Question 1: Suppose you are managing a stock portfolio consisting a mixture of high and low beta stocks. You have information which leads you to believe that the stock market is likely to be very strong in the immediate future, i.e., you are confident that the market is about to rise sharply. If you want to take advantage of the situation to maximize the value of your portfolio, what would you do now? Explain your answer.
Question 2: Project X has an internal rate of return of 20 percent. Project Y has an internal rate of return of 15 percent. Both projects have a positive net present value. Does this mean Project X has a shorter payback than Project Y? Explain your answer.
Question 3: In capital budgeting, why is the focus on cash flows rather than net income? Should interest payments be considered in capital budgeting? How about the changes in net operating working capital? Provide the arguments to support your answers.
Question 4: What would be the effect if a company increases its debt ratio, but leaves its operating income (EBIT) and total assets unchanged?