Suppose firms expect future output to be higher and future interest rates to be higher. Given...

Suppose firms expect future output to be higher and future interest rates to be higher. Given this information, how will firms alter investment in the current period? Explain.

Expert Solution

Here interest rate means Return on capital employed.

If the firms expecting future output to be higher and future interest rates to be higher, then the firms has to alter financing method in current period in order to reduce Cost of capital, ie.

If the firm is raising funds from stock ie. From common stock and Preference Share,

Then they has to levere the firms ie. raising funds through debenture rather than common and preference stock.

Because Cost of Capital on Debenture is generally lower than the other method of raising funds.

If there would be lower cost capital, then Return on the Capital employed by firms will be higher. That will results in Higher earning per share and would leads Increase in price per share and will also enhance brand equity.

Rahul Sunny answered 2 years ago

2. Suppose that the current and expected future short-term interest rates are given by: it =...

2. Suppose that the current and expected future short-term interest rates are given by: it = 0:05 ie t+3 = 0:03 ie t+1 = 0:05 ie t+4 = 0:03 ie t+2 = 0:04 And suppose that the liquidity premiums on bonds with maturity on 1 through 3 years are: l1t = 0:00 l4t = 0:02 l2t = 0:01 l5t = 0:025 l3t = 0:015 (a) Find the yields on the 2-, 3-, 4-, and 5-year bonds implied by the expectations...

1. Suppose the data on today’s and future expected interest rates is given: Time Yield on...

1. Suppose the data on today’s and future expected interest rates is given: Time Yield on 1-year T-bond Today 1.2% Next year 1.2% (expected) 2 years from today 1.6% (expected) 3 years from today 2.0% (expected) a) Calculate today’s interest rates on 2-year, 3-year and 4-year bonds using the expectations hypothesis. Use these yields to construct a yield curve and plot it. What kind of shape does it have? b) Now, suppose term premiums for 2-year, 3-year and 4-year bonds...

1. Suppose the data on today’s and future expected interest rates is given: Time Yield on...

1. Suppose the data on today’s and future expected interest rates is given: Time Yield on 1-year T-bond Today 1.2% Next year 1.2% (expected) 2 years from today 1.6% (expected) 3 years from today 2.0% (expected) a) Calculate today’s interest rates on 2-year, 3-year and 4-year bonds using the expectations hypothesis. Use these yields to construct a yield curve and plot it. What kind of shape does it have? b) Now, suppose term premiums for 2-year, 3-year and 4-year bonds...

Suppose the economy is in long-run equilibrium. Then, suppose workers and firms suddenly expect higher prices...

Suppose the economy is in long-run equilibrium. Then, suppose workers and firms suddenly expect higher prices in the future and agree to an increase in wages. Explain the following questions using appropriate diagrams. Describe the initial impact of this event in the model of aggregate demand (AD) and aggregate supply (AS) by explaining which curve shifts which way. What happens to the price level and real output in the short run? If policymakers wanted to move output back to the...

When an economy is experiencing higher real interest rates, wewould expect aggregate demand to ______________...

When an economy is experiencing higher real interest rates, we would expect aggregate demand to ______________ and unemployment to _____________.shift to the left; riseshift to the left, fallshift to the right; risenot move; not changeIf investment spending increases, then according to the Keynesian model:the aggregate demand shifts right.the short run aggregate supply curve shifts right.the aggregate demand curve shifts left.the short run aggregate demand curve shifts left.

For a given time period and for the same future value amount, the higher the interest...

For a given time period and for the same future value amount, the higher the interest rate the lower the present value. T or F You are trying to save up to buy a mountain bike worth $5,900. You can invest $200 a month in your bank that pays 4.4% interest on its accounts. How many years will it be before you have enough to purchase the mountain bike? Tim has his heart set on buying a million-dollar house when...

Which interest rate would expect to be higher?

Which interest rate would expect to be higher?A. RealB. NominalC. They are the same

suppose that you believe that interest rates are going to fall in the future and you...

suppose that you believe that interest rates are going to fall in the future and you must choose between two bond investment, options a) and b) which of the two bond investment options would you select and why? A) Buy 10 bonds with 6% coupon rate, thirty-years to maturity, $100 face value, and pay semi annual coupons B) buy 1 bond with a 4% coupon rate, thirty-years to maturity, $1,000 face value, and pay semi annual coupons

Suppose that a bank increases its interest rates. If people are rational, how will the higher...

Suppose that a bank increases its interest rates. If people are rational, how will the higher interest rates affect their borrowing (ceteris paribus)? People will borrow more People will borrow less People will not change their borrowing habits Suppose than an economy is in an inflationary gap, which of the following must happen for this problem to fix itself, according to classical economists? Wages must rise Wages must fall Which of the following best illustrates Say's Law? If I want...

Interest rates are 7% in the U.S. Foreign interest rates are 10%. If you expect the...

Interest rates are 7% in the U.S. Foreign interest rates are 10%. If you expect the foreign currency to depreciate 5%, where are you better off investing? A U.S. firm has a future receivable (cash inflow) denominated in Euros. The U.S. firm faces foreign exchange risk in the form of the Euro _____________ between now and the time the U.S. firm receives Euros. In the current international trade environment, countries are increasingly taking steps to strengthen their home currency so...

Question

Suppose firms expect future output to be higher and future interest rates to be higher. Given...

Solutions

Expert Solution

Related Solutions

2. Suppose that the current and expected future short-term interest rates are given by: it =...

1. Suppose the data on today’s and future expected interest rates is given: Time Yield on...

1. Suppose the data on today’s and future expected interest rates is given: Time Yield on...

Suppose the economy is in long-run equilibrium. Then, suppose workers and firms suddenly expect higher prices...

When an economy is experiencing higher real interest rates, wewould expect aggregate demand to ______________...

For a given time period and for the same future value amount, the higher the interest...

Which interest rate would expect to be higher?

suppose that you believe that interest rates are going to fall in the future and you...

Suppose that a bank increases its interest rates. If people are rational, how will the higher...

Interest rates are 7% in the U.S. Foreign interest rates are 10%. If you expect the...