Finance functions in a two-parameter world of risk and return. Define risk and return in a financial sense and discuss how these two concepts are "joined at the hip."
What will be an ideal response?
Answer: Investors desire to maximize return and minimize risk. Or put another way, they want to get the most out of their investments with the least amount of uncertainty. However, there is a direct trade-off between risk and expected return. In order for investors to increase their expected return, they must be willing to bear greater risk or uncertainty. You cannot have one without the other; thus risk and return are "joined at the hip," so to speak.
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Which of the following statements is correct concerning marketable securities on a firm's balance sheet?
A) all are without price risk B) not all are guaranteed against loss C) all are U.S. government obligations D) all earn interest income
Target company T has a book value equal to $100mm and has outstanding debt. Acquirer A uses cash from its balance sheet and borrows funds to pay $125mm for all of T's shares. This creates Goodwill on A's balance sheet equal to:
a) $100mm b) $25mm c) $125mm d) Depends on how much of T's debt A assumed e) Depends on the excess of A's market value over its book value prior to the acquisition