All Matches

Solution Library

Expert Answer

Textbooks

Search Textbook questions, tutors and Books

Oops, something went wrong!

Change your search query and then try again

Result Not Found

Books FREE
Tutors
Study Help
Hire a Tutor
AI Study Help New

Search
Sign In
Register

study help
business
theory of corporate finance

Questions and Answers of Theory Of Corporate Finance

Even if the stock price follows a random walk, its actual price can definitely—and most likely will be—different from today’s price. Only the expected price is the same as the price today.
The typical movement (variation) of a stock is around plus or minus 2% to 3% a day. The average rate of return on a day is much lower. Thus, the signal-to-noise ratio is very low.
A daily trading strategy would have to offer above 20% per annum in order to overcome typical transaction costs. The calculation in the text came to about 23% per annum.
If a stock has an expected rate of return of 20% per year—which is definitely on the high side for most firms—the daily rate of return would be 1.21/255 − 1 ≈ 7.15 basis points. If you
The random-walk formula is on page 355. It states that the expected price tomorrow is the price today plus a drift. The drift can be a small constant or a very small fraction of the price today.
If you believe that market values do not always perfectly reflect underlying fundamental values, but that trading costs nevertheless prevent you from exploiting this profitably (in large scale), then
Momentum strategies seem to violate even weak-form market efficiency—unless you believe that their returns are just normal because they reflect some sort of normal compensation for risk.
The foreign currency market may well be the biggest market in the world, with the dollar and the euro both being the world’s two main currencies. With so many smart investors trading on the exact
Markets are more likely to be efficient when transaction costs are low, because this makes it easier for smart investors to compete away any unusual opportunities.
An efficient market is one in which the market uses all available information. In a perfect market, market pressures by arbitrageurs will make market efficiency come true, so a perfect market should
Market efficiency is a much more powerful concept over short horizons, because the expected rate of return over a short horizon (say, a day) is very small (a few basis points) in virtually all
As a believer in market efficiency, you would point out that the heretics are wrong in how they measure the risk-reward trade-off (the model for what expected rates of return should be). Your second
The “efficient market” phrase is shorthand for “the market uses all available information in the setting of its price.” There are further classifications as to the precise degree of market
What kind of corporate events are greeted as good news by the financial markets?What events are greeted as bad news?
What are the factors that make an event study more likely to be informative?
How sensitive are event study results to the use of the CAPM?
Are event studies better suited to events that occur on the same day for all companies, or better suited to events that occur on a different day for every single company?
Is the average value change on the announcement date a good measure of the average value consequence of an event?
In a perfect market, what kind of response (“unusual” stock price change and “unusual” rate of return) would you expect when your company announces that it has struck oil and plans to pay a
For convenience, assume a zero discount rate. You have no cash on hand and can only raise financing for new projects by issuing more equity.You know that your existing project will truly return $500
Explain what survivorship bias is and how it manifests itself in the mutual fund context.
If a firm employs 10,000 analysts, how many of them are likely to issue forecasts that beat the market 10 years in a row if none of them has special any ability and there are no transaction costs?
If you want to determine whether fund managers have an ability to outperform the stock market, given that many of them are likely to beat the market, does it make sense to look for these high-ability
Before you dedicate your life to exploiting a seeming arbitrage between financial markets, what questions should you ask?
Explain when and why you would prefer a true arbitrage to a risk(y)arbitrage opportunity.
Is earning money without risk an arbitrage?
Assume that the typical day-to-day noise (standard deviation) is about 100 basis points. Assume that you have the kind of stock-picking ability that earns you an extra 200 basis points per annum.
To be a consistent superstar trader, by how many basis points should you be able to outperformthe risk-adjusted financial market per typical day?
If stocks follow a random walk, can the price tomorrow be different from the price today?
What is the typical movement of a stock on an average day?
What kind of rates of return does a strategy of trading stocks once a day have to offer in order for you to earn a positive rate of return? Assume typical real-world trading transaction costs are
What is the typical expected rate of return on a stock on an average trading day?
From memory, write down the formula for a random walk.
If you believe that market values do not always perfectly reflect underlying fundamental values, but that trading costs nevertheless prevent you from exploiting this profitably (in large scale),
