Question 1
There is an opportunity cost associated with
◦ only investments made with borrowed funds.
◦ only investments made with retained earnings.
◦ only investments made with funds received from the sale of new bonds.
◦ every investment project, no matter how it is funded.
Question 2
You work as a forecaster for a luxury automobile manufacturer. You know that there is a strong positive relationship between the demand for luxury automobiles and income levels. The government issues a report predicting that it expects income levels to increase steadily over the next 5 years. All else equal, which of the following courses of action would you recommend to the firm?
◦ Don't change the amount of investment made, but raise the price of luxury automobiles in response to the expected increase in the demand.
◦ Suggest that the firm make an investment in new capital to produce luxury automobiles only after it can verify an increase in income levels.
◦ Start to increase investment now so that when income levels increases and the demand for luxury automobiles increases, the firm will be able to meet the new demand.
◦ Suggest that the firm curtail its advertising to avert a substantial increase in demand for luxury automobiles.
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