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26 Cards in this Set
- Front
- Back
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Capital
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One of society's resources. Other resources include: Land, Labor, and Entrepreneurship.
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Physical capital
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Plant and Equipment and ****
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Human capital
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the skills, and training of the labor force
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The Marginal approach to profit
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A firm should take any action that adds more to its revenue than it adds to its cost
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What does the marginal approach to profit tell us about renting capital?
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When capital is rented, rather than purchased, the marginal approach to profit tells us that the firm should rent another unit of capital whenever the addition (net) revenue per period is greater than the additional rental cost per period.
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Time value of money
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because present dollars can earn interest it is always preferable to recieve a given sum of $ earlier rather than later. Therefore, a dollar received later has less value than a dollar received now, niggah
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Present Value
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of a future payment is its equivalent value in today's dollars. Alternatively, it is the most anyone would pay today for the right to receive future payment with certainty.
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PV equation
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PV of Y$ to be received n years from now =
PV = Y / (1 + r)^n |
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Discounting
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the act of converting future value into present-day equivalent
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a payment received later has a _________ PV than a payment received earlier
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lower
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the PV of a future payment is ___________ when the interest rate is higher.
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lower
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The PV of a future stream of payments:
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payment 1 payment 2 payment 3
___________ + _____________ + ____________ + etc.... ( 1 + r ) (1 + r)^2 (1 + r )^3 |
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The principle of asset valuation
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when there is no uncertainty, the value of any asset is the sum of the present values of all of the future benefits it will gather.
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When there is uncertainty about future benefits...
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The principle of asset valuation is just a starting point. It tells us the most an asset would be worth. The greater the uncertainty, or the greater one's aversion to risk, the more the value of the risky asset will fall short of its PV
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Investment
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Firms' purchases of new capital over some period of time
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As the interest rate rises, each business firm ...
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will place a lower value on additional capital, and decide to purchase less of it. Therefore, in the economy as a whole, a rise in the interest rate causes a decrease in investment expenditures
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Lower interest rates...
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increase firms' investment in physical capital, causing the capital stock to be larger, and our overall standard of living to be higher.
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Financial asset
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promise to pay future income in some form, such as future profits or future interest payments.
Stocks Bonds |
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Primary market
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the market in which newly issued financial assets are sold for the first time.
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Secondary market
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The market in which previously issued financial assets are sold.
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Firms that issue financial assets in the primary market are affected by
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what happens in the secondary market. More specifically, if an asset's price rises in the secondary market, so will the price the firm can charge for similar, newly issued assets in the primary market
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Describe the relationship between bond prices and bond yields.
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Inverse. The higher the price of any given bond, the lower the yield on that bond.
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Default risk
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A bond is a promise to pay in the future, and the danger that the promise wont be kept is called the default risk
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Bonds with default risk sell for
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less than the PV of their promised payments. The greater risk of default, the lower the bond's price and the greater its yield
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PV of a stock
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if a firm will earn a constant Y$ in profit after taxes each year forever, then the PV of these future profits is $Y/r, where r is the discount rate
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The value of a share of stock, under no uncertainty
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equals the total PV of its future after-tax profit, divided by the # of shares outstanding
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