Which formof market efficiency do momentum trading strategies seem to violate?
Would you expect the market for the dollar–euro exchange rate to be more or less perfect and efficient than the NYSE?
Is it more or less likely for a financial market to be efficient when transaction costs are low?
How does an efficient market differ from a perfect market?
Is market efficiency a more powerful concept over long horizons or short horizons?
As a believer in efficient markets, what would you likely answer when heretics claim that they can reject market efficiency because they have found assets that pay too much for their risk?
Your borrowing rate is 15% per year. Your lending rate is 10% per year. The project costs$5,000 and has a rate of return of 12%.(a) Should you take the project if you have$2,000 to invest?(b) If you
What are the perfect market assumptions?
Evaluate whether supermarkets operate in perfect markets.
Uncle Sam would benefit from an increase in inflation, because he taxes nominal rates of return, not real rates of return. In the real world, interest rates would also have to rise to compensate
Instead of 10%, you earn only 98% . 10% + 2% . (−100%) = 7.8%. Translated into a formula, this is (1 −d) . rnominal, before tax+ d . (−100%) = rnominal, before tax− d . (1 + rnominal, before
First, a simple version of the answer: Your one real apple becomes eight nominal pseudoapples (at 700%), which is four real apples after 100% inflation. One goes bad, so you are left with three
What is your after-tax rate of return on taxable bonds? $100 will grow to $110 at a 10% interest rate before tax, minus the 20% that Uncle Sam collects. Uncle Sam takes 1.1 . $100 = $110, subtracts
From Altman’s evidence: The default premium seems more important than the other non-time premiums.From de Jong’s evidence, ranking the remaining premiums: For investment-grade bonds, the
Entrepreneurs pay interest rates as high as 1,000 basis points for one of two reasons: First, default rates are high. (This is not necessarily a difference in expected rates of return.) Second,
For comparing the zero- and coupon bonds, assume you start with $1,000 of money:(a) The 10% zero-bond would have a single before-tax payout of $1,000 . 1.1010 ≈ $2,593.74, for which the IRS would
The $1 is paid from after-tax income, so leave it as is. The $10 million is taxed, so you will only receive $7 million.With a 1 in 9 million chance of winning, the expected payoff is $7,000,000 .
Your opportunity cost of capital is determined by the tax-exempt bond, because 66.67% . 20% < 15%.Your project’s $2,000 will turn into 66.67% . $2,000 ≈ $1,334 after-tax earnings, or $13,334
First, you need to compute your best opportunity cost of capital if you do not take your project.The Treasury will pay $108 before tax. You could therefore earn $108 − 0.375 . $8 = $105 after
On March 28, 2008, 5-year AAA munis were offering 3.04%/4.14% ≈ 73.43% of the 5-year corporate AAA yields. Therefore, (1 − τ) ≈ 0.7343, which means that the marginal investor’s tax rate was
If the marginal investor’s tax rate is 30% and taxable bonds offer a rate of return of 6%, then munis should offer r = 70% . 6% = 4.2% to earn the marginal investor the same after-tax income.
For every $100, you receive $6. Uncle Sam takes 20% of $6, or $1.20. Your after-tax rate of return is$4.80/$100 = 4.8%. You could have also computed (1 − 20%) . 6% = 4.8% directly.
The marginal tax rate is usually not lower but higher. The average tax rate is usually lower, because the first few dollars of income are taxed at lower tax rates.
The first preference of taxpayers is to receive income in the form of capital gains (especially as long-term capital gains, which is usually under the control of the taxpayer). Their second
A taxpayer prefers to have a before-tax expense, because it reduces the amount that Uncle Sam considers as income, which Uncle Sam would then want to tax.
A liquidity premium is an up front lower price to compensate you for transaction costs later on. This can allow you to earn a higher expected rate of return on the investment.
For this house transaction cost question, you first need to assume a proper discount rate for the$4,000/month rent. At a 7%effective interest rate per year, your true monthly rate is 1.071/12 − 1
Direct transaction cost components: broker costs, market maker or exchange costs (bid-ask spread), and other cash expenses (e.g., advertising costs and postage). Indirect transaction cost components:
Dell is a large stock, just like PepsiCo. Therefore, a round-trip transaction would probably cost a bid-ask spread of between 0.1% and 0.3%. On a $10,000 investment, the bid-ask cost would be around
Covenants, collateral, and credit ratings are all common mechanisms to aid the lender in determining the probability of default. Even if disclosure is not required, good borrowers would still want to
(a) The expected payoff is $99. The discounted expected payoff is $99/1.05 ≈ $94.286. The promised yield is therefore $100/$94.286 − 1 ≈ 6.06%.(b) This borrower would believe the value to be
True. In a perfect and risk-neutral market, the default rates may be quite different, but the expected rates of return on all investments should be the same.
Yes, banks can quote different borrowing and lending rates even in a perfect market! Stated interest rates include a default premium. A perfect market is about equality of expected rates, not about
