True or false 1- Starting to invest early for retirement increases the benefits
ID: 2754600 • Letter: T
Question
True or false
1- Starting to invest early for retirement increases the benefits of compound interest.
2- If the discount (or interest) rate is positive, the future value of an expected series of payments will always exceed the present value of the same series.
3- The market value of any real or financial asset, including stocks, bonds, or art work purchased in hope of selling it at a profit, may be estimated by determining future cash flows and then discounting them back to the present.
4- Yield to maturity is higher than the coupon interest rate if a bond is trading at Premium.
5- There exists a negative relationship between outstanding bond prices and going market interest rates.
6- The cost of perpetual preferred stock is found as the preferred's annual dividend divided by the market price of the preferred stock. No adjustment is needed for taxes because preferred dividends, unlike interest on debt, are not deductible by the issuing firm.
7- In case of conflict, one should always choose the IRR method (over the NPV method) because the IRR is inherently superior to the NPV method.
8- For capital budgeting and cost of capital purposes, the firm should assume that each dollar of capital is obtained in accordance with its target capital structure, which for many firms means partly as debt, partly as preferred stock, and partly common equity.
9- NPV and IRR methods are based on identical assumptions regarding reinvestment rate of future cash flows.
Explanation / Answer
1. TRUE : if investment made early, the return we get at compound interest increases with efflex of time as interest is calculated on interest of first year also
2. TRUE: if the discount rate is positive, the future value of expected series of payments always more than present value of the of same series due to interest factor or interest amount that is to added to the present seires of payments
3. TRUE: Market value of any real or financial asset like bonds, stock etc. is found by estimating future cash folows generaled and discounting them to the present by applying an appropriate cost of capital
4. FALSE: Yield to maturity is less than coupon rate of interest as bond is trading at premium
5. FALSE: Suppose market interest rates increases, bond prices also increases due to increase in interest rate. Hence, there is positive relationship between bond price and market rate of interest
6. TRUE: Cost of preferred stock is found by dividing Dividends by Market price of a prefered stock but tax adjustment will not be done like interest on debt as tax will not be deducted from dividends
7. FALSE: NPV is superior to IRR as NPV gives the benefit of a dollor invested. NPV indicates the net increase in the wealth of a company
8. TRUE: The return or benefit can be increased due to optimum Capital structure which means Capital structure which leads to overall cost of capital is low. When cost is low dollor capital automatically increase
9. TRUE: Both NPV and IRR are based on the assumption that cash flows are reinvested at an opporunity cost
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