Finance Week 1

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 instantly receive a share of the company, either in paid dividends or rights to vote in the company. I would not be certain that my expectations would be met because there is no way to determine the exact negative or positive outcome of a stock’s performance due to changing market conditions.

1-4 When is a stock said to be in equilibrium? At any given time, would you guess that most stocks are in equilibrium as you defined it? Explain.

Answer: Equilibrium is when the market price equals the intrinsic value, causing investor’s to be indifferent between buying or selling. At any given time, most stocks are fairly close to their intrinsic values, therefore close to equilibrium. Stock prices and equilibrium can be at different values so stocks can be temporarily undervalued or overvalued.

1-5 Suppose three honest individuals gave you their estimates of Stock X’s intrinsic value. One person is your current roommate, the second person is a professional security analyst with an excellent reputation on Wall Street and the third person is Company X’s CFO. If the three estimates differed, in which one would you have the most confidence? Why?

Answer: If the three individuals gave me differing estimates, I would have more confidence in the estimate provided by the CFO as has direct insight and accountability for the company’s finances, investments, and what is reported to the public and shareholders. Additionally, the CFO is held accountable to the Securities exchange Commission that reports such as annual reports are accurate, otherwise faced with strict penalties such as fines and or jail time.

1-8 What are the four forms of business organization? What are the advantages and disadvantages of each?

1. Sole...