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1. Which of the following statements is CORRECT? A. Limited liability of its stockholders is an advantage of the corporate form of organization, but corporations have more trouble raising money in financial markets because of the complexity of this form of organization. B. A hostile takeover is the main method of transferring ownership interest in a corporation. C. Unlimited liability and limited life are two key advantages of the corporate form over other forms of business organization. E. A corporation is a legal entity that is generally created by a state, and it has a life and existence that is separate from the lives of its individual owners and managers. Teweles has never paid a dividend to its common stockholders. Which of the following statements is CORRECT? C. The company has more equity than debt on its balance sheet. 1. Suppose firms follow similar financing policies, face similar risks, have equal access to capital, and operate in competitive product and capital markets.

Under these conditions, then firms that have high profit margins will tend to have high asset turnover ratios, and firms with low profit margins will tend to have low turnover ratios. 1. Companies E and P each reported the same earnings per share (EPS), but Company E’s stock trades at a higher price. Which of the following statements is CORRECT? A. Company E probably has fewer growth opportunities. B. Company E must have a higher market-to-book ratio. C. Company E must pay a lower dividend. D. Company E is probably judged by investors to be riskier. E. Company E trades at a higher P/E ratio. 1. Which of the following statements is NOT CORRECT? A. All else equal, secured debt is less risky than unsecured debt. B. The expected return on a corporate bond must be less than its promised return if the probability of default is greater than zero. C. All else equal, senior debt has less default risk than subordinated debt.

D. A company’s bond rating is affected by its financial ratios and provisions in its indenture. 1. Which of the following statements is CORRECT? A. If the maturity risk premium (MRP) is greater than zero, then the yield curve must have an upward slope. B. If the maturity risk premium (MRP) equals zero, the yield curve must be flat. C. If inflation is expected to increase in the future, and if the maturity risk premium (MRP) is greater than zero, then the yield curve will have an upward slope. D. Because long-term bonds are riskier than short-term bonds, yields on long-term Treasury bonds will always be higher than yields on short-term T-bonds. E. The yield curve can never be downward sloping. 1. A highly risk-averse investor is considering adding one additional stock to a 3-stock portfolio, to form a 4-stock portfolio. 1.0 and a perfect positive correlation with the market. 0.75. However, Stock A’s standard deviation of returns is 12% versus 8% for Stock B. Which stock should this investor add to his or her portfolio, or does the choice matter?

A. Either A or B, i.e., the investor should be indifferent between the two. C. Add A, since its beta must be lower. D. Neither A nor B, as neither has a return sufficient to compensate for risk. 1. If two firms have the same current dividend and the same expected dividend growth rate, their stocks must sell at the same current price or else the market will not be in equilibrium. 1. Stock X has a required return of 10%, while Stock Y has a required return of 12%. Which of the following statements is CORRECT? B. If the market is in equilibrium, and if Stock Y has the lower expected dividend yield, then it must have the higher expected growth rate. C. If Stock X and Stock Y have the same current dividend and the same expected dividend growth rate, then Stock Y must sell for a higher price. E. The stocks must sell for the same price. 35. Both options expire in three months. 1. Which of the following is NOT a capital component when calculating the weighted average cost of capital (WACC)?

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