Sample Exam 1 Answers - Sample Exam I Answers Business...

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Sample Exam I Answers Business Finance (2007) After graduating from the McCombs School of Business, you are hired by Tri-Star 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 risk-free rate increases the cost of equity. True
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This note was uploaded on 02/23/2009 for the course FIN 374C taught by Professor Goldreyer during the Fall '08 term at University of Texas at Austin.

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Sample Exam 1 Answers - Sample Exam I Answers Business...

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