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principles corporate finance
Questions and Answers of
Principles Corporate Finance
Is an arbitrage of this sort really without risk?
If a corporate treasurer finds himself in the situation described above, should he execute the arbitrage?
What is the main drawback of accounting profitability indicators?
Why do EVA adversaries describe it as a great marketing stunt?
What is a TSR calculated over one year?
Will a company that is making losses record positive economic profits or EVA?
Can a company with a positive net profit show a negative economic profit?
What is the sum of future EVA discounted to the cost of capital equal to?
Subject to what conditions is it possible to compare EPS before and after a deal?
What is your view of this quotation: “A series of positive EVA can only be a sign of two things: either of a monopoly that is more or less temporary (for example a high tech development) or a poor
Is a drop in return on equity synonymous with value destruction? Why?
Is a drop in return on capital employed (ROCE) synonymous with a value destruction?Why?
Can a company create value and have a negative TSR over one year? And over 10 years?
What does TSR correspond to in terms of investment choice?
If you were stranded on a deserted island with only one criterion for measuring value creation, which would you want to use? Why?
If EPS drops after a deal, does this necessarily imply value destruction?
If EPS rises after a deal, does this necessarily imply value creation?
Why does an accurate calculation of EVA or profitability mean that the balance sheet will have to be restated?
What is the drawback of company rankings based on EVA?
Do layoffs systematically lead to value creation?
Can value be created by developing new products and new markets or by reducing costs?
The hotel chain CIGA provides information to the market on value creation, measured by a ROCE calculated as the ratio between EBITDA and the historic value (i.e. gross before depreciation and
The group Lagardère states in its annual report that “the rate used to measure the cost of capital is the discount rate which is equal to the flow of net future dividends(excluding tax credits) at
How does using different scenarios differ from simple cash flow discounting?
In a simplified form, can the Monte Carlo method be implemented without a computer?
What does the theory of options contribute to the valuing of an investment?
Is the theory of options opposed to the theory of efficient markets?
Can a project that contains significant real options be valued properly by the NPV criteria?By the construction of scenarios? By the Monte Carlo method? By the certainty equivalent method?
Provide an example of a project where there is an option to abandon.
Provide an example of a project where there is an option to expand.
In practice, what is the most serious problem raised by real options?
What makes the contribution of real options attractive for operations managers?
An Internet portal aimed at pet owners has just developed a nuclear sewing machine EXERCISE and offers you the opportunity to invest in the industrialisation of this product. The project will last 5
How is risk measured in a market economy?
What does the β coefficient measure?
In the graph on page 391, which is the most volatile asset? What motivates investors to enter this market? Volatility can be measured mathematically by variance and standard deviation. RETURN OF SOME
The β coefficient measures the specific risk of a security. True or false?
Is the Heineken share more or less risky than the whole of the market? Why?
Upon what is the β coefficient dependent?
Why are market risk and specific risk totally independent?
Will an increase in a company’s debt reduce or increase the volatility of its share price?
As a result of a change in the nature of its business, there is a relative rise in the proportion of fixed costs in a group A’s total costs. Will this affect the risk attached to its share price?
Explain why it is unhealthy for a company to invest its cash in shares.
Is the β of a diversified conglomerate close to 1? Why?
Internet companies have low fixed costs and low debt levels, yet their β coefficients are high. Why?
Is the β coefficient of a group necessarily stable over time? Why?
You buy a lottery ticket for BC100 on which you could win BC1,000,000, with a probability rate of 0.008%. Is this a risky investment? Could it be even riskier? How could you reduce the risk? Would
Why is standard deviation preferable to variance?
What law of statistics explains that in the long term, risk disappears? State your views.
You receive BC100,000 which you decide to save for your old age. You are now 20. What sort of investment should you go for? Perform the same analysis as if it happened when you are 55 and 80.
Do shares in Internet companies carry a greater or smaller risk than shares in large retail groups? Why?
There are some sceptics who claim that financial analysis serves no purpose. Why?State your views.
Why are negative β coefficients unusual?
What can you say about a share for which the standard deviation of the return is high, and the β is low?
