Fundamentals of Corporate Finance with Connect Access Card
11th Edition
ISBN: 9781259418952
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 13, Problem 10CRCT
Earnings and Stock Returns [LO1] As indicated by a number of examples in this chapter, earnings announcements by companies are closely followed by, and frequently result in, share price revisions. Two issues should come to mind. First, earnings announcements concern past periods. If the market values stocks based on expectations of the future, why are numbers summarizing past performance relevant?
Second, these announcements concern accounting earnings. Going back to Chapter 2, such earnings may have little to do with cash flow—so, again, why are they relevant?
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“When the stock market declines the net worth of companies decreases, causing the problem of asymmetric information to decrease as well.” Is this statement true, false, or uncertain? Explain your answer.
QUESTION 9
If markets are semi-strong efficient, which of the following situations is most likely to yield abnormal returns?
O 1. Following the advice of your stockbroker's newsletter
O 2. Identifying a pattern in a company's historical stock price
O 3. Obtaining insider information
Analysing a company's earning report
Which one of the following statements is correct?
A- Stock prices are independent of the economic cycle
B- Stock prices chane simultaneoustly with the economy
C- Stock prices often start to rise before the end of a recession
D- Changes in stock prices generally lag changes in the economy
Chapter 13 Solutions
Fundamentals of Corporate Finance with Connect Access Card
Ch. 13.1 - How do we calculate the expected return on a...Ch. 13.1 - In words, how do we calculate the variance of the...Ch. 13.2 - What is a portfolio weight?Ch. 13.2 - How do we calculate the expected return on a...Ch. 13.2 - Is there a simple relationship between the...Ch. 13.3 - What are the two basic parts of a return?Ch. 13.3 - Under what conditions will a companys announcement...Ch. 13.4 - Prob. 13.4ACQCh. 13.4 - Prob. 13.4BCQCh. 13.5 - What happens to the standard deviation of return...
Ch. 13.5 - What is the principle of diversification?Ch. 13.5 - Why is some risk diversifiable? Why is some risk...Ch. 13.5 - Why cant systematic risk be diversified away?Ch. 13.6 - Prob. 13.6ACQCh. 13.6 - What does a beta coefficient measure?Ch. 13.6 - True or false: The expected return on a risky...Ch. 13.6 - How do you calculate a portfolio beta?Ch. 13.7 - Prob. 13.7ACQCh. 13.7 - What is the security market line? Why must all...Ch. 13.7 - Prob. 13.7CCQCh. 13.8 - If an investment has a positive NPV, would it plot...Ch. 13.8 - What is meant by the term cost of capital?Ch. 13 - Prob. 13.1CTFCh. 13 - Prob. 13.5CTFCh. 13 - Beta is a measure of what?Ch. 13 - The slope of the security market line is equal to...Ch. 13 - Where would a negative net present value project...Ch. 13 - Prob. 1CRCTCh. 13 - Prob. 2CRCTCh. 13 - Systematic versus Unsystematic Risk [LO3] Classify...Ch. 13 - Systematic versus Unsystematic Risk [LO3] Indicate...Ch. 13 - Prob. 5CRCTCh. 13 - Diversification [LO2] True or false: The most...Ch. 13 - Portfolio Risk [LO2] If a portfolio has a positive...Ch. 13 - Beta and CAPM[LO4] Is it possible that a risky...Ch. 13 - Corporate Downsizing [LO1] In recent years, it has...Ch. 13 - Earnings and Stock Returns [LO1] As indicated by a...Ch. 13 - Determining Portfolio Weights [LO1] What are the...Ch. 13 - Portfolio Expected Return [LO1] You own a...Ch. 13 - Portfolio Expected Return [LO1] You own a...Ch. 13 - Prob. 4QPCh. 13 - Prob. 5QPCh. 13 - Prob. 6QPCh. 13 - Calculating Returns and Standard Deviations [LO1]...Ch. 13 - Calculating Expected Returns [LO1] A portfolio is...Ch. 13 - Returns and Variances [LO1] Consider the following...Ch. 13 - Returns and Standard Deviations [LO1] Consider the...Ch. 13 - Calculating Portfolio Betas [LO4] You own a stock...Ch. 13 - Calculating Portfolio Betas [LO4] You own a...Ch. 13 - Using CAPM[LO4] A stock has a beta of 1.15, the...Ch. 13 - Using CAPM[LO4] A stock has an expected return of...Ch. 13 - Using CAPM [LO4] A stock has an expected return of...Ch. 13 - Using CAPM [LO4] A stock has an expected return of...Ch. 13 - Using the SML[LO4] Asset W has an expected return...Ch. 13 - Reward-to-Risk Ratios [LO4] Stock Y has a beta of...Ch. 13 - Reward-to-Risk Ratios [LO4] In the previous...Ch. 13 - Using CAPM [LO4] A stock has a beta of 1.14 and an...Ch. 13 - Portfolio Returns [LO2] Using information from the...Ch. 13 - Prob. 22QPCh. 13 - Portfolio Returns and Deviations [LO2] Consider...Ch. 13 - Analyzing a Portfolio [LO2, 4] You want to create...Ch. 13 - Analyzing a Portfolio [LO2, 4] You have 100,000 to...Ch. 13 - Systematic versus Unsystematic Risk [LO3] Consider...Ch. 13 - SML [LO4] Suppose you observe the following...Ch. 13 - SML [LO4] Suppose you observe the following...Ch. 13 - Prob. 1MCh. 13 - Beta is often estimated by linear regression. A...Ch. 13 - Prob. 3MCh. 13 - Prob. 4MCh. 13 - Prob. 5M
