FIN420 Financial Management
Answered
Task:
A lot of employees of our firm have told me that you are an expert in finance. So, I would like to ask you a few questions related to finance. I would greatly appreciate your help.
(Question 1) As you know, our firm uses NPV for capital budgeting. I have heard that PI (profitability index) is a useful capital budgeting technique. What is PI? What is the PI rule? How different are the NPV rule and PI rule from each other? Please explain briefly.
(Question 2) Suppose that Stock A has a beta of 0.7 and Stock B has a beta of 1.2. Which stock should have a higher actual return next year according to the capital asset pricing model? Please explain briefly.
(Question 3) Some people criticize the idea that the objective of corporations is the maximization of firm value. If a firm’s objective is to maximize firm value, does it necessarily mean that the firm cares only about its shareholders and does not care about the other stakeholders such as debtholders,
employees, suppliers, customers, etc.? Please briefly justify your answer. (For this question, I will focus mainly on your justification.)
(Please answer my questions clearly in simple terms. I will be ok with some formulas, but please try to minimize the use of them. Please do not copy and paste sentences from other sources. I would like to know your thoughts and see your writings on the above issues.)