general finance questions

Module 2 Class Discussion
1. There are several issues with pegging a currency. Largely they relate to the economic distortion this creates – Chinese good are cheaper than they should be in America and American goods are more expensive than they should be in China. This results in higher employment in China, higher GDP, but also much higher inflation. In the US, inflation is held low but employment and GDP growth are suppressed (Lee, 2017).
2. Liability isn't the same thing as risk. Liability is a form of risk, so I'm not 100% what the question is asking. Yes, pharmaceutical companies are likely to face a substantial amount of liability. Liability risk arises when a company sells anything that is ingested into the body, and pharmaceuticals can be especially powerful. They are a product that, despite being tightly regulated, often has tremendous potential to harm its users, and that alone will create a fair amount of liability risk.
But there are other ways pharmaceutical companies face risk, such as with their marketing. Marketing drugs for off-label uses is prohibited by law, but there are often powerful economic incentives for pharmaceutical companies to do so. Drug companies are often sued for their marketing practices as well. An example would be last year's $486 million settlement that Pfizer made regarding marketing that concealed the risks of a couple of its drugs (Stempel, 2016).
3. According to MSN Moneycentral, the ROA for General Electric (5-year average) is 2.18%, whereas the industry average over the same time period is 3.24%. Now, GE is a conglomerate, so its businesses are not directly comparable with those of other conglomerates, and certainly not with companies that only have one main business. But versus relatively similar companies, GE has a lower ROA than those other companies.
4. The question of whether stocks outperform bonds has to be addressed on the basis of risk-adjusted returns. Stocks are expected to outperform bonds in the sense that they should return more, but there are reasons why stocks return more. Stocks are riskier, and stockholders are not paid out until debts have been paid, so equity is subordinated to debt. For that reason alone, equity investors demand a higher rate of return than debt investors receive. But of course, stocks are riskier. A typical investor will own multiple different asset classes, with each playing a specific role in the overall portfolio. As such, there may not be any particular comparison made between equity and debt, as the choice of asset classes relates to a lot of different factors such as time horizon, what the intended use of the money is, etc.
Perhaps because of the completely different reasons for owning the two, little analysis has been done comparing them; the purchase is not generally an either/or decision, but one of weighting. Fame and French (1989) did show that excess returns for both stocks and bonds move together; that is to say that while each has different risk characertistics, if the underlying company is the same the market expectations and outcomes do not change in any significant way.
5. Wal-Mart's 5-year-average ROE is 18.27%, and Target's is 23.64%. I'm not sure there's evidence to support the idea that seasonality is a big influencer of ROE. For one, we're comparing annual results here, not quarterly. But these two companies have very similar product lines and overall business models so would have the same seasonal influences anyway. The most important difference as to why Target has a better ROE is that it has more debt. Target has a debt/equity ratio of 1.01, and Wal-Mart has a debt/equity ratio of 0.54. This means that Target carries more debt (around 50%) whereas Wal-Mart has around 1/3 debt on its books. Since Wal-Mart has more equity in its capital structure, it will have a lower ROE than Target, which spreads out its profits to a smaller base of equity investors.

References

Fame, E. & French, K. (1989) Business conditions and expected returns on stocks and bonds. Journal of Financial Economics. Vol. 25 (1989) 23-49.

Lee, R. (2017) The pros and cons of a pegged exchange rate. Investopedia. Retrieved August 5, 2017 from http://www.investopedia.com/articles/forex/08/pegged-vs-floating-currencies.asp

MSN Moneycentral (2017) General Electric. MSN Moneycentral. Retrieved August 5, 2017 from http://www.msn.com/en-us/money/stockdetails?symbol=GE&ocid=qbeb

MSN Moneycentral (2017) Target. MSN Moneycentral . Retrieved August 5, 2017 from http://www.msn.com/en-us/money/stockdetails?symbol=TGT&ocid=qbeb

MSN Moneycentral (2017) Wal-Mart MSN Moneycentral . Retrieved August 5, 2017 from http://www.msn.com/en-us/money/stockdetails?symbol=WMT&ocid=qbeb

Stempel, J. (2016) Pfizer in $486 million settlement of Celebrex, Bextra litigation. Reuters. Retrieved August 5, 2017 from http://www.reuters.com/article/us-pfizer-lawsuit-idUSKCN10D1D8