If you bought a share of stock, what would you expect to receive, when would you
expect to receive it, and would you be certain that your expectations would be met?
1-2 Are the stocks of different companies equally risky? If not, what are some factors that
would cause a company’s stock to be viewed as being relatively risky?
1-3 If most investors expect the same cash flows from Companies A and B but are more
confident that A’s cash flows will be close to their expected value, which should have the
higher stock price? Explain.
1-4 Are all corporate projects equally risky, and if not, how do a firm’s investment decisions
affect the riskiness of its stock?
1-5 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 its current price?
1-6 When is a stock said to be in equilibrium? At any given time, would you guess that most
stocks are in equilibrium as you defined it? Explain
Suppose three completely honest individuals gave you their estimates of Stock X’s intrinsic value. One is your current girlfriend or boyfriend, the second is a professional security analyst with an excellent reputation on Wall Street, and the third is Company X’s CFO. If the three estimates differed, which one would you have the most confidence in?
Why?
1-8 Is it better for a firm’s actual stock price in the market to be under, over, or equal to its intrinsic value? Would your answer be the same from the standpoints of both stockholders in general and a CEO who is about to exercise a million dollars in options and then retire? Explain.
1-9 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 it 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 the stock’s intrinsic value? Which would be the better performance measure? Why?
1-10 What are the three principal forms of business organization? What are the advantages
and disadvantages of each?
1-11 Should stockholder wealth maximization be thought of as a long-term or a short-term
goal—for example, if one action would probably increase the firm’s stock price from a
current level of $20 to $25 in 6 months and then to $30 in 5 years but another action
would probably keep the stock at $20 for several years but then increase it to $40 in 5
years, which action would be better? Can you think of some specific corporate actions
that might have these general tendencies?
1-12 What are some actions stockholders can take to ensure that management’s and stock-
holders’ interests are aligned?
1-13 The president of Southern Semiconductor Corporation (SSC) made this statement in the
company’s annual report: “SSC’s primary goal is to increase the value of our common
stockholders’ equity.” Later in the report, the following announcements were made:
a. The company contributed $1.5 million to the symphony orchestra in Birmingham,
Alabama, its headquarters city.
b. The company is spending $500 million to open a new plant and expand operations
in China. No profits will be produced by the Chinese operation for 4 years, so earn-
ings will be depressed during this period versus what they would have been had
the decision not been made to expand in that market.
c. The company holds about half of its assets in the form of U.S. Treasury bonds, and it
keeps these funds available for use in emergencies. In the future, though, SSC plans
to shift its emergency funds from Treasury bonds to common stocks.
Discuss how SSC’s stockholders might view each of these actions, and how they might affect the stock price
