1.If interest rates rise, the price of existing bonds increases. 2. Corporations
ID: 2636394 • Letter: 1
Question
1.If interest rates rise, the price of existing bonds increases. 2. Corporations are obligated to pay cash dividends if they generate earnings. 3. An increase in risk should cause the value of common stock to fall. 4. Discounting refers to the process of bringing the future back to the present. 5.If the bank pays 5% compounded semi-annually, the true rate of interest is less than 5 % annually. 6. Net working capital is the difference between current liabilities and current assets. 7.Systematic risk is reduced through diversification. 8.The IRR equates the NPV and the cost of the investment. 9.Stock dividends increase the wealth of the stockholder who receive additional shares. 10. Beta coefficient and standard deviation may be used as indicators of risk. 11. The value of a stock should increase if investors' require,: rate of return declines. 12. If a firm has only $1,000m to invest, it should purchase, the least costly investment. 13. An increase in the debt ratio may be associated with a: increase in risk. 14. A portfolio consisting of assets that are highly correlate is well diversified. 15. The interest factors in the present value of a dollar tab' are the reciprocal of the interest factors in the future value of a dollar table.
Explanation / Answer
Answer:
1. False - If Interest Rates rises the price of bonds decreases.
2. False - Corporations are not obligated to pay dividends cash or otherwise even if they generate earnings.
3. True - An increase in Risk should cause the value of common stock to fall.
4. False -- Discounting refers to determining the present value of a payment which will be recieved in future.
5. True -- The compounded interest semiaanually is slightly higher than the true rate annually.
6. False -- Net working capital is the ratio between current liabilities and current assets.
7. False -- Unsystematic Risk can be reduced through Diversification.
8. True -- The IRR equates the NPV and cost of Investment.
9. False -- Stock dividends increase the number of shares of the stockholders but the wealth remains the same.
10. True -- Beta Co-eeficient and Standard deviation may be used as indicators of Risk.
11. True -- The vaue of stock shoud increase if the investors' required rate of return declines.
12. False -- The company should purchase the greater yielding purchase with limited risk. the cost of the purchase is unimportant here.
13. True -- An increase in debt ratio will increase the financial risk of a firm.
14. False -- A portfolio consisting of uncorrelated assets is well diversified.
15. True -- The interest factors in the present value of a dollar table are the reciprocal of the interest factors in the future value of a dollar table.
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