Question

I. The prices of financial assets are based on the expected value of future cash flows, discount rate, and past dividends.

A. True
B. False

II. By using different discount rates, the market allocates capital to companies based on their risk, efficiency, and expected returns.
A. True

B. False

III. A 10-year bond pays 12% interest on a $1,000 face value annually. If it currently sells for $1,100, what is its approximate yield to maturity?
A. 10.35%
B. 10.91%
C. 11.00%
D. 12.00%

IV. A firm that does not earn the cost of capital in the long run will not maximize shareholder wealth.

A. True

B. False

V. Each project should be judged against

A. the specific means of financing used to support its implementation.
B. the going interest rate at that point in time.
C. the cost of new common stock equity.
D. the weighted average cost of capital

VI. With nonmutually exclusive events and no capital rationing, we will usually arrive at the same conclusions using either the net present value or internal rate of return methods.
A. True

B. False

VII. The payback period is easy to understand and places a heavy emphasis on liquidity.
A. True

B. False

VIII. Sensitivity analysis helps the financial planner to determine how sensitive shareholders will be to changes in investment strategy.
A. True

B. False

VIIII. Choosing projects with returns equal to the company norm but having a higher level of risk will most likely lower the company's share price.
A. True

B. False

X. Combining assets that have highly correlated returns will reduce portfolio risk.

A. True
B. False

Answer 1

1. False. Past Dividends are not used to calculate price but future dividends are used.

2. True. Capital allocation to companies are based on risk ,efficiency and expected returns.

3. N = 10 years; Coupon (PMT) = 1000*12%= 120; PV = - 1,100

Using Financial Calculator
N=10; PMT = 120; PV = -1100; FV = 1000; CPT I/Y
YTM = 10.35%(Option a is correct)

4. True. If the earnings don't exceed cost of capital it will lose value

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