Question 1: We have seen over long periods of time, stock investments have tended to substantially outperform bond investments. However, it is not at all uncommon to observe investors with long horizons holding entirely bonds. Are such investors irrational?
Suppose the government announces that, based on a just-completed survey, the growth rate in the economy is likely to be 2 percent in the coming year, as compared to 5 percent for the year just completed. Will security prices increase, decrease, or stay the same following the announcement? Does it make any difference whether or not the 2 percent figure was anticipated by the market? Explain.
Question 2: In calculating WACC, if you had to use book values for either debt or equity, which would you choose? Why?
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