公司理财全书课后答案及人大金融考研(3)

CONCEPT QUESTIONS - CHAPTER 9

9.1 · What are the two parts of total return? Dividend income and capital gain (or loss)

· Why are unrealized capital gains or losses included in the calculation of returns?

Because it is as much a part of returns as dividends, even if the investor decides to hold onto the stock and not to realize the capital gain.

· What is the difference between a dollar return and a percentage return?

A dollar return is the amount of money the original investment provided, while percentage return is the percentage of the original investment represented by the total return.

9.2 · What is the largest one-period return in the 63-year history of common

stocks we have displayed, and when did it occur? What is the smallest return, and when did it occur?

Largest common stock return: 53.99% in 1933. Smallest common stock return: -43.34% in 1931.

· In how many years did the common stock return exceed 30 percent, and in how many years was it below 20 percent?

It exceeded 30% in 16 years. It was below 20% in 39 years.

· For common stocks, what is the longest period of time without a single losing year? What is the longest streak of losing years?

There are 6 consecutive years of positive returns. The longest losing streak was 4 years.

· What is the longest period of time such that if you have invested at the

beginning of the period, you would still not have had a positive return on your common-stock investment by the end?

The longest period of time was 14 years (from 1929 to 1942).

9.4 · What is the major observation about capital markets that we will seek to explain?

That the return on risky assets has been higher on average than the return on risk-free assets.

· What does the observation tell us about investors for the period from 1926 through 1994.

An investor in this period was rewarded for investment in the stock market with an extra or excess return over what would have achieved by simply investing in T-bills.

9.5 · What is the definition of sample estimates of variance and standard deviation?

Variance is given by Var (R) = (1 / (T-1) ) St (Rt - R)2 where T is the number of periods, Rt

is the period return and R is the sample mean. Standard deviation is given by SD = Var 1/2. For large T, (T-1) may be approximated by T.

· How does the normal distribution help us interpret standard deviation?

For a normal distribution, the probability of having a return that is above or below the men by a certain amount only depends on the standard deviation.

9.6 · How can financial managers use the history of capital markets to estimate

the required rate of return on nonfinancial investments with the same risk as the average common stock?

They can determine the historical risk premium and add this amount to the current risk-free rate to determine the required return on investments of that risk. CONCEPT QUESTIONS - CHAPTER 11

11.1· What are the two basic parts of a return? 1. The expected part 2. The surprise part

· Under what conditions will some news have no effect on common stock prices?

If there is no surprise in the news, there will not be any effect on prices. That is, the news was fully expected.

11.2· Describe the difference between systematic risk and unsystematic risk.

A systematic risk is any risk that affects a large number of assets, each to a greater or lesser degree. An unsystematic risk is a risk that specifically affects a single asset or a small group of assets.

· Why is unsystematic risk sometimes referred to as idiosyncratic risk?

Because information such as the announcement of a labor strike, may affect only some companies.

11.3 · What is an inflation beta? A GNP beta? An interest-rate beta?

An inflation beta is a measure of the sensitivity of a stock's return to changes in the expected inflation rate. A GNP beta measures the sensitivity of a stock's return to changes in the expected GNP. An interest rate beta reflects the sensitivity of a stock's return to changes in the market interest rate.

· What is the difference between a k-factor model and the market model?

The main difference is that the market model assumes that only one factor, usually a stock market aggregate, is enough to explain stock returns, while a k-factor model relies on k factors to explain returns.

· Define the beta coefficient.

The beta coefficient is a measure of the sensitivity of stock's return to unexpected changes in

one factor.

11.4· How can the return on a portfolio be expressed in terms of a factor model?

It is the weighted average of expected returns plus the weighted average of each security's beta times a factor F plus the weighted average of the unsystematic risks of the individual securities.

· What risk is diversified away in a large portfolio? The unsystematic risk.

11.5· What is the relationship between the one-factor model and CAPM?

Assuming the market portfolio is properly scaled, it can be shown that the one-factor model is identical to the CAPM.

11.7 · Empirical models are sometimes called factor models. What is the difference between a factor as we have used it previously in this chapter and an attribute as we use it in this section?

