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September 18th, 2012, 12:57 PM   #1
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value of the firm?

Which one of these instances would increase or decrease the value of the firm?

A) Firm is required to install pollution-control equipment

B) The workforce votes to unionize

c) The rate of interest rises

d) the rate of inflation changes

For my answers I have that:
A)pollution control would decrease value of the firm
B)workforce unionization would decrease the value of the firm since your paying them above market wages increasing your costs
C) If interest rates rise, the value of the firm would decrease
D)not to sure for the change in inflation

please help i have been working on these for a while
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September 18th, 2012, 02:52 PM   #2
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Re: value of the firm?

I am just an amateur armchair economist so don't take my thought's too seriously, however, i would like to comment.



A) Credibility among public rises, firm value rises also. The installation adds to the value of the firm. Think of remodelling a house, it will be worth more.

C) If the firm has LESS DEBT than competitors it's value should rise.

D) Although the numerical value of the firm may go up, adjusted for inflation, IIMHO this is not a REAL increase because inflation affects buying power of EVERYONES money. For example, when inflation increases, 1 dollar is worth less because it has less buying power, doesn't matter if it's in your pocket... or a billionair's pocket.

B) This one is tough for me. Personally, i respect companies that comply with all rules and regulations, I disrespect companies that don't, particularly companies that violate labor laws. So it depends how many people out there think this way. It can be a credibility issue.

If the workers are happy, they will make a better product, unless they are starving and will do anything to get a job. Then they will make the best product they can for fear of being replaced by countless others also starving who would do anything to get a job. It's sad, but IMHO that happens too often and it will only get worse.

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September 18th, 2012, 10:01 PM   #3
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Re: value of the firm?

Quote:
Originally Posted by agentredlum
A) Credibility among public rises, firm value rises also. The installation adds to the value of the firm. Think of remodelling a house, it will be worth more.
No, I don't think so. The comparison is off: that would be like having someone else buy the company pollution controls (which would increase the value of the company). A new requirement will certainly lower their value. If they chose to buy the pollution controls on their own it would neither increase nor decrease the value (generally speaking). If they were given pollution control equipment for free then their value would rise.

For B the phrase you're looking for is "wages of efficiency" but the value of the firm will still decrease here. It's the same exogenous/endogenous issue as in A.

For C I think I agree, though it's not obvious whether the comparison should be with competitors, sector, or market.

For D you're answering a different question: "What happens if there is sudden one-time inflation?" which you answered correctly. But if the rate of inflation changes over the next X years this is more like C where it depends on your assets and debt.
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