Financial Management

✅ The correct answer is C.
The firm has an infinite life is the assumption of the MM model on dividend policy. According to Miller and Modigliani Hypothesis or MM Approach, dividend policy has no effect on the price of the shares of the firm and believes that it is the investment policy that increases the firm’s share value.

✅ The correct answer is C.
An interest rate which is used in calculation of cash flows of bonds is called required rate of return. The required rate of return is the minimum return an investor expects to achieve by investing in a project. An investor typically sets the required rate of return by adding a risk premium to the interest percentage that could be gained by investing excess funds in a risk-free investment.

✅ The correct answer is B.
If coupon rate is less than going