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Ba350 Principles Of Finance I W7 Assignment

Bret Shoener G00097438 Week 4 Assignment 1 a. What is an agency relationship? When you first begin operations, assuming you are the only employee and only your money is invested in the business, would any agency conflicts exist? Explain your answer. No agency conflicts would exist. Agency conflicts normally arise whenever the owner of the firm owns less than 100% of the firm’s common stock. Since you are the one employee and the entire investment is belonged to you, you own 100% of the firm. As a single owner presumably you will operate the firm to maximize your own welfare, with welfare measured in the form of raised personal wealth, more leisure, or perquisites. b. If you expanded, and hired additional people to help you, might that give rise to agency problems? By expanding business and hiring additional people to help you, might give rise to agency problems. An agency relationship could exist between you and your employees, if you

6-4 If investors’ aversion to risk increased, would the risk premium on a high-beta stock increase more or less than that on a low-beta stock? Explain. The effect of the change in the risk aversion is stronger on more risky securities than in less riskier securities. There is the positive relationship between risk aversion and the risk premium. If the risk aversion increases then the risk premium also goes up causing the slope of the security market line (SML) to become steeper. The risk in high beta stock is very high and the risk for low beta in minimal. 6-5 If a company's beta were to double, would its expected return double?    No it would not double, if the company doubled the beta. The market premium doubles but the risk stays the same. There could even be a lose here 6-3 Suppose that the risk free rate is 5% and that the market risk premium is 7%. What is the required return on (1) the market t = 7%+5% = 12% (2) a stcok with a beta of 1.0, 5%+1*7% = 12% (3) a stock with a beta of 1.7? Assume that the risk free rate is 5% and that the market risk