Financial Management 21. The valuation of a financial asset is based on determining:
the present value of future cash flows the current yield to maturity on long term corporate bonds the capital budgeting process what the corporation is paying to attract preferred shareholders View answer Correct answer: (A)
22. When the coupon rate on a bond is equal to the yield to maturity, the price of the bond will be:
par above par below par more information is required View answer Correct answer: (A)
23. To determine the price of preferred stock:
divide the rate of return by the dividend amount divide the dividend amount by the rate of return divide the dividend amount by the rate of return minus the growth rate divide the dividend amount by the growth rate View answer Correct answer: (B)
24. One assumption underlying the use of the cost of capital to analyze capital projects is that:
current costs will remain the same capital structure will vary with the type of financing different risk projects are required to diversify the firm the analyzed projects are of comparable risk to existing projects View answer Correct answer: (D)
25. The cost of retained earnings is equal to:
the return on new common stock the return on preferred stock the return on existing common stock It does not have a cost. View answer Correct answer: (C)
26. The capital budgeting decision involves the planning of expenditures for projects with a life of at least:
one year five years ten years fifteen years View answer Correct answer: (A)
27. Under the payback period:
we compute the time required to recoup the original investment there is no consideration of inflows after the cutoff period the time value of money is ignored all of the above are correct View answer Correct answer: (D)
28. All of the following are true of capital cost allowance except:
it is a non-cash expense it is not tax-deductible it provides tax shield benefits it should not be disregarded in capital budgeting decisions View answer Correct answer: (B)
29. The standard deviation:
is the square root of the variance measures dispersion or variability around the expected value may be used to compare investments with the same expected return all of the above are correct View answer Correct answer: (D)
30. The efficient frontier represents:
the difference between investment returns optimal risk-return tradeoffs the correct investment for all firms to make the correlation between profits and the portfolio effect View answer Correct answer: (B)