Kindly help in solving the following questions.
1. Define the Doctrine of Laissez-faire Economics.
Discuss the following statement: the First Fundamental Theorem of Welfare Economics provides an unassailable argument in favor of the Doctrine of Laissez-faire Economics.
The latest balance sheet of Rough Lid is as follows: Rough Ltd Balance sheet as at 31 March 2008 fm Em ASSETS Non-current assets Intangible Property, plant and equipment 15 Current assets Inventory W N Trade receivables 5 Total assets 20 EQUITY AND LIABILITIES Share capital Retained earnings 6 10 Non-current liabilities Secured loans Current liabilities Trade payables - N Bank 3 20 Vest Lid supplies raw materials to Rough Lid. The finance director of Vest has just discovered that Rough has run into serious problems and is likely to be wound up. This is a matter of major concern because Rough owes Vest $500,000 which is included in the trade payables as at the latest balance sheet date. The finance director of Vest is trying to estimate how much, if anything, the company will receive once Rough has been wound up. The following information has been gathered from various sources: Intangible non-current assets comprise the cost of buying a licence to manufacture a product that has been the cause of Rough's downfall. The product has been linked to a major consumer safety scare. . Property, plant and equipment has been offered for sale and is likely to realise tom. Inventory and trade receivables are likely to realise 50% of their book values.The chief executive of Vest has suggested that it might be worth considering buying Rough as a going concern. It would cost approximately $8.5m to acquire and reorganise the company so that it could manufacture a new product range that would make heavy use of Vest's materials. This new line of business is expected to generate a net annual cash flow of 10.8m in perpetuity. Vest's cost of capital is 8%. Enquiries of the directors of Rough suggest that their cost of capital prior to the collapse was 1 1%. (i) Calculate the amount that Vest is likely to receive from Rough in the event that the company is wound up. [5] (ii) (a) Calculate the value of Rough to Vest, assuming required rates of return of 8% and 11% on the estimated future cash flows. (b) Comment on your findings in (a). [3] (iii) (a) Explain why the appropriate required rate of return for this investment is unlikely to be that of either Rough or Vest. (b) Explain how Vest should go about valuing the proposed investment in Rough. [12] [Total 20]1. Consider the following constrained two-period optimization problem: max u(C1, (2) = - exp(-ye1) - Bexp(-ye2) (1) 1 subject to: ci + -02 S I (2) where y > 0 is the coefficient of absolute risk aversion (CARA), BE (0, 1) is the discount factor, (c1, c2) is the optimal bundle of consumption in periods 1 and 2, I is the given total income during the two periods, R is the gross interest rate. (a) Set up the Lagrangian function for the above optimization problem, and derive the first order conditions
