Assume that you are the new CEO of a major corporation that has ...

[asan beg]

Assume that you are the new CEO of a major corporation that has five major product lines each run as separate corporations.
 
  You discover that if you invested the company's money outside of the firm that it could earn a 15 rate of return on the investment. You tell all the presidents of each of these subsidiary companies that in order for them to remain with the company that their return on capital must equal to or exceed 15 rate of return. Use two economic principles discussed in chapter 1 to explain why the CEO's advice is sound.

Question 2

Suppose the Fed decreases the money supply. In response households and firms will ________ short term assets and this will drive ________ interest rates.
 
  A) sell; down B) buy; down C) sell; up D) buy; up

[ryansturges]

Answer to Question 1

Essentially there is a high opportunity cost associated with investing large sums of money in a corporation when the rate of return is higher if invested elsewhere. By getting the presidents of each of the subsidiary companies to push the rate of return on their capital upwards the stockholder's money is being more efficiently managed.

Answer to Question 2

C

[asan beg]

Gracias!

[kthug]

Thanks for the timely response, appreciate it