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