In order to maximize its shareholders' value, a firm's management must attempt to maximize the stock price in the long run, or the stock's "intrinsic value." True False If inflation is expected to be relatively low, then interest rates will tend to be relatively low, other things held constant. True False The cost of debt and the coat of equity will increase in the case that the risk free rate increases but the market risk premium remains constant. True False Which of the following is a primary market transaction? You sell 200 shares of IHM stock on the NYSE through your broker. You buy 200 shares of IBM stock from your brother. The trade is not made through a broker; you just give him cash and he gives you the stock. HIM issues 2,000,000 shares of new stock and sells them to the public through an investment banker. One financial institution buys 200,000 shares of IBM stock from another institution. An investment banker arranges the transaction. IBM sells 2,000,000 shares of treasury stock to its employees when they exercise options that were granted in prior years. Which of the following statements is CORRECT? A graph of the SML as applied to individual stocks would show required rates of return on the vertical axis and standard deviations of returns on the horizontal axis. The CAPM has been thoroughly tested, and the theory has been confirmed beyond any reasonable doubt. If two "normal" or "typical" stocks were combined to form a 2-stock portfolio, the portfolio's expected return would be a weighted average of the stock's expected returns, but the portfolio's standard deviation would probably be greater than the average of the stock's standard deviations. Become more risk averse, then (1) the slope of the SML would increase and (2) rate of return on low-beta stocks would increase by more than the requires on high-beta stocks. In expected inflation, combined with a constant real-free rate and a constant