Answered: Two companies operate in the same…

Cornerstones of Financial Accounting

4th Edition

ISBN:9781337690881

Author:Jay Rich, Jeff Jones

Publisher:Jay Rich, Jeff Jones

ChapterA2: Investments

Section: Chapter Questions

Problem 3MCQ

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1). Two companies operate in the same industry and tend to follow practically identical patterns of performance. Which statement describes the relationship between the returns of the two companies? (a). They show perfect negative correlation. (b). They show imperfect correlation. (c). They are uncorrelated. (d). They show perfect positive correlation. 2). What is meant by the term ‘junk bond’? (a). It is a financial security issued by retail chains selling inexpensive items. (b). It is a financial instrument with predominantly debt characteristics but offering high rate and high risk, and sometimes offering an equity kicker. (c). It is a worthless bond. (d). It is a financial instrument with predominantly equity characteristics but offering high dividends and high risk, and sometimes offering a linked debt kicker. 3). Which of the following best describes what determines the cost of debt capital? (a). The cost to the firm of income less taxable profits (b). The expected returns required by investors buying corporation bonds in competing companies (c). The current market rate of return for a risk class of debt (d). The expected returns required by shareholders buying new shares in a firm 4). Which two terms correctly complete the following statement: “The NAV approach to valuation focuses on _______ values, which may be adjusted to reflect ________ values.”? (a). balance sheet; current market (b). fixed asset; discounted values (c). fixed asset; future (d). balance sheet; discounted values

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