Question
What are the components of the required rate of return on a share of stock? Briefly explain each component. According to the Capital Asset Pricing
- What are the components of the required rate of return on a share of stock? Briefly explain each component.
- According to the Capital Asset Pricing Model (CAPM), the expected return on a risky asset depends on three components. Describe each component, and explain its role in determining expected stock returns.
- What are the lessons learned from capital market history? What evidence is there to suggest these lessons are correct?
- Explain in words what beta is and why it is important.
- Explain the factors that determine beta and how an asset beta can differ from equity betas.
- Sometimes it is not clear if a particular security is debt or equity. Explain the basic difference between debt and equity.
- What are some of the advantages and disadvantages of leasing?
- In each of the theories of long term capital structure (with/without tax) the cost of equity rises as the amount of debt increases. So why don't financial managers use as little debt as possible to keep the cost of equity down? After all, isn't the goal of the firm to maximize share value and minimize shareholder costs?
- Restrictive short-term financial policies regarding current asset management include three basic actions. List and briefly describe each action.
- Why are some risks diversifiable and some nondiversifiable? Give an example of each.
- We routinely assume that investors are risk-averse return-seekers; i.e., they like returns and dislike risk. If so, why do we contend that only systematic risk and not total risk is important?
- If a portfolio has a positive investment in every asset, can the expected return on the portfolio be greater than that on every asset in the portfolio? Can it be less than that on every asset in the portfolio? If you answer yes to one or both of these questions, give an example to support your answer.
- If a portfolio has a positive investment in every asset, can the standard deviation on the portfolio be less than that on every asset in the portfolio? What about the portfolio beta?
- Is it possible that a risky asset could have a beta of zero? Explain. Based on the CAPM, what is the expected return on such an asset? Is it possible that a risky asset could have a negative beta? What does the CAPM predict about the expected return on such an asset? Can you give an explanation for your answer?
- A broker has advised you not to invest in oil industry stocks because they have high standard deviations. Is the brokers advice sound for a risk-averse investor like yourself? Why or why not?
- Is the following statement true or false? A risky security cannot have an expected return that is less than the risk-free rate because no risk-averse investor would be willing to hold this asset in equilibrium. Explain.
If you can borrow all the money you need for a project at 6 percent, doesnt it follow that 6 percent is your cost of capital for the project?
- What is the difference between internal financing and external financing?
- What factors influence a firms choice of external versus internal equity financing?
- In a world with no taxes, no transaction costs, and no costs of financial distress, is the following statement true, false, or uncertain? If a firm issues equity to repurchase some of its debt, the price per share of the firms stock will rise because the shares are less risky. Explain
- In a world with no taxes, no transaction costs, and no costs of financial distress, is the following statement true, false, or uncertain? Moderate borrowing will not increase the required return on a firms equity. Explain.
- Explain what is meant by business and financial risk. Suppose Firm A has greater business risk than Firm B. Is it true that Firm A also has a higher cost of equity capital? Explain.
- Is there an easily identifiable debtequity ratio that will maximize the value of a firm? Why or why not?
- Do you agree or disagree with the following statement? A firms stockholders will never want the firm to invest in projects with negative net present values. Why
- How does the existence of financial distress costs and agency costs affect Modigliani and Millers theory in a world where corporations pay taxes?
- What are the key differences between leasing and borrowing? Are they perfect substitutes?
Taxes are an important consideration in the leasing decision. Which is more likely to lease: A profitable corporation in a high tax bracket or a less profitable one in a low tax bracket? Why?
What are the costs of shortages? Describe them.
In an ideal economy, net working capital is always zero. Why might net working capital be positive in a real economy?
Is it possible for a firm to have too much cash? Why would shareholders care if a firm accumulates large amounts of cash?
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