【正文】 FOR AN INVESTMENT BANK WHOSE PRIMARY FUNCTION IS TO HELP BUSINESSES RAISE NEW CAPITAL。 (2) unlimited personal liability for business debts。 INTEGRATED CASE Integrated Case: 1 9 (2) INVESTMENTS, WHICH FOCUSES ON THE DECISIONS OF BOTH INDIVIDUAL AND INSTITUTIONAL INVESTORS AS THEY CHOOSE SECURITIES FOR THEIR INVESTMENT PORTFOLIOS。 explain which of these is relevant to a welldiversified investor. ? State the basic proposition of the Capital Asset Pricing Model (CAPM) and explain how and why a portfolio’s risk may be reduced. ? Explain the significance of a stock’s beta coefficient, and use the Security Market Line to calculate a stock’s required rate of return. ? List changes in the market or within a firm that would cause the required rate of return on a firm’s stock to change. ? Identify concerns about beta and the CAPM. ? Explain how stock price volatility is more likely to imply risk than earnings volatility. Chapter 2 Risk and Rates of Return LEARNING OBJECTIVES SouthWestern Lecture Suggestions: 5 15 Risk analysis is an important topic, but it is difficult to teach at the introductory level. We just try to give students an intuitive overview of how risk can be defined and measured, and leave a technical treatment to advanced courses. Our primary goals are to be sure students understand (1) that investment risk is the uncertainty about returns on an asset, (2) the concept of portfolio risk, and (3) the effects of risk on required rates of return. What we cover, and the way we cover it, can be seen by scanning Blueprints, Chapter 5. For other suggestions about the lecture, please see the ―Lecture Suggestions‖ in Chapter 2, where we describe how we conduct our classes. DAYS ON CHAPTER: 3 OF 58 DAYS (50minute periods) LECTURE SUGGESTIONS Answers and Solutions: 5 16 51 a. The probability distribution for plete certainty is a vertical line. b. The probability distribution for total uncertainty is the Xaxis from ? to +?. 52 Security A is less risky if held in a diversified portfolio because of its negative correlation with other stocks. In a singleasset portfolio, Security A would be more risky because ?A ?B and CVA CVB. 53 a. No, it is not riskless. The portfolio would be free of default risk and liquidity risk, but inflation could erode the portfolio’s purchasing power. If the actual inflation rate is greater than that expected, interest rates in general will rise to incorporate a larger inflation premium (IP) andas we shall see in Chapter 7the value of the portfolio would decline. b. No, you would be subject to reinvestment rate risk. You might expect to ―roll over‖ the Treasury bills at a constant (or even increasing) rate of interest, but if interest rates fall, your investment ine will decrease. c. A . governmentbacked bond that provided interest with constant purchasing power (that is, an indexed bond) would be close to riskless. The . Treasury currently issues indexed bonds. 54 a. The expected return on a life insurance policy is calculated just as for a mon stock. Each oute is multiplied by its probability of occurrence, and then these products are summed. For example, suppose a 1year term policy pays $10,000 at death, and the probability of the policyholder’s death in that year is 2 percent. Then, there is a 98 percent probability of zero return and a 2 percent probabil。 however, shareholders receive more dividends so the effect on stock price is indeterminate. If the firm’s stock price increases as current management believes it will, this may cause some bondholders to sell their bonds and buy the firm’s stock to earn a higher return. So, the proposed dividend increase may cause a decline in the value of the firm’s existing bonds. c. Yes, assuming that management has performed the correct analysis it should undertake projects/actions that will increase the firm’s stock price. Stockholder wealth maximization is the goal of management. d. Bondholders can take the following actions to protect themselves against managerial decisions that reduce bond values: 1. Place restrictive covenants in debt agreements. 2. Charge a higherthannormal interest rate to pensate for the risk of possible exploitation. 3. Refuse to deal with management entirely. Firms that deal unfairly with creditors either lose access to the debt markets or are saddled with high interest rates and restrictive covenants, all of which are detrimental to shareholders. 114 a. Increasing corporate tax rates and reducing individual tax rates will cause the firm to remain as an unincorporated partnership. In addition to higher corporate tax rates, corporations are exposed to double taxation. b. By increasing environmental and labor regulations to include firms with 50+ employees, this firm will choose to remain an unincorporated partnership due to the additional costs it would have to bear if it operated as a corporation. 115 Earnings per share in the current year will decline due to the cost of the investment made in the current year and no significant performance impact in the short run. However, the pany’s stock price should increase due to the significant cost savings expected in the future. CINTEGRATED CASE Integrated Case: 1 8 Take a Dive Financial Management Overview 11 KATO SUMMERS OPENED TAKE A DIVE 17 YEARS AGO。 however, the board is not well served if the manager takes shortrun actions that bump up shortrun earnings at the expense of longrun profitability and the pany’s stock price. Consequently, the board may want to rely more on stock options and less on performance shares that are tied to accounting performance. 111 As the stock market bee