Problem 1. What are the three principal forms of business organization? What are the advantages and disadvantages of each?
Problem 2. What is the firm's fundamental, or intrinsic, value? What might cause a firm's intrinsic value to be different than its actual market value?
Problem 3. What is an opportunity cost rate? How is this rate used in discounted cash flow analysis, and where is it shown on a time line? Is the opportunity rate a single number that is used in all situations?
Problem 4. What is the operating capital, and why is it important?
Problem 5. Explain the difference between NOPAT and net income. Which is a better measurement of the performance of a company's operations?
Problem 6. What is free cash flow? Why is the most important measure of cash flow?
Problem 7. If investors aversion to risk increased, would the risk premium on a high-beta stock increase more or less than that on a low-beta stock? Explain.
Problem 8. If a company's beta were to double, would its expected return double?
Problem 9. Security A has an expected rate of return of 6%, a standard deviation of returns of 30%, a correlation coefficient with the market of .25, and a beta coefficient of -0.5. Security B has an expected return of 11%, a standard deviation of returns of 10%, a correlation with the market of 0.75, and a beta coefficient of 0.5. Which security is more risky? Why?