Lecture 3-10 Sept 2013

Question 1

What must be remembered about market structure models?

Answer 1

They are only theoritical

Question 2

What are the characteristics of a perfect market structure?

Answer 2

1. Many sellers, many firms participate
2. Many buyers
3. Firms offer homogenous products or services
4. Ease of entry-considering key inputs
5. Easy to exist
6. Complete or full knowledge
7. Average or normal profits overtme

Question 3

Discuss each of the characteristics of a perfect market structure.

Answer 3

1. Many sellers, many firms participate (situation in which customer base is broad)
2. Many buyers
3. Firms offer homogenous products or services
4. Ease of entry-considering key inputs
5. Easy to exist
6. Complete or full knowledge
7. Average or normal profits overtme

Question 4

What will determine what the firm’s avg or normal profits will be?

Answer 4

The firm’s industry

Question 5

What will happen to a firm’s profits as more firms enter?

Answer 5

profits will be diluted.

Question 6

What are the characteristics of monopolistic competition

Answer 6

1. Few # of firms, usually less than 10.

2. Interdependent decisions-Reaction functions how will other firms react.

Question 7

What are two things to consider in production decisions.

Answer 7

1. Will firm be firm be capital (automation) or labor intensive?
2. What will the production technique be

Question 8

What are some o the market exist decisions that a firm must consider?

Answer 8

1. Shutdown/liquidate

2. Sell business-Whats the value or price to expect

Question 9

What is a homogeneous product or service

Answer 9

A situation in which a product or service is perceived by consumers as exactly the same (quality of service, features, design)

Question 10

What is one method to value a firm?

Answer 10

Gordon’s model-valuation is the sum of all expected future earnings using a discounted rate

Question 11

What are the five common returns for a firm?

Answer 11

1. EBT 2. EAT 3. Cash flows 4. EBIT 5. EBITDA

Question 12

Define and discuss each of the five common types of returns

Answer 12

1. EBT 2. EAT 3. Cash flows 4. EBIT 5. EBITDA

Question 13

What is the relationship between risk and discount rate?

Answer 13

There is a direct relationship between risk and the discount rate. The higher the risk the higher the risk will be.

Question 14

Define EBIT

Answer 14

Alternative term for operating income. it gives a more accurate picture of a firm’s profitability than gross income.

Question 15

EBITDA

Answer 15

Computed by subtracting cost of sales and operating expenses (but not amortization and/or depreciation, interest, and taxes) from total revenue. EBITDA figure is used usually as a measure of the financial performance of a firm with large capital, restructuring, or acquisition costs.

Question 16

Cash flow

Answer 16

Incomings and outgoings of cash, representing the operating activities of an organization.

The level of cash flow is not necessarily a good measure of performance, and vice versa: high levels of cash flow do not necessarily mean high or even any profit; and high levels of profit do not automatically translate into high or even positive cash flow.

Question 17

EAT

Answer 17

An altenative to operating income that is calculated after taking into account the taxes paid. This might not be a good measure of profitability for someone seeking to acquire a business that would have a different tax situation.