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- If you were an investor considering purchasing the stock of a company and you were concerned about the company's ability to produce income or operating success for a given period of time, which of the following trends would worry you most? O a decreasing inventory turnover ratio an increasing return on common stockholders' equity ratio O a decreasing return on assets ratio an increasing current ratioarrow_forwardCompanies often are under pressure to meet or beat Wall Street earnings projections in order to increase stock prices and also to increase the value of stock options. Some resort to earnings management practices to artificially create desired results. Required: 1. How can a company manage earnings by changing its depreciation method? Is this an effective technique to manage earnings? 2. How can a company manage earnings by changing the estimated useful lives of depreciable assets? Is this an effective technique to manage earnings? 3. Using a fictitious example and numbers you make up, describe in your own words how asset impairment losses could be used to manage earnings. How might that benefit the company?arrow_forwardThe future earnings are likely to withstand an economic downturn,is situation of? A. defensive companies and stock B. cyclical companies and stock C. Growth companies and stockarrow_forward
- 1. Is stock bonus a real dividend payment in principle? 2. Briefly describe the information signaling effect caused by dividend reduction announcement (in terms of assumption and market reaction)arrow_forward1. Stock exchanges want to be sure that investors have enough information toSelect one:a. Increase a company’s performance and prospectsb. Evaluate a company’s performance and prospectsc. Decrease a company’s performance and prospectsd. Evaluate a company’s assets and liabilitiesarrow_forwardCase Study 1: A common measure of the relative value of a company's stock is the price to earnings ratio... A relatively low PE indicates either a relatively undervalued stock or a company expected to have low or even negative future earnings growth, while a relatively high PE indicates either an over-valued stock or a company expected to have robust future earnings growth. Consider the following companies, for which we want to determine the aggregate PE: Company A B с D PE Ratio 22.50 24.20 20.00 60.00 Find the right statistical tool, then state the reason for using that tool.arrow_forward
- Which of the following is the best reason why the price-earnings method is often used by investors to estimate the fair price of a stock? a) Because the earning multiples are easily found in online financial databases. b) Earnings per share is a known amount that is related to the payment of future dividends. c) Because the price-earnings method gives the same answer as the constant growth method and is easier to compute. d) The price-earnings method has been shown to provide the most accurate price estimate.arrow_forwardAssume that a company announces an unexpectedly large cash dividend to its shareholders. In an efficient market without information leakage, one might expect:a. An abnormal price change at the announcement.b. An abnormal price increase before the announcement.c. An abnormal price decrease after the announcement.d. No abnormal price change before or after the announcement.arrow_forwardRatio analysis is an important tool used by financial analysts in determining the future value of a company's stock. 1. Explain which ratios you think are most useful in determining the future viqbility kf a company. 2 What are the importance of benchmarks and red flags that are obvious indicators of future problems?arrow_forward
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