Questions from Corporate Finance

Q: Explain what the following sentence means: The market portfolio is a

Explain what the following sentence means: The market portfolio is a fence that protects the sheep from the wolves, but nothing can protect the sheep from themselves.

Q: You are trading in a market in which you know there are

You are trading in a market in which you know there are a few highly skilled traders who are better informed than you are. There are no transaction costs. Each day you randomly choose five stocks to b...

Q: Why does the CAPM imply that investors should trade very rarely?

Why does the CAPM imply that investors should trade very rarely?

Q: Your brother Joe is a surgeon who suffers badly from the overconfidence

Your brother Joe is a surgeon who suffers badly from the overconfidence bias. He loves to trade stocks and believes his predictions with 100% confidence. In fact, he is uninformed like most investors....

Q: Explain what is wrong with the following argument: “If a

Explain what is wrong with the following argument: “If a firm issues debt that is risk free, because there is no possibility of default, the risk of the firm’s equity does not change. Therefore, risk-...

Q: Consider the entrepreneur described in Section 14.1 (and referenced

Consider the entrepreneur described in Section 14.1 (and referenced in Tables 14.1–14.3). Suppose she funds the project by borrowing $750 rather than $500. a. According to MM Proposi...

Q: Suppose Visa Inc. (V) has no debt and an

Suppose Visa Inc. (V) has no debt and an equity cost of capital of 9.2%. The average debt-to value ratio for the credit services industry is 13%. What would its cost of equity be if it took on the ave...

Q: Global Pistons (GP) has common stock with a market value

Global Pistons (GP) has common stock with a market value of $200 million and debt with a value of $100 million. Investors expect a 15% return on the stock and a 6% return on the debt. Assume perfect c...

Q: Hubbard Industries is an all-equity firm whose shares have an

Hubbard Industries is an all-equity firm whose shares have an expected return of 10%. Hubbard does a leveraged recapitalization, issuing debt and repurchasing stock, until its debt-equity ratio is 0.6...

Q: You are analyzing the leverage of two firms and you note the

You are analyzing the leverage of two firms and you note the following (all values in millions of dollars): a. What is the market debt-to-equity ratio of each firm? b. What is the book debt-to-equit...