[UST SBMA] MA5125 - Valuation Method - Prelim Reviewer

One of the assumptions in using the Capital Asset Pricing Model is that there is no riskless security in the world and that assets/securities are traded.

• True

• False

Answer explanation

An assumption in using the CAPM includes the security being “riskless”.

1. Your decision should be to invest if the expected rate of return in a stock investment is less than the required rate of return.

• True

• False

Answer explanation

Preferably, the expected rate of return should be greater than or equal to the required rate of return in deciding whether to invest or not.

1. The ratio of debt and equity that is optimal shall provide the lowest cost of capital.

• True

• False

1. In absolute valuation, assets are valued by calculating the present value of their future cash flows, but in relative valuation, assets are valued according to their current market value, which is based on similar assets.

• True

• False

1. An aggressive beta will provide the highest expected return on stock investment.

• True

• False

1. The efficient market hypothesis provides that the expected rate of return is equal to the required rate of return because the presumption is all information is readily avaible to the market for the investors.

• True

• False

1. The cost of debt as a component of the cost of capital must be after tax due to the tax shield effect of interest expense while the cost of equity as a component of the cost of capital must not be after tax because there is no tax shield effect of dividend declaration.

• True

• False

1. Callable bonds offer a higher interest than non-callable bonds.

• True

• False

1. An increase in the corporate tax rate would lower the weighted average cost of capital for an average firm, other things held constant.

• True

• False

1. Capital components are the types of capital used by the firm to raise money. It comes from one of the three components: long-term debt, preferred stock, and equity.

• True

• False