1-1: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?
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 possibly incorrect infor
1-2: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.
Equilibrium is the situation where the actual market price equals the intrinsic value, so investors are indifferent between buying or selling a stock. If a stock is in equilibrium then there is no fundamental imbalance, hence no pressure for a change in t
1-3:Suppose three honest individuals gave you their estimates of Stock X's intrinsic value. One person is your current roommate, the second person is a professional security analyst with an excellent reputation on Wall Street, and the third person is Comp
If the three intrinsic value estimates for Stock X were different, you would have the most confidence in Company X's CFO's estimate. Intrinsic values are strictly estimates, and different analysts with different data and different views of the future will
1-5: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
The board of directors should set CEO compensation dependent on how well the firm performs. The compensation package should be sufficient to attract and retain the CEO but not go beyond what is needed. Compensation should be structured so that the CEO is
1-7:Should stockholder wealth maximization be thought of as a long-term or a short-term goal? For example, if one action increases a 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 keeps the
Stockholder wealth maximization is a long-run goal. Companies, and consequently the stockholders, prosper by management making decisions that will produce long-term earnings increases. Actions that are continually shortsighted often "catch up" with a firm
1-8:What are some actions that stockholders can take to ensure that management's and stockholders' interests are aligned?
Useful motivational tools that will aid in aligning stockholders' and management's interests include: (1) reasonable compensation packages,
(2) direct intervention by shareholders, including firing managers who don't perform well, and
(3) the threat of ta
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1-11:Edmund Enterprises recently made a large investment to upgrade its technology. Although these improvements won't have much of an impact on performance in the short run, they are expected to reduce the future cost significantly. What impact will this
Since firm has recently invested large capital to upgrade their technology, earning per share of the firm will go down. The reason why firms earning per share go down is that the firm has less money (as expenses goes up, profit decreases due to capital in
1-13:Suppose you are a director of an energy company that has three divisions-natural gas, oil, and retail (gas stations). These divisions operate independently from one another, but all division managers report to the firms CEO. If you were on the compen
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