EXAM帮助 Define and explain the significance of the following terms. You should reference original articles that we have read in this course.
DEFINITIONS (five points each)
Define and explain the significance of the following terms. You should reference original articles that we have read in this course.EXAM帮助
The St. Petersburg Paradox
Semi-Strong Efficient Markets Tests
Internal Rate of Return
True, False or Uncertain (“TFU”) – Points will be given based on your explanation of your answer. Each question in this section is worth 10 points.EXAM帮助
TFU “The optimal capital structure of the firm is the one with the most debt that can be supported without risking bankruptcy.”
TFU “A highly variable dividend payout is worth less than a steady one.”
7. TFU “The only way to increase the value of the firm is to find and accept new investment projects with positive net present value.”
TFU “The finding that stock prices fluctuate randomly means they are meaningless.”
TFU “The best portfolio for an investor is the one that has the largest expected rate of return and the least risk.”
10. TFU “Stock splits are valuable to investors because they keep share prices in affordable ranges.”
11. (Total of 20 points – 4 points per section) Prepare an answer to this memo as though you are answering for Mr. Moore. Be explicit on how you come to your conclusions. Be sure to identify and answer all of the relevant issues.
PillBox Industries, Inc
New Haven CT
To: Henry Moore
From: Bartholomew Vanderbilt III
Re: Some Thoughts
Several things have come up in board meetings that I wish to bring to your attention. What are your thoughts?
(continued on the following pages, A-E).EXAM帮助
Our new distribution company, Pillbox Direct, is a big hit. Customers can order our drugs online and receive shipments in their mailboxes – no waiting in line at pharmacies. But we missed an opportunity because we issued stock to the seller of the company. Had we borrowed some of the acquisition cost we could have boosted our return on equity and raised our stock price. Better still we could have used some retained earnings to pay for some of the cost. Since we are not borrowing money or issuing stock but rather using our own money the cost of capital for retained earnings is zero – so we could have boosted the stock price even more.
The board is considering raising our profile in the market by paying out a special one-time extra dividend. We have been generating so much free cash that we can afford to do this and it will give us great recognition. However, some board members think this is missing an opportunity to use the case to pay down our debt. Getting rid of a big pile of debt could also signal the market we are doing well.
Another topic is our investment decision rule. We invited Professor Pangloss to join our board. At his first board meeting he gave us a well-received lecture on project selection. The good professor told us that historical studies indicate that the average rate of return on broadly diversified portfolios of common stock has been about 9% over the last seventy years. To make things simple, Professor Pangloss says we should not accept any new projects that do not at least promise this same 9%. Simple and easy to remember. A clever man, who by the way is very optimistic about our future.
The board is wondering what you think about the idea of us entering a new market, namely medicine for household pets (cats and dogs). People spend a lot of money on their animals and these creatures need medicine too. What do you think? How would you go about making your recommendation to the board? One thought is that this would make Pillbox a more diversified company that would attract new investors. Confidentially we might do this by buying an existing company and renaming the product line “PillBox 4 Paws.”
Professor Pangloss has told us about some new academic research as to the alignment of interest between the management of the company and the shareholders. Do you know anything about this? If this is valid we might decide to pay our executives and board with Pillbox stock options. What do you think about this idea?EXAM帮助
END OF TEST
(extra space for answers)