Sample Exam I Answers
Business Finance (2007)
After graduating from the McCombs School of Business, you are hired by TriStar
Electronics Inc. as its CFO.
You are given with the following tasks:
1.
(
True or False
) Your colleague, the Chief Marketing Officer (CMO), is confused with
many of the financial concepts, and sometimes makes false statements.
For each of
the following statements, evaluate whether it is true or false.
If false, explain why.
a)
(1 point) Standard deviation is the measure of risk when an investor holds a well
diversified portfolio.
False
.
Beta is the measure of risk when an investor is holding a well diversified
portfolio.
Standard deviation includes diversifiable risk that can be eliminated
with diversification.
b)
(1 point) Diversification benefit exists even when combining two assets with the
correlation coefficient of zero.
True
.
Diversification benefit exists as long as the correlation coefficient is less
than 1.
c)
(1 point) If a bond is traded at par, the yield to maturity is equal to the coupon
rate.
True
.
Consider a bond with a par value of $100 and a coupon rate of 10%.
If
the yield is also 10%, the price of this bond is $100 (110/1.1), which is equal to the
par value.
d)
(1 point) Dividend discount model asserts that the price of a stock with no
dividend today should be zero.
False
.
Dividend discount model takes into account all future dividend streams.
As long as future dividend exists, share price cannot be zero from the dividend
discount model
e)
(1 point) Higher riskfree rate increases the cost of equity.
True
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 Fall '08
 Goldreyer
 Finance, Net Present Value, Weighted average cost of capital, new project, TriStar Electronics Inc.

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