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business
principles of finance

Questions and Answers of Principles Of Finance

Why might the Standard & Poor's 500 Index be a better measure of stock market performance than the Dow Jones Industrial Average? Why is the DJIA more popular than the S&P 500?(LG3)
Explain how it is possible for the DJIA to increase one day while the NAS- DAQ Composite decreases during the same day. (LG3)
Which is higher, the ask quote or the bid quote? Why? (LG4)
Illustrate through examples how trading commission costs impact an investor's return. (LG4)
Describe the difference in the timing of trade execution and the certainty of trade price between market orders and limit orders. (LG4)
What are the differences between common stock and preferred stock? (LG5)
How important is growth to a stock's value? Illustrate with examples. (LG5)
Under what conditions would the constant-growth model not be appropri- ate? (LG5)
The expected return derived from the constant-growth-rate model relies on dividend yield and capital gain. Where do these two parts of the return come from? (LG5)
Describe, in words, how to use the variable-growth-rate technique to value a stock. (LG6)
Can the variable-growth-rate model be used to value a firm that has a negative growth rate in Stage 1 and a stable and positive growth in Stage 2? Explain. (LG6)
Explain why using the P/E relative value approach may be useful for companies that do not pay dividends. (LG7)
How is a firm's changing P/E ratio reflected in the stock price? Give examples. (LG7)
Differentiate the characteristics of growth stocks and value stocks. (LG7)
What's the relationship between the P/E ratio and a firm's growth rate? (LG7)
Describe the process for using the P/E ratio to estimate a future stock price. (LG7)
Stock Index Performance On October 9, 2007, the Dow Jones Industrial Average set a new high. The index closed at 14,164.53, which was up 120.80 that day. What was the return (in percent) of the stock
Stock Index Performance On March 9, 2009, the Dow Jones Industrial Average reached a new low. The index closed at 6,547.05, which was down 79.89 that day. What was the return (in percent) of the
Buying Stock with Commissions Your discount brokerage firm charges $8.95 per stock trade. How much money do you need to buy 200 shares of Pfizer, Inc. (PFE), which trades at $27.22? (LG4)
Buying Stock with Commissions Your discount brokerage firm charges $9.50 per stock trade. How much money do you need to buy 300 shares of Time Warner, Inc. (TWX), which trades at $22.62? (LG4)
Selling Stock with Commissions Your full-service brokerage firm charges $120 per stock trade. How much money do you receive after selling 150 shares of Nokia Corporation (NOK), which trades at
Selling Stock with Commissions Your full-service brokerage firm charges $135 per stock trade. How much money do you receive after sell- ing 250 shares of International Business Machines (IBM), which
Buying Stock with a Market Order You would like to buy shares of Sirius Satellite Radio (SIRI). The current ask and bid quotes are $3.96 and $3.93, respectively. You place a market buy order for 500
Buying Stock with a Market Order You would like to buy shares of Coldwater Creek, Inc. (CWTR). The current ask and bid quotes are $20.70 and $20.66, respectively. You place a market buy order for 200
Selling Stock with a Limit Order You would like to sell 200 shares of Xenith Bankshares, Inc. (XBKS). The current ask and bid quotes are $4.66 and $4.62, respectively. You place a limit sell order at
Selling Stock with a Limit Order You would like to sell 100 shares of Echo Global Logistics, Inc. (ECHO). The current ask and bid quotes are $15.33 and $15.28, respectively. You place a limit sell
Value of a Preferred Stock A preferred stock from Duquesne Light Com- pany (DQUPRA) pays $2.10 in annual dividends. If the required return on the preferred stock is 5.4 percent, what's the value of
Value of a Preferred Stock A preferred stock from Hecla Mining Co. (HLPRB) pays $3.50 in annual dividends. If the required return on the preferred stock is 6.8 percent, what is the value of the
P/E Ratio and Stock Price Ultra Petroleum (UPL) has earnings per share of $1.56 and a P/E ratio of 32.48. What's the stock price? (LG7)
P/E Ratio and Stock Price JP Morgan Chase Co. (JPM) has earnings per share of $3.53 and a P/E ratio of 13.81. What is the price of the stock? (LG7)
Value of Dividends and Future Price A firm is expected to pay a divi- dend of $1.35 next year and $1.50 the following year. Financial analysts believe the stock will be at their price target of $75
Value of Dividends and Future Price A firm is expected to pay a divi- dend of $2.05 next year and $2.35 the following year. Financial analysts believe the stock will be at their price target of $110
Dividend Growth Annual dividends of AT&T Corp (T) grew from $0.96 in 2000 to $1.33 in 2006. What was the annual growth rate? (LG5)
Dividend Growth Annual dividends of General Electric (GE) grew from $0.66 in 2001 to $1.03 in 2006. What was the annual growth rate? (LG5)
Value a Constant Growth Stock Financial analysts forecast Safeco Corp.'s (SAF) growth rate for the future to be 10 percent. Safeco's recent dividend was $1.20. What is the value of Safeco stock when
Value a Constant Growth Stock Financial analysts forecast Limited Brands (LTD) growth rate for the future to be 12.5 percent. LTD's recent dividend was $0.60. What is the value of Limited Brands
Expected Return Ecolap Inc. (ECL) recently paid a $0.46 dividend. The dividend is expected to grow at a 14.5 percent rate. At a current stock price of $44.12, what is the return shareholders are
Expected Return Paychex Inc. (PAYX) recently paid an $0.84 dividend. The dividend is expected to grow at a 15 percent rate. At a current stock price of $40.11, what is the return shareholders are
Dividend Initiation and Stock Value A firm does not pay a dividend. It is expected to pay its first dividend of $0.20 per share in three years. This dividend will grow at 11 percent indefinitely.
