Question 1:

Several stock valuation models were described in the chapter, including zero-growth, constant growth, variable growth, free cash flow, book value, and P/E multiple models. Which of these do you believe would generate the most accurate value estimates for most firms? Explain your choice.

Question 2:

Read the Focus on Ethics box (“Psst! Have You Heard Any Good Quarterly Earnings Forecasts Lately?”). Explain what quarterly earnings guidance is, and what purpose it is supposed to serve. If you were a corporate CEO, would you discontinue this practice? Why or why not?

Question 3:

Diversification occurs when stocks with low correlations of returns are placed together in a portfolio. Identify at least one type of firm that might exhibit low correlations of returns with the overall stock market? Explain why the correlations of these firms are expected to be low.

Question 4:

In general, the cost of debt capital is lower than the cost of equity capital. For this reason, it might be expected that firms with high debt ratios would have a lower weighted average cost of capital. Explain at least one reason why this is not the case.

Question 5:

Which capital investment technique does the discussion in the textbook favor? Why? Do you agree with this assessment?

Question 6:

Assume your firm has multiple investments to consider each with differing risk levels. How can differing risk levels be incorporated into NPV analysis? How can they be incorporated into IRR analysis?