Tutor profile: Aditya P.
How do you calculate the net present value of a project based off of cash flows?
A discounted cash flow model (DCF) considers the cash outlays and future cash flows for a project. The summation of the cash flows depends on the number of periods, and a time horizon that affects the weighted cost of capital (WACC). The formula for calculating a DCF is sum( CFt/ (1 + WACC) ^t) over n periods. WACC is the minimum required rate of return on a project. It is calculated by the following equation: WACC = wd (rd) (1-t) + wp (rp) + we(re) where wd = the weight of debt, rd is the cost of debt (all considered pretax), wp= weight of preferred stock, rp= cost of preferred stock, we= weight of equity and re= is the cost of equity the weights are denoted by part over the total (i.e wd= Debt/ Debt + Equity)
What is the market structure of an oligopoly? How do firms adopt a pricing strategy under this model?
An oligopoly is a market type where there are (1) a small number of sellers, (2) the products are similar, close substitutes with one another, but differentiated by marketing or other non-pricing strategies, (3) high costs to entry where (4) firms have significant pricing power. Firms can adopt pricing strategies in one of three ways. The first focuses on a demand model where the demand curve faces an inelastic region at lower prices, but more elastic at higher prices. There would be a drop off in MR graphically, giving way to knik. The kink at demand os the price and quantity that the firm takes. The second method is based on the Cournot assumption, where each firm determines its profit maximizing levels when the other firms output does not change. In solving the equations for total revenue (TR) and marginal revenue (MR) , one must consider that Q = q1+ q2. Lastly, firms can adopt pricing based off of Nash Equilibrium (game theory) which assumes that each firm acts in a way that increases profitability based off of the decision of its rival.
What is the purpose of the Solow Model (also known as the neoclassical model)?
The Solow model identifies underlying sources of growth within an economy. The model is heavily based off of the production function Y= AF(L,K) where the function F(L, K) considers the total output based off of labor and capital inputs (the function itself will dictate the productive capacity of each of the inputs). A refers a factor of technological expertise within the economic system. The growth of A, however, does not directly affect quantities of labor (L) or capital (K); however affects the productive capacity. This all plays into the GDP, as the growht in potential GDP = the growth in technology + Weight of capital * (growth in capital) + Weight of Labor * ( Growth of Labor ) where Wk = (the sum of corporate profits + net interest income + rental income + depreciation ) / GDP , while WL = (employee compensation)/ GDP
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