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Investors and Firm's Intrinsic Value

1-2: If most investors expect the same cash flows from Companies A and B but are more confident that A's cash flows will be closer to their expected value, which company should have the higher stock price? Explain
1-3: what is a firm's intrinsic value? Its current stock price? Is the stock's "true long-run value" more closely related to its intrinsic value or to its current price?
1-7: If a company's board of directors wants management to maximize shareholder wealth, should the CEO's compensation be set as a fixed dollar amount, or should the compensation depend on how well the firm performs? If it is to be based on performance, how should performance be measured? Would it be easier to measure performance by the growth rate in reported profits or the growth rate in stock's intrinsic value? Which would be the better performance measure? Why?
1-8: what are the four forms of business organization? What are the advantages and disadvantages of each?
1-10: what are some actions that stockholders can take to ensure that management's and stockholders' interests are aligned?
2-2: describe the different way in which capital can be transferred from suppliers of capital to those who are demanding capital.
2-3: Is an initial public offering an example of a primary or secondary market transaction? Explain.
2-9: Describe the three different forms of market efficiency.
2-10: Investors expect a company to announce a 10% increase in earnings; instead, the company announces a 1% increase. If the market is semi-strong form efficient, which of the following would you expect to happen? Hint: refers to footnote 13 in this chapter.)
a. The stock's price will increase slightly because the company had a slight increase in earnings.
b. The stock's price will fall because the earnings increase was less than expected.
c. The stock's price will stay the same because earning s announcements have no effect if the market is semi-strong form efficient.
2-12: Explain whether the following statement are true or False
a. Derivatives transactions are designed to increase risk and the used almost exclusively by the speculators who are looking for the capture high returns.
b. Hedge funds typically have large minimum investments and are marketed to institutions and individuals with high net worth.
c. Hedge funds have traditionally been highly regulated
d. The New York stock exchange is an example of a stock exchange that has a physical location.
e. A larger bid-ask spread means that the dealer will realize a lower profit.
f. The efficient markets hypothesis assumes that all investors are rational.

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Question 1-2
Company A will have the higher stock price because the variability in its expected return is less and that investors are surer of what their expected returns will be from that stock.

Question 1-3
Intrinsic value is the value of a company that its investment characteristics are completely understood whereas the company's stock price is the market's expectation of the present value of the company's expected cash flows. In the long run, the stock's true long-run value is more closely related to its intrinsic value as investors gain more understanding of that company's investment characteristics and incorporate that in their pricing in addition to its cash flows.

Question 1-7
The compensation should depend on how well the company performs to align the CEO's goal with shareholder wealth maximization. Performance should be measured using several factors such as stock price, earnings per share growth, return on equity growth among others. It would be better ...

Solution Summary

The solution examines investors and a firm's intrinsic value. Initial public offerings are examined.