Question 1# Firm A has a Price-to-Earnings ratio of 29 while Firm B has a
Price-to-Earnings ratio of 18. The two firms are in the same industry and are often considered direct competitors of each other. Discuss the implication of this – specifically, does this imply that Firm A is overpriced? If so, why? If not, then what does it imply? (Short Answer)
Question #2- You are speaking with a friend about how you are each invested. Your friend says “You should really switch to my investment professional – he was able to make a portfolio of stocks with zero risk and a very nice return, now I don’t even have to worry about risk.” Why should your friend’s statement be concerning? (Short Answer)
True or False
Question #3- An agency cost occurs anytime managers (acting as the agent of the shareholder) make a decision within the firm that does not support maximizing the firm’s value, but provides greater benefit to the manager than the alternative that does support maximizing the firm’s value. T or F
Question #4- The goal of upper management from the financial perspective should be to maximize its shareholders’ wealth. T or F
Question #5- Shareholders always prefer to see the Debt Ratio as low as possible as this indicates that the firm’s risk is low. T or F
Question #6- Both annuities and perpetuities are steady streams of cash flows paid periodically. However, the cash flow stream for a perpetuity continues infinitely into the future while the cash flow stream for an annuity has a set stopping point. T or F
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