True/False and Multiple Choice (2 points each) Chapter 10

1. The prices of financial assets are based on the expected value of future cash flows, discount rate, and past dividends. A. True B. False

2. By using different discount rates, the market allocates capital to companies based on their risk, efficiency, and expected returns. A. True B. False

3. As time to maturity increases, bond price sensitivity decreases. A. True B. False

4. Valuation of a common stock with no dividend growth potential is treated in the same manner as preferred stock. A. True B. False

5. Valuation of financial assets requires knowledge of A. future cash flows. B. appropriate discount rate. C. past asset performance. D. future cash flows and appropriate discount rate.

6. Which of the following financial assets is likely to have the highest required rate of return based on risk? A. corporate bond B. Treasury bill C. preferred share D. common share

7. A bond which has a yield to maturity less than its coupon interest rate will sell for a price A. below par. B. at par. C. above par. D. that is equal to the face value of the bond plus the value of all interest payments.

8. A 10-year bond pays 12% interest on a $1,000 face value annually. If it currently sells for $1,100, what is its approximate yield to maturity? A. 10.35% B. 10.91% C. 11.00% D. 12.00%

Chapter 11

9. Companies prefer to maintain some financing flexibility in order to choose the lowest cost source of funds at a single point in time. A. True B. False

10. A firm that does not earn the cost of capital in the long run will not maximize shareholder wealth. A. True B. False

11. The use of the optimum capital structure minimizes the cost of capital. A. True B. False

12. The discount rate that equates a future stream of expected dividends to the current price is a good approximation of the cost of common shares. A. True B. False

13. Retained earnings has a cost associated with it because A. new funds must be raised. B. there is an opportunity cost associated with shareholder funds. C. Ke > g. D. flotation costs increase the cost of funding