Busm 301 Ch1
Answers to End-of-Chapter Questions Chapter 1
1-1 When you purchase a stock, you expect to receive dividends plus capital gains. Not all stocks pay dividends immediately, but those corporations that do, typically pay dividends quarterly. Capital gains (losses) are received when the stock is sold. Stocks are risky, so you would not be certain that your expectations would be met—as you would if you had purchased a U.S. Treasury security, which offers a guaranteed payment every 6 months plus repayment of the purchase price when the security matures.
1-2 No, the stocks of different companies are not equally risky. A company might operate in an industry that is viewed as relatively risky, such as biotechnology—where millions of dollars are spent on R&D that may never result in profit. A company might also be heavily regulated and this could be perceived as increasing its risk. Other factors that could cause a company’s stock to be viewed as relatively risky include: heavy use of debt financing vs. equity financing, stock price volatility, and so on.
1-3 If investors are more confident that Company A’s cash flows will be closer to their expected value than Company B’s cash flows, then investors will drive the stock price up for Company A. Consequently, Company A will have a higher stock price than Company B.
1-4 No, all corporate projects are not equally risky. A firm’s investment decisions have a significant impact on the riskiness of the stock. For example, the types of assets a company chooses to invest in can impact the stock’s risk—such as capital intensive vs. labor intensive, specialized assets vs. general (multipurpose) assets—and how they choose to finance those assets can also impact risk.
1-5 A firm’s intrinsic value is an estimate of a stock’s “true” value based on accurate risk and return data. It can be estimated but not measured precisely. A stock’s current price is its market price—the value based on perceived but
1-1 When you purchase a stock, you expect to receive dividends plus capital gains. Not all stocks pay dividends immediately, but those corporations that do, typically pay dividends quarterly. Capital gains (losses) are received when the stock is sold. Stocks are risky, so you would not be certain that your expectations would be met—as you would if you had purchased a U.S. Treasury security, which offers a guaranteed payment every 6 months plus repayment of the purchase price when the security matures.
1-2 No, the stocks of different companies are not equally risky. A company might operate in an industry that is viewed as relatively risky, such as biotechnology—where millions of dollars are spent on R&D that may never result in profit. A company might also be heavily regulated and this could be perceived as increasing its risk. Other factors that could cause a company’s stock to be viewed as relatively risky include: heavy use of debt financing vs. equity financing, stock price volatility, and so on.
1-3 If investors are more confident that Company A’s cash flows will be closer to their expected value than Company B’s cash flows, then investors will drive the stock price up for Company A. Consequently, Company A will have a higher stock price than Company B.
1-4 No, all corporate projects are not equally risky. A firm’s investment decisions have a significant impact on the riskiness of the stock. For example, the types of assets a company chooses to invest in can impact the stock’s risk—such as capital intensive vs. labor intensive, specialized assets vs. general (multipurpose) assets—and how they choose to finance those assets can also impact risk.
1-5 A firm’s intrinsic value is an estimate of a stock’s “true” value based on accurate risk and return data. It can be estimated but not measured precisely. A stock’s current price is its market price—the value based on perceived but