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accounting department

1. The head of the accounting department at a major software manufacturer has asked you to put together a pro forma statement of the company’s value under several possible growth scenarios and the assumption that the company’s many divisions will remain a single entity forever.  The manager is concerned that, despite the fact that the firm’s competitors are comparatively small, collectively their annual revenue growth has exceeded 50 percent over each of the last five years.  She has requested that the value projections be based on the firm’s current profits of $4.7 billion (which have yet to be paid out to stockholders) and the average interest rate over the past 20 years (6 percent) in each of the following profit growth scenarios:

a. Profits grow at an annual rate of 9 percent. (This one is tricky.)

Instructions: Round your responses to 2 decimal places.

b. Profits grow at an annual rate of 4 percent.


c. Profits grow at an annual rate of 0 percent.


d. Profits decline at an annual rate of 2 percent.


2. A firm produces output according to a production function:

Q = F(K,L) = min {3K,6L}.

a. How much output is produced when K = 2 and L = 3?

b. If the wage rate is $55 per hour and the rental rate on capital is $45 per hour, what is the cost-minimizing input mix for producing 6 units of output?


c. How does your answer to part b change if the wage rate decreases to $45 per hour but the rental rate on capital remains at $45 per hour?

Capital increases and labor decreases.
Capital and labor increase.
It does not change.
Capital decreases and labor increases.

3. You’ve recently learned that the company where you work is being sold for $435,000. The company’s income statement indicates current profits of $23,000, which have yet to be paid out as dividends. Assuming the company will remain a “going concern” indefinitely and that the interest rate will remain constant at 7 percent, at what constant rate does the owner believe that profits will grow?

Instruction: Round your response to 2 decimal places.

Growth rate of:  percent.

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4. Suppose the demand for X is given by Qxd = 100 – 2PX + 4PY + 10M + 2A, where PX represents the price of good X, PY is the price of good Y, M is income and A is the amount of advertising on good X. Based on this information, we know that good X is a

substitute for good Y and a normal good.

complement for good Y and an inferior good.

complement for good Y and a normal good.

substitute for good Y and an inferior good.

5. Suppose market demand and supply are given by Qd = 100 – 2P and QS = 5 + 3P. If the government sets a price floor of $20 and agrees to purchase all surplus at $20 per unit, the total cost to the government will be:





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