The present value of a perpetuity can be determined as the cash flow divided by the required rate of return. True/False

6. The effective annual rate of interest (EAR) is less than the annual percentage rate of interest (APR). True/False

7. There are several types of investment risk. Market risk or the risk faced by all similar types of securities traded in a specific market such as the United States financial markets, is also referred to as systematic risk, and can be eliminated by diversifying the portfolio, for example by diversifying across industries. True/False

8. Market risk, also referred to as systematic risk, can be eliminated by diversifying the investment portfolio. True/False

9. The primary market is the most important market for the trading of stocks and bonds and is the market in which the price of those securities is determined over the life of the firm. True/False

10. The money market is the financial market in which short-term securities are traded and which expresses, therefore, the financial risk and return requirements of the buyers and sellers of those short-term securities. True/False

11. The secondary market provides a mechanism for companies to raise additional capital. True/False

12. A bond that sells at a price higher than its par value is called a face value bond. True/False

13. All else equal, longer maturity bonds will increase in value more when interest rates fall than will shorter maturity bonds. True/False

14. If the YTM of a bond is higher than the coupon rate, the bond will sell at a discount to par value. True/False

15. Consul bonds are bonds which have no maturity date and pay interest into perpetuity. True/False

16. The bondholder of a company assumes more risk than the stockholder of the same company. True/False

17. As owners of the company, stockholders have the first claim upon asset liquidation, ahead of bondholders. True/False

18. Common stock financing is a form of equity financing which provides an investor with a residual form of ownership in a corporation. True/False

19. The preemptive right is the right of bond investors to receive interest payments without interruption when a firm incurs net losses. True/False

20. Common stock dividends cannot be paid by firms with net losses as shown on the firm’s income (or profit and loss) statement. True/False

21. A typical preferred stock is a stock which has no maturity date and which generally pays a fixed dividend into perpetuity. True/False

22. The cost of capital must be less than the return on a firm’s assets in order to increase the value of the firm. True/False

23. A firm’s cost of capital is affected by the firm’s capital structure. True/False

Answer rating: 100% (QA)

5 The present value of a perpetuity can be determined as the cash flow divided by the required rate of return True It is given by Cr where C is the amount and r the interest rate 6 The effective annua... View the full answer