A factor is generally a market wide or industry wide factor proxng the systematic risk. An attribute is related with the returns of the stocks.

· What is data mining and why might it overstate the relation between some stock attribute and returns?

Choosing parameters because they have been shown to be related to returns is data mining. The relation found between some attribute and returns can be accidental, thus overstated.

· What is wrong with measuring the performance of a U.S. growth stock manager against a benchmark composed of English stocks?

Using a benchmark composed of English stocks is wrong because the stocks included are not of the same style as those in a U.S. growth stock fund.

CONCEPT QUESTIONS - CHAPTER 12

12.1· What is the disadvantage of using too few observations when estimating beta? Small samples can lead to inaccurate estimations.

· What is the disadvantage of using too many observations when estimating beta?

Firms may change their industries over time making observations from the distant past out-of-date.

· What is the disadvantage of using the industry beta as the estimate of the beta of an individual firm?

The operations of a particular firm may not be similar to the industry average.

12.2· What are the determinants of equity betas?

1. The responsiveness of a firm's revenues to economy wide movements. 2. The degree of a firm's operating leverage. 3. The degree of a firm's financial leverage.

· What is the difference between an asset beta and an equity beta? Financial leverage.

12.6h What is liquidity?

Liquidity in this context means the cost of bung and selling stocks. Those stocks that are expensive to trade are considered less liquid.

h What is the relation between liquidity and expected return?

There is a high expected return for illiquid stocks with high trading costs.

h What is adverse selection?

Adverse selection occurs when individuals have ignorance about traits, trends, or other information hidden in a population. For instance, a trader may suffer from adverse selection if certain market knowledge is hidden from him but is available to some investors.

h What can a corporation do to lower its cost of capital?

A corporation can be proactive in taking actions that will lower trading costs, thereby lowering its cost of capital.

CONCEPT QUESTIONS - CHAPTER 13

13.1· List the three ways financing decisions can create value. 1. Fool investors

2. Reduce costs or increase subsidies 3. Create a new security

13.2 · Can you define an efficient market?

It is a market where current prices reflect all available information.

13.3 · Can you describe the three forms of the efficient-market hypotheses?

1. Weak-from EMH postulates that prices reflect all information contained in the past history of prices.

2. Semistrong form EMH says that prices not only reflect the history of prices but all publicly available information.

3. Strong form EMH contends that prices reflect all available information, public and private (or \

· What kinds of things could make markets inefficient? 1. Large costs of acquiring and skillfully utilizing information 2. The existence of private information 3. Large transactions costs

Does market efficiency mean you can throw darts at a Wall Street Journal listing of New York Stock Exchange stocks to pick a portfolio.

No. All it says is that, on average, a portfolio manager will not be able to achieve excess returns on a risk-adjusted basis.

· What does it mean to say the price you pay for a stock is fair?

It means that the stock has been priced taking into account all publicly available information. · Why is it sometimes difficult to tell whether a particular security is debt or equity? Because it has characteristics that are particular to both. Companies are very adept at creating hybrid securities that are considered debt by the IRS but have equity features.

14.3· What is a preferred stock?

It is a security that has preference over common stock in the payment of dividends and in the distribution of assets in the case of liquidation.

· Do you think it is more like debt or equity?

Preferred stock is similar to both debt and common equity. Preferred shareholders receive a stated dividend only, and if the corporation is liquidated, preferred receive a stated dividend only, and if the corporation is liquidated, preferred stockholders get a stated value. However, unpaid preferred dividends are not debts of a company and preferred dividends not a tax deductible business expense.

· What are three reasons why preferred stock is issued?

1. Because of the way utility rates are determined in regulatory environments, regulated public utilities can pass the tax disadvantage of issuing preferred stock on to their customers. 2. Companies reporting losses to the IRS may issue preferred stock.

3. Firms issuing preferred stock can avoid the threat of bankruptcy that exists that debt financing.

14.4 · What is the difference between internal financing and external financing?

Internal financing comes from internally generated cash flows and does not require the issuing securities.

· What are the major sources of corporate financing?

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