You read a story in the newspaper announcing the proposed merger of Dell Computer and Gateway. The merger is expected to greatly increase Gateway's profitability. If you decide to invest in Gateway stock, you can expect to earn
A) above average returns since you will share in the higher profits.
B) above average returns since your stock price will definitely appreciate as higher profits are earned.
C) below average returns since computer makers have low profit rates.
D) a normal return since stock prices adjust to reflect expected changes in profitability almost immediately.
D
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How much is a bond worth if it pays $20 in coupon payments at the end of each year for 4 years and $1,000 at the end of the fourth year, if the interest rate is 5%?
A) $822.70 B) $893.62 C) $1,070.92 D) $1,080
Suppose a bank has $3,000 in reserves, $25,000 of deposits, and a 10 percent reserve requirement. What is the amount of excess reserves?
The economy can be in equilibrium and in a recessionary gap simultaneously
Indicate whether the statement is true or false
Mel is thinking of going on a cruise. Mel values a cruise in nice weather at $2,000 and values a cruise in bad weather at $50. The probability of nice weather is 60 percent and the probability of bad weather is 40 percent. Trip insurance is sometimes available. If purchased, it allows travelers to delay the cruise until the weather is nice. Suppose that the price of the cruise is $1,200. If Mel is risk-neutral, then Mel should:
A. only buy trip insurance if it costs less than $20. B. not buy trip insurance. C. only buy trip insurance if it costs less than $780. D. only buy trip insurance if it costs less than $50.