Dividend Initiation and Stock Value A firm does not pay a dividend. It is expected to pay its first dividend of $0.25 per share in two years. This dividend will grow at 10 percent indefinitely. Using
P/E Ratio Model and Future Price Kellogg Co. (K) recently earned a profit of $2.52 earnings per share and has a P/E ratio of 19.86. The divi- dend has been growing at a 5 percent rate over the past
P/E Ratio Model and Future Price New York Times Co. (NYT) recently earned a profit of $1.21 per share and has a P/E ratio of 19.59. The divi- dend has been growing at a 7.25 percent rate over the
Value of Future Cash Flows A firm recently paid a $0.45 annual divi- dend. The dividend is expected to increase by 10 percent in each of the next four years. In the fourth year, the stock price is
Value of Future Cash Flows A firm recently paid a $0.60 annual divi- dend. The dividend is expected to increase by 12 percent in each of the next four years. In the fourth year, the stock price is
Constant Growth Stock Valuation Walgreen Co. (WAG) paid a $0.137 dividend per share in 2000, which grew to $0.286 in 2006. This growth is expected to continue. What is the value of this stock at the
Constant Growth Stock Valuation Campbell Soup Co. (CPB) paid a $0.632 dividend per share in 2003, which grew to $0.76 in 2006. This growth is expected to continue. What is the value of this stock at
Changes in Growth and Stock Valuation Consider a firm that had been priced using a 10 percent growth rate and a 12 percent required return. The firm recently paid a $1.20 dividend. The firm just
Changes in Growth and Stock Valuation Consider a firm that had been priced using an 11.5 percent growth rate and a 13.5 percent required return. The firm recently paid a $1.50 dividend. The firm has
Variable Growth A fast-growing firm recently paid a dividend of $0.35 per share. The dividend is expected to increase at a 20 percent rate for the next three years. Afterwards, a more stable 12
Variable Growth A fast-growing firm recently paid a dividend of $0.40 per share. The dividend is expected to increase at a 25 percent rate for the next four years. Afterwards, a more stable 11
P/E Model and Cash Flow Valuation Suppose that a firm's recent earn- ings per share and dividend per share are $2.50 and $1.30, respectively. Both are expected to grow at 8 percent. However, the
P/E Model and Cash Flow Valuation Suppose that a firm's recent earn- ings per share and dividend per share are $2.75 and $1.60, respectively. Both are expected to grow at 9 percent. However, the
Spreadsheet Problem Spreadsheets are especially useful for computing stock value under different assumptions. Consider a firm that is expected to pay the following dividends: a. Using an 11 percent
Why is the percentage return a more useful measure than the dollar return? (LG1)
Characterize the historical return, risk, and risk-return relationship of the stock, bond, and cash markets. (LG2)
How do we define risk in this chapter and how do we measure it? (LG3)
What are the two components of total risk? Which component is part of the risk-return relationship? Why? (LG3)
What's the source of firm-specific risk? What's the source of market risk? (LG3)
Which company is likely to have lower total risk, General Electric or Coca-Cola? Why? (LG3)
Can a company change its total risk level over time? How? (LG3)
What does the coefficient of variation measure? Why is a lower value better for the investor? (LG4)
What does diversification do to the risk and return characteristics of a portfolio? (LG5)
Describe the diversification potential of two assets with a -0.8 correlation. What's the potential if the correlation is +0.8? (LG5)
You are a risk-averse investor with a low-risk portfolio of bonds. How is it possible that adding some stocks (which are riskier than bonds) to the portfolio can lower the total risk of the
Many employees believe that their employer's stock is less likely to lose half of its value than a well-diversified portfolio of stocks. Explain why this belief is erroneous. (LG5)
Explain what we mean when we say that one portfolio dominates another portfolio. (LG6)
Explain what the efficient frontier is and why it is important to investors. (LG6)
If an investor's desired risk level changes over time, should the investor change the composition of his or her portfolio? How? (LG6)
Say you own 200 shares of Mattel and 100 shares of RadioShack. Would your portfolio return be different if you instead owned 100 shares of Mattel and 200 shares of RadioShack? Why? (LG7)
Investment Return FedEx Corp stock ended the previous year at $103.39 per share. It paid a $0.35 per share dividend last year. It ended last year at $106.69. If you owned 300 shares of FedEx, what
Investment Return Sprint Nextel Corp stock ended the previous year at $23.36 per share. It paid a $2.37 per share dividend last year. It ended last year at $18.89. If you owned 500 shares of Sprint,
Investment Return A corporate bond that you own at the beginning of the year is worth $975. During the year, it pays $45 in interest payments and ends the year valued at $965. What was your dollar
