couple question

Name
Tutor
Course
Date of submission
Fundamentals of Financial Management
Question 1
Is it better for a firm’s actual stock price in the market to be under, over, or equal to its intrinsic value? Would your answer be the same from the standpoints of stockholders in general and a CEO who is about to exercise a million dollars in options and then retire? Explain
Answer
The best price of a firm’s shares is when stock’s worth of the company equals its intrinsic value as at a rate, there is no pressure to either buy or sell the shares in a hurry. In theory, the inherent worth and the actual trading value should equal although the intrinsic values are considered as the long run concepts. The executive role concerning shares is the maximization of a firm’s intrinsic value of the stocks and not necessarily its trading price. By so doing, the future average trading prices will also be maximized but not at all trading points around the trading periods. However, the shareholders would prefer undervaluing the share prices in the realization that should the executives be performing; then the trading prices need not be maximized at any point in time. Contrastingly, the CEO will prefer overvalued shares to benefit from the stock options at the present rates. Furthermore, the CEO will be retiring after making the decision, and so there will be no repercussions whatsoever unless he acted ultra vires during his term.
Question 2
Explain whether the following statements are true or false.
a. Derivative transactions are designed to increase risk and are used almost exclusively by speculators who are looking to capture high returns.

Response
False; derivative transactions are used to reduce risks and to speculate. They are usually for hedging purposes to decrease risks (Brigham and Houston 33).
b. Hedge funds typically have large minimum investments and are marketed to institutions and individuals with high net worth.
Response
True; hedge funds have substantial minimum investments which target institutions and high net worth individuals. The risks assumed by hedge funds are considerably higher than mutual funds and average individual stocks (Brigham and Houston 35-36).
c. Hedge funds have traditionally been highly regulated.
Response
False; hedge funds target sophisticated investors, and as such, they have been unregulated until 2008 as the small investors have minimal participation (Brigham and Houston 35).
d. The New York Stock Exchange is an example of a stock exchange that has a physical location.
Response
True; NYSE is a licensed trade with physical locations in New York (Brigham and Houston 39).
e. A larger bid-ask spread means that the dealer will realize a lower profit.
Response
False; Bid-ask spread is the intrinsic difference between the lowest price that a seller is willing to sell and the highest rate which a buyer is ready to buy. A large bid-ask spread means that the dealer will realize a higher profit (Brigham and Houston 47).
Works Cited
Brigham, Eugene and Houston, Joel. Fundamentals of Financial Management. 14th Ed. Boston, USA: Cengage learning, 2014.