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Bizhelp, CPA
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Determining the market price of a financial asset depends principally

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Determining the market price of a financial asset depends principally on identifying the future cash flows associated with its ownership. (Points : 5)

2. A security's value is equal to the present value of its expected future cash flows discounted by an appropriate rate of return. (Points : 5)

3. Coupon rates and payments are generally fixed throughout the life of a bond regardless of the economic or market conditions. (Points : 5)

4. Because stocks rely on dividends as the principal source of cash flow, ascertaining stock prices is an easier and more precise process than the valuation of bonds, which relies on variable coupon payments. (Points : 5)

5. The longer the time to maturity, the smaller the maturity risk associated with a bond. (Points : 5)

6. Junk bonds pay high interest rates and are issued by even the most solid companies. (Points : 5)

7. A stock's total return is realized from two principal sources, its dividend yield and any gain from the increase in its selling price over the original purchase price of the stock. (Points : 5)

8. There is a strong similarity between bonds and stocks because of the nature of the cash flows. Both bonds and stocks offer assurance of regular payments through either dividend or interest, the final sale of stock is similar to the final return of a bond's principal. (Points : 5)

9. The considerations associated with stock valuation do not include: (Points : 5)
the expected future dividend performance of the stock
the estimated selling time and price of the stock
the exchange on which the stock is traded
the market return on stocks of that type

10. Which of the following statements is/are correct regarding the intrinsic value of a stock? (Points : 5)
The intrinsic value of a stock is the same for every well-informed investor.
The intrinsic value of a stock is based on forecasted cash flows.
The intrinsic value of a stock will change based on how long a stock is expected to be held by the investor.
a. and b. above are correct.
b. and c. above are correct.

11. Common stockholders have a ____ on both income and assets of the firm. (Points : 5)
preemptive right
residual claim
cumulative claim
proxy right
none of the above.

12. One reason that investors may assign a different value to a stock is due to differences in the appropriate discount rate to use in solving for present values. (Points : 5)

13. Stock pricing models do not give precise results due to the uncertainty of future cash flows. (Points : 5)

14. Risk in finance is defined as the variability of return. (Points : 5)

15. An investor will typically enter into an investment only when he or she has established a minimum required return that will either be met or exceeded by the expected return. (Points : 5)

16. The larger the variance of the probability distribution of returns, the more actual returns will cluster around the mean or expected value. (Points : 5)

17. Stocks that have high financial rewards are generally accompanied by: (Points : 5)
high dividend payments
low dividend payments because of internally generated growth
high risk
all of the above

18. Standard deviation is an important concept in portfolio theory because: (Points : 5)
it is a measure of risk for a stock when it is held on a stand-alone basis.
it is a measure of risk for a stock when it is held in a diversified portfolio.
it is a measure of the variability of a stock's return.
both a. and c. are correct.
all of the above are correct.

19. The principle of risk aversion can best be described as: (Points : 5)
the observation that investors are unwilling to acquire very risky securities regardless of their risk premiums
the hypothesis that people always prefer investments with less risk to those with more risk if the expected returns are equal
the observation that risky securities usually offer unattractive expected returns when the possibility of loss is considered
all of the above

20. Diversifiable risk is: (Points : 5)
measured by beta
unsystematic risk
Both b & c

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