A Price Floor Policy Establishes a Minimum Price for a Market

question 17

Multiple Choice

A price floor policy establishes a minimum price for a market, and the policy is said to be binding if the market equilibrium price is less than the floor price. What impact does a binding price floor have on the market outcome?

• A) Excess supply
• B) Excess demand
• C) Shortage
• D) No impact, and the market price and quantity equal their equilibrium values

Describe the adjustements made to dividend costs to account for flotation expenses.

Understand the fundamental concepts of the Capital Asset Pricing Model (CAPM) and its role in calculating a firm's cost of equity.

Recognize the importance of using an appropriate discount rate, specifically the weighted average cost of capital (WACC), in evaluating investment projects, including adjustments for project risk.

Calculate the weighted average cost of capital (WACC) using a firm's target capital structure and component costs of capital, considering the effect of taxes.

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Definitions:

Amortized

Refers to the process of paying off debt over time in equal installments of principal and interest.

Compounded Monthly

A method of interest calculation where the interest earned each month is added to the principal, thus earning more interest in the following month.

Compounded Monthly

The process of calculating interest on the initial principal and the accumulated interest from previous periods monthly.

Amortized

The steady decrease of an owed sum through consistent payments towards both the interest and the principal over a set duration.