?

 

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