1. Why do firms set upper and lower limits on their cash balance? What factors affect these limits?
2. How is WACC different from the expected rate of return calculated using CAPM?
3. Firm A and Firm B have the same betas but Firm A has a much higher total risk (standard deviation of returns) than the Firm B. The dividends and dividend growth rates for both firms are the same. Do we expect Firm A’s price to be greater or less than Firm B’s price?
4. What is the relationship between the expected rate of return and the rate used to discount cash flows? Re-write the formula for stock price P=D/(r-g) to provide an expression for the expected rate of return.
5. Is it true that if a stock possesses a higher expected rate of return then it must be a better investment?