Finance: Corporation and Intrinsic Value Essay

817 Words Dec 24th, 2012 4 Pages
Principles of Finance
HW# 1

Question# 1-1: If you bought a share of stock, what would you expect to receive, when would you expect to receive it, and would you be certain that your expectations would be met?

Answer: If I bought a share of stock, I would expect to receive a share of the company. Meaning either to vote in the company or receive paid dividends, depending on if I purchased common or preferred stock. I would expect to receive my share instantly. I would not be certain that my expectations would be met. The reason why, there is not a way to be positive that the stock value is accurate and the market value can change at any time.

Question# 1-2: If most investors expect the same cash flows from Companies A and B but are
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If a stock isn’t equilibrium, then there is no fundamental difference, therefore any pressure for a change in the stock’s price. At any given time, most stocks are reasonably close to their intrinsic values and are at or close to equilibrium. However, at times, the stock prices and equilibrium values are not the same, so stocks can be temporarily underestimated or overvalued.

Question# 1-7: Is it better for a firm’s actual stock price in the market to be under, over, or equal to its intrinsic value? Would your answer be the same from the standpoints of stockholders in general and a CEO who is about to exercise a million dollars in options and then retire? Explain.

Answer: If a stock’s market price and intrinsic value are equal, then the stock is in equilibrium and there is no pressure (buying/selling) to change the stock’s price. Stockholders in general would probably expect the firm’s market price to be under the intrinsic value, realizing that if management is doing its job that current price at any point in time would not necessarily be maximized. However, the CEO would prefer that the market price be high, since it is the current price that he will receive when exercising his stock options.

Question# 1-8: What are the four forms of business organization? What are the advantages and dis-advantages of each?

Answer: The four forms of business organization are sole proprietorships, partnerships,

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