False. A perfect market is still socially valuable, because sellers and buyers receive surpluses. The buyer surplus is the difference between the value that the good has to a particular buyer and the
For the $1,000 cost project:(a) You would have to borrow $100 at an interest rate of 10% in order to take the project. If you take the project, you will therefore have $1,000 . 1.08 − $110 = $970
The perfect market assumptions are: (a) no differences in information, (b) no market power, (c) no transaction costs, and (d) no taxes.
There is no perfect capital market in this world. However, the concept of a perfect market helps you evaluate what departures from a perfect market really mean—and even what kind of departures you
A competitive market is only one of the four conditions of a perfect market.
In a perfect market, borrowing and lending rates are identical. An important implication of equal borrowing and lending rates is that there is a unique price for which a product would be selling
If the private sector is a net saver (e.g., leaving the public sector as a net borrower), does Uncle Sam have an incentive to reduce or increase inflation?
REALLY ADVANCED: Assume there is a 10% nominal rate of return, a tax rate of 40%, and an inflation rate of 5%. (In the taxes-and-inflation example from Formula 10.1 we worked out that the
ADVANCED: Assume the inflation rate is 100% per year and the nominal rate of interest is 700% per year. (This was also our apples example from Section 5.2.) Now, assume that there is also a 25%
Assume you have both taxes and inflation. You are in the 20% tax bracket, and the inflation rate is 5% per year. A 1-year project offers you $3,000 return for a $20,000 investment. Taxable bonds
How important are the various premiums for investment-grade bonds and junk bonds? (Omit the time premium.)
Assume your marginal tax rate is 25%. Assume that the IRS would tax payments only when made. (Sorry, in real life, the IRS nowadays does tax zero-bonds even when they do not yet pay out anything.)(a)
It is not uncommon for individuals to forget about taxes, especially when investments are small and payoffs are large but rare. Say you are in the 30% tax bracket. Is the NPV of a $1 lottery ticket
You are in the 33.3% tax bracket. A project will return $14,000 in 1 year for a $12,000 investment—a $2,000 net return. The equivalent taxexempt bond yields 15%, and the equivalent taxable bond
You have a project that costs $50,000 and will return $80,000 in 3 years.Your marginal capital gains tax rate on the $30,000 gain will be 37.5%.Treasuries pay a rate of return of 8%per year; munis
On March 28, 2008, tax-exempt AAA-rated 5-year muni bonds traded at a yield of 3.04%. Corporate 5-year AAA bonds traded at 4.14%.What was the marginal investor’s tax rate?
If the marginal investor’s tax rate is 30% and taxable bonds offer a rate of return of 6%, what rate of return do equivalent muni bonds offer?
If your tax rate is 20%, what interest rate do you earn in after-tax terms if the before-tax interest rate is 6%?
Why is the marginal tax rate usually lower than the average tax rate?
What types of income do taxpayers prefer?Why?
Is it better for the taxpayer to have a before-tax or an after-tax expense?Why?
What is the difference between a liquidity premium and a transaction cost?
Compute your after-transaction-costs rate of return on purchasing a house for $1,000,000 if you have to pay 0.5% transaction fees up front and pay a 6%broker’s commission (plus 2% in waiting costs)
List important transaction cost components, both direct and indirect.
What would you guess the transaction costs to be for a round-trip transaction of $10,000 worth of shares in Dell Computer? Describe in percentage and in absolute terms.
What mechanisms can borrowers use to assure lenders? If providing this information is not legally required, will they still volunteer to do so?
A bond will pay off $100 with probability 99%, and nothing with probability 1% next year. The equivalent appropriate expected rate of return for risk-free bonds is 5%.(a) What is an appropriate
“If the world is risk neutral and the market is perfect, then the promised and expected rates of return may be different, but the expected rate of return on all loans should be equal.” Evaluate.
Can there be a difference in the borrowing and lending rates quoted by the bank in perfect markets?
Evaluate the following statement: “In a perfect market, no one is getting a good deal. Thus, it would not matter from a social perspective if this market were not available.”
Your borrowing rate is 10% per year. Your lending rate is 4% per year.Your project costs $1,000 and will have a rate of return of 8%. Assume you have $900 to invest.(a) Should you take the
Without looking back, what are the perfect market assumptions?
Does a perfect capital market exist in the real world? What is the use of the perfect markets concept?

Showing 800 - 900 of 1690

First
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
Last

Services

Sitemap
Fun
Definitions
Become Tutor
Study Help Categories
Recent Questions
Expert Questions

Company Info

Security
Copyrights
Privacy Policy
Terms & Conditions
SolutionInn Fee
Scholarship

Get In Touch

About Us
Contact Us
Career
Jobs
FAQ
Campus Ambassador

Secure Payment

Download Our App

© 2024 SolutionInn. All Rights Reserved