Essay about Problem Set 1

622 Words Sep 28th, 2012 3 Pages
Problem Set 1

Problem 1
Which project should the firm select? Why?

Project B: Managers should try to maximize their stock’s intrinsic value while also bringing in revenue. The P/E ratio shows the dollar amount investors will pay for $1 of current earnings.

Problem 2
If most investors expect the same cash flows from Companies A and B but are more confident that A’s cash flows will be closer to their expected value, which company should have the higher stock price? Explain.

The primary goal of a corporation should be to maximize its owner’s value. If a manager is to maximize shareholder wealth, he/she must know how that wealth is determined. Fundamentally, shareholder wealth is the number of shares outstanding at times the
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First the stockholders might see $1.5 million to the symphony orchestra a little bit too much when they want to plan for new construction. Everyone understands new construction has to happen for growth but at the expense of 4 years of no dividends?! Wow, this is going to make many stockholders sell and the price of SSC will plummet. Finally, by switching the U.S. Treasury bonds to common stock SSC is switching from fixed income securities to equity securities.

Problem 4
Edmund Enterprises recently made a large investment to upgrade its technology. While these improvements won’t have much of an effect on performance in the short run, they are expected to reduce future costs significantly. What effect will this investment have on Edmund Enterprises’ earnings per share this year? What effect might this investment have on the company’s intrinsic value and stock price?

Since firm has recently invested large capital to upgrade their technology, earning per share of the firm will go down. The reason why firms earning per share go down is that the firm has less money (as expenses goes up, profit decreases due to capital investment) to distribute dividends to the shareholders. The fundamental value of firm may increase due to positive future perception of investor towards firm that firms future cash flow will increase due to the change in technology. Since investors have positive perception towards firm, the demand of stock goes up as a result intrinsic

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