Part A.

1)If a perfectly competitive industry is monopolized, consumer surplus: A. becomes equal to producer surplus. B. can be expected to decrease. C. usually remains constant. D. becomes double of producer surplus.

2)If a monopolistically competitive firm is in long-run equilibrium and average cost equals $150, then the market price must be $150. True or False

3)The term "monopolistic competition": A. denotes an industry characterized by one seller of many differentiated products. B. denotes an industry characterized by many sellers of differentiated products. C. is used to describe perfect competition that has strong entry barriers. D. denotes an industry characterized by many sellers of homogeneous products.

4)A monopolistic competitor's demand curve is A. less elastic than a monopolist's or oligopolist's but more elastic than a perfect competitor's demand curve. B. as elastic as an oligopolist's demand curve. C. more elastic than a monopolist's or oligopolist's but less elastic than a perfect competitor's demand curve. D. perfectly elastic.

5)Monopolistic competition is different from perfect competition because monopolistic competitors: A. are price takers. B. produce differentiated products C. have high barriers to entry. D. produce homogeneous products.

6)Monopolistically competitive firms: A. may earn short-run economic profit, but long-run economic profit is typically zero. B. may earn economic profit both in the short run and in the long run. C. are guaranteed to earn short-run economic profit. D. earn zero economic profit both in the short run and in the long run.

7)Which of the following characteristics distinguishes oligopoly from other market structures? A. Interdependence among firms in the industry B. The production of homogeneous products C. A downward-sloping demand curve D. A horizontal demand curve

8)Interdependent decision making on price, quality, or advertising is a characteristic of: A. monopolistic competition. B. perfect competition. C. oligopolies. D. monopolies.

9)During certain periods in the past few decades, if one of the three major breakfast cereal producers in the United States announced a price increase, the other two announced a similar price increase. This implies that the market for breakfast cereals is a good example of _____. A. the price-leadership model of oligopoly B. a cartel. C. a pure monopoly. D. monopolistic competition

10)The principal advantage of the game theory approach is that it allows to: A. better understand decision making when one person's choices affect another person's choices. B. take all possible information into consideration before developing a theory. C. better understand why firms in a competitive industry avoid games. D. better understand how the government should regulate a natural monopoly.

11)Differentiate between perfect competition and an oligopoly? A. Firms in an oligopoly face horizontal demand curves, whereas firms in a perfectly competitive market face downward-sloping demand curves. B. Firms in an oligopoly charge a lower price than firms in a perfectly competitive market. C. Firms in an oligopoly earn economic profit in the long run, whereas firms in perfectly competitive market earn zero economic profit in the long run. D. An oligopoly is characterized with low barriers to entry, whereas a perfectly competitive market is characterized with high barriers to entry.

Part B.

Trans-Pacific Industry & Technology Company

Trans-Pacific Industry & Technology (TPIT), Inc. is a diversified industrial company. The Company owns businesses providing products & services to the energy, transportation, chemical, and construction sectors.

The energy segment operates as an oil and natural gas contract drilling company the United States. The energy segment acquires, explores, develops, and produces oil and natural gas properties primarily located in Oklahoma and Texas, as well as in Arkansas, Colorado, Kansas, Louisiana, Mississippi, Montana, New Mexico, North Dakota, Utah, and Wyoming. This segment generated over $10 billion of revenue in 2016.

The transportation segment is among the largest public railroad in North America. Operating on 12,000 miles of track in the western one thirds of the U.S., This segment generated over $20 billion of revenue in 2016 by hauling coal, industrial products, intermodal containers, agriculture goods, chemicals, and automotive goods.

The chemical segment sells value-added chemicals, thermoplastic polymers, and other chemical-based products worldwide. This segment develops, produces, and supplies specialty polymers for automotive and medical applications, as well as for use in industrial products and consumer electronics. This segment generated over $5 billion of revenue in 2016.

The Construction segment produces and sells specialty construction chemicals, specialty building materials, and packaging sealants and coatings. The Company operates through two segments: Specialty Construction Chemicals and Specialty Building Materials. The Specialty Construction Chemicals segment manufactures and markets products to manage performance of Portland cement, and materials based on Portland cement, such as concrete admixtures and cement additives, as well as concrete production management systems. The Specialty Building Materials segment manufactures and markets building envelope products, residential building products and specialty construction products. This segment generated over $5 billion of revenue in 2016.

During the last few years, Trans-Pacific Industry has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company has decided to look at a major expansion program that has been proposed by the marketing department. The expansion requires investment in eight projects from the four segments. Table-1 provides information about the projects.

Assume that you are an assistant to Jim Jones, the financial vice president. Your first task is to estimate TPIT's cost of capital.

As a part of your analysis you have collected the following data:

The firm's tax rate is 40%.

The current price of TPIT 12% coupon, semiannual payment, non-callable bonds with 15 years remaining to maturity is $1,153.72. TPIT does not use short-term interest-bearing debt on a permanent basis. New bonds would be privately placed with no flotation cost.

The current price of the firm's 10%, $100 par value, quarterly dividend, perpetual preferred stock is $116.95. TPIT would incur flotation costs equal to 5% of the proceeds on a new issue.

TPIT's common stock is currently selling at $50 per share. Its last dividend was $3.12, and dividends are expected to grow at a constant rate of 5.8% in the foreseeable future. TPIT's beta is 1.2, the yield on T-bonds is 5.6%, and the market risk premium is estimated to be 6%.

Suppose the firm has historically earned 15% on equity (ROE) and retained 35% of earnings, and investors expect this situation to continue in the future. How could you use this information to estimate the future dividend growth rate, and what growth rate would you get? Is this consistent with the 5.8% growth rate given earlier?

TPIT's target capital structure is 30% long-term debt, 10% preferred stock, and 60% common equity.

1 What sources of capital should be included when you estimate TPIT's weighted average cost of capital (WACC)?

2 Should the component costs be figured on a before-tax or an after-tax basis?

3 Should the costs be historical (embedded) costs or new (marginal) costs? Explain?