Define and contrast idiosyncratic and systematic risk and

Question

Question 1: Define and contrast idiosyncratic and systematic risk and the risk premium required for taking each on. Can beta be helpful in this instance? Explain your answer.

Question 2: Define the following terms and explain how they affect one another. More specifically, for what purposes are they used and how do they relate to one another: efficient portfolio, individual investor, short selling, Sharpe ratio, beta and CAPM.

Question 3: What additional assumptions (to the main three) are important when applying the Capital Asset Pricing Model and what are the underlying strengths and weaknesses of this application? Discuss the reliability of the model and give examples in your explanation.

Question 4: Discuss the Arbitrage Pricing Theory and the Fama-French factor and the "preciseness" of techniques used to calculate cost of capital. How does one decide on which technique is best to use?

Question 5: Define the three conditions that make up a perfect capital market, and then compare and contrast the effects of perfect capital markets and imperfect capital markets on value. Can they create or destroy value? Explain.

Question 6: Define EBIT and discuss why the optimal level of leverage from a tax-saving perspective is the level at which interest equals EBIT. Does this have a connection with under-leveraging corporations, both domestically and internationally?

Question 7: What impact does asymmetric information have on the optimal level of leverage? In your answer, be sure to describe the implications of adverse selection and the lemons principle for equity issuance, as well as the empirical implications.

Question 8: Compare and contrast mature profitable firms with stable cash flows with firms with higher risk (dependencies on economy) with unstable cash flows. What risks do they take in regards to leverage use, tax shields, and trading information between managers and investors?

Question 9: In what situations should the WACC and the APV be used? How do personal taxes affect the use of these two methods? Use examples when explaining your answer.

Question 10: Explain the use of IRR and cash multiples as alternative valuation metrics, and discuss the drawbacks of those methods. In your answer, include how sensitivity analysis affects the evaluation process.