Investment Return A Treasury bond that you own at the beginning of the year is worth $1,055. During the year, it pays $35 in interest payments and ends the year valued at $1,065. What was your dollar
Total Risk Rank the following three stocks by their level of total risk, high- est to lowest. Rail Haul has an average return of 12 percent and standard deviation of 25 percent. The average return
Total Risk Rank the following three stocks by their total risk level, highest to lowest. Night Ryder has an average return of 12 percent and standard deviation of 32 percent. The average return and
Risk versus Return Rank the following three stocks by their risk-return relationship, best to worst. Rail Haul has an average return of 12 percent and standard deviation of 25 percent. The average
Risk versus Return Rank the following three stocks by their risk-return relationship, best to worst. Night Ryder has an average return of 13 per- cent and standard deviation of 29 percent. The
Dominant Portfolios Determine which one of these three portfolios dominates another. Name the dominated portfolio and the portfolio that dominates it. Portfolio Blue has an expected return of 12
Dominant Portfolios Determine which one of the three portfolios domi- nates another. Name the dominated portfolio and the portfolio that domi- nates it. Portfolio Green has an expected return of 15
Portfolio Weights An investor owns $4,000 of Adobe Systems stock, $5,000 of Dow Chemical, and $5,000 of Office Depot. What are the portfo- lio weights of each stock? (LG7)
Portfolio Weights An investor owns $3,000 of Adobe Systems stock, $6,000 of Dow Chemical, and $7,000 of Office Depot. What are the portfo- lio weights of each stock? (LG7)
Portfolio Return Year-to-date, Oracle had earned a -1.34 percent return. During the same time period, Valero Energy earned 7.96 percent and McDonald's earned 0.88 percent. If you have a portfolio
Portfolio Return Year-to-date, Yum Brands had earned a 3.80 percent return. During the same time period, Raytheon earned 4.26 percent and Coca-Cola earned -0.46 percent. If you have a portfolio made
Average Return The past five monthly returns for Kohls are 3.54 percent, 3.62 percent, -1.68 percent, 9.25 percent, and -2.56 percent. What is the average monthly return? (LG1)
Average Return The past five monthly returns for PG&E are -3.17 per- cent, 3.88 percent, 3.77 percent, 6.47 percent, and 3.58 percent. What is the average monthly return? (LG1)
Standard Deviation Compute the standard deviation of Kohls' monthly returns shown in problem 9-15. (LG3)
Standard Deviation Compute the standard deviation of PG&E's monthly returns shown in problem 9-16. (LG3)
Risk versus Return in Bonds Assess the risk-return relationship of the bond market (see Tables 9.2 and 9.4) during each decade since 1950. (LG2, LG4)
Risk versus Return in T-bills Assess the risk-return relationship in T-bills (see Tables 9.2 and 9.4) during each decade since 1950. (LG2, LG4)
Diversifying Consider the characteristics of the following three stocks: The correlation between Thumb Devices and Air Comfort is -0.12. The correlation between Thumb Devices and Sport Garb is
Diversifying Consider the characteristics of the following three stocks: The correlation between Pic Image and Tax Help is 0.88. The correlation between Pic Image and Warm Wear is -0.21. The
Portfolio Weights If you own 300 shares of Alaska Air at $42.88, 350 shares of Best Buy at $51.32, and 250 shares of Ford Motor at $8.51, what are the portfolio weights of each stock? (LG7)
Portfolio Weights If you own 400 shares of Xerox at $17.34, 500 shares of Qwest at $8.15, and 350 shares of Liz Claiborne at $44.73, what are the portfolio weights of each stock? (LG7)
Portfolio Return At the beginning of the month, you owned $5,500 of General Dynamics, $7,500 of Starbucks, and $8,000 of Nike. The monthly returns for General Dynamics, Starbucks, and Nike were 6.80
Portfolio Return At the beginning of the month, you owned $6,000 of News Corp, $5,000 of First Data, and $8,500 of Whirlpool. The monthly returns for News Corp, First Data, and Whirlpool were 8.24
Asset Allocation You have a portfolio with an asset allocation of 50 per- cent stocks, 40 percent long-term Treasury bonds, and 10 percent T-bills. Use these weights and the returns in Table 9.2 to
Asset Allocation You have a portfolio with an asset allocation of 35 per- cent stocks, 55 percent long-term Treasury bonds, and 10 percent T-bills. Use these weights and the returns in Table 9.2 to
Portfolio Weights You have $15,000 to invest. You want to purchase shares of Alaska Air at $42.88, Best Buy at $51.32, and Ford Motor at $8.51. How many shares of each company should you purchase so
Portfolio Weights You have $20,000 to invest. You want to purchase shares of Xerox at $17.34, Qwest at $8.15, and Liz Claiborne at $44.73. How many shares of each company should you purchase so that
Portfolio Return The table below shows your stock positions at the beginning of the year, the dividends that each stock paid during the year, and the stock prices at the end of the year. What is your

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