Finance Exam

What is the primary method used to value financial assets?

• 1. Historical cost analysis

• 1. Future cash flow discounting

• 1. Market comparison

• 1. Book value assessment

Why might United Airlines be considered a riskier investment than Microsoft?

4. 

• 1. United Airlines has a larger market share.

• 1. Microsoft operates in a more volatile industry.

• 1. United Airlines has faced financial difficulties and higher volatility.

• 1. Microsoft has a less diversified product portfolio.

How does inflation premium affect the required rate of return?

• 1. It decreases the required rate of return.

• 1. It increases the required rate of return.

• 1. It has no effect on the required rate of return.

• 1. It stabilizes the required rate of return.

What is the likely impact on bond prices if inflationary expectations increase?

• 1. Bond prices will increase

• 1. Bond prices will decrease

• 1. Bond prices will remain unchanged

• 1. Bond prices will fluctuate randomly

How does the remaining time to maturity affect a bond's price sensitivity to changes in yield?

• 1. Longer maturity bonds are less sensitive

• 1. Longer maturity bonds are more sensitive

• 1. Shorter maturity bonds are more sensitive

• 1. Maturity has no impact on sensitivity

What does the growth rate in the required rate of return on common stock signify?

• 1. Expected increase in dividends and earnings

• 1. Expected decrease in stock price

• 1. Expected inflation rate

• 1. Expected interest rate

Why might management quality and performance influence the price-earnings ratio?

• A)It affects investor confidence and future earnings expectations

• 1. It directly changes the firm's debt levels

• 1. It alters the firm's tax obligations

• 1. It impacts the firm's asset base

What is a potential risk of using only the cost of debt for investment decisions?

• lt may underestimate the project's risk

• 1. It may overestimate the project's return

• 1. It may lead to overinvestment in equity

• 1. It may increase the firm's tax liability

How does using the overall cost of capital affect the evaluation of a project?

• 1. It ensures all projects are evaluated on a consistent basis

• 1. It reduces the cost of capital

• 1. It increases the project's net present value

• 1. It simplifies the investment decision process

Which statement best describes the relationship between discount rates and capital allocation?

• Higher discount rates lead to more capital allocation.

• Lower discount rates lead to more capital allocation.

• Discount rates have no impact on capital allocation.

• Discount rates are inversely related to capital allocation.