Must the values of financial assets fluctuate in opposite directions in order to reduce risk? Why?
What other concept does the capital market line bring to mind?
Why does the market portfolio include all high risk assets in order to achieve maximum diversification?
Security A carries little risk and security B has great risk. Which would you choose if you wanted to take the least risk possible?
The correlation coefficient between French equities and European equities developed as follows: Years 1970-1979 1980-1989 1990-1999 2000-2008 Coefficient 0.43 0.42 0.73 0.996
Use the table on page 400 to determine which industrial sector makes the greatest contribution to reducing the risk of a portfolio.
What is the only asset that can be used to precisely measure the levels of risk of a portfolio?
What conditions are necessary for a risk-free asset to be free of risk? Provide an example. Is it really risk-free?
Show that the market portfolio must be on the capital market line and on the portion of the curve called the efficient frontier (see Section 21.2).
Why does this chapter provide an explanation of the development of mutual funds?
Can the risk of a portfolio be greater than the individual risk of each of the securities it contains? Under what circumstances?
Under which circumstances can the risk of a portfolio be less than the individual risk of each of the securities it contains?
The greater the number of shares in a portfolio, the less the marginal contribution to diversification of an additional security will be. True or false?
Will very wide diversification eliminate specific risk? And market risk?
Explain in a few lines why diversifiable risk cannot be remunerated on markets in equilibrium?
Given that diversifiable risk is not remunerated, would it be worthwhile to diversify an investment?
What is the rate of return required by the shareholder equal to?
What is the drawback of the β coefficient?
A shareholder requires a rate of return that is twice as high on a share with a β coefficient that is twice as high as that of another share. True or false?
What does a low-risk premium indicate?
On the graph on page 427, does the Alcatel-Lucent share seem under- or overvalued to you? What about the Daimler share? 14- 12- 10- Expected return (%) Steria EADS Peugeot Air France Rhodia
What is the strong point of the APT compared with the CAPM? And the weak point?
Will liquidity premiums tend to rise or fall during a crash? Why?
What does a negative liquidity premium indicate?
The standard deviation of the earnings on Bouygues shares is 40%, while for Siemens it is only 28%. However, Bouygues has a β of 1.13 and Siemens of 1.7. Explain how this is possible.
Explain why an investor would be prepared to require a lower return on a risk-free share for a share with a negative β.
How do you explain the fact that rates of return required by investors may be identical for two groups of totally different activities (oil and IT services for example) as long as they have the same
An experiment was recently carried out where a child, an astrologer and a financial analyst were each given €10,000 to invest for eight years. Who do you think achieved the best results?
When is the cost of capital equal to the cost of equity? Can the cost of capital be equal to the cost of debt?
Why does the cost of capital constitute a direct link between return on capital expenditure and the returns required by capital investors?
Why is the cost of capital not an accounting concept?
What is the cost of capital equal to?
Is the cost of equity equal to the return on the shares?
What is the cost of reserves equal to? And the cost of depreciation?
How many costs of capital are there in a company that has diversified into different(business) sectors but not geographic areas? What about if it has done so within each of the company’s divisions?
Can a company that invests in projects on which the returns are lower than its cost of capital continue to obtain resources through cash flow? Through debt? Through capital increases?
A listed company launches a takeover bid on another company at a price that is far too high. According to the cost of capital theory, what should the sanction be?
What is the difference between the zero coupon curve and the yield curve?
Why is a yield curve showing higher long-term interest rates than short-term rates(rising curve) called a normal curve?
What risk are we talking about when we say that government bonds are risk-free?
What is the “reinvestment risk”?
You observe the following prices for different bonds (note that the coupons on all of them have just been paid)(a) Calculate the return on each of these bonds.(b) Reconstruct the zero coupon curve at
In 2009 you notice that the yields to maturity of the same company’s two bonds, 5% of 2013 and 9% of 2013, are selling at 87.44 and 100.71, respectively, and the resulting yield to maturity is
Why is the bond rating important?
What is the default risk?
What is the “character” of a bond issuer?
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