Question

1a) Explain the concept of market value added, economic value added and future growth value
b) A project has a net present value of zero, what return is earned on this project when the discounting rate of 15%?.Explain your answer
c) Demonstrate how supply and demand equations can be derived using the concept of elasticity.
d) in oligopoly, game theory can be used to explain the behaviour if firms . explain how firms can end up in a suboptimal equilibrium in the absence of cooperation.

Answer 1

Answers:  

1. Market value added: Market value added is the difference between the current market value of a firm and the capital contributed by the investors.

Economic value added: It is the measure of a firm's financial performance based on residual wealth which is calculated by deducting its cost of capital from its operating profit.

Future growth value: It is the value of an asset at a specific date.It measures the nominal future sum of money that a given sum of money is "worth" at a specified time in the future assuming a certain interest rate.

2. A project will have zero net present value only when its required rate of return is equal to the return generated by that project.So if the net present value is zero with discount rate( required rate of return) equal to 15% then the return earned on this project is also equal to 15% i.e equal to the discount rate.

3. let us first write down the formula of price elasticity to understand the concept better

price elasticity of demand= % change in quantity demanded /% change in price

similarly price elasticity of supply=% change in quantity supplied /% change in price

These are actually the slope of the supply and demand functions respectively.

so suppose there is only 1% change in demand for one % change in price means it is unit elastic and the slope of the supply curve is -1 (-ve sign indicated the decrease in demand with increase in price.

similarly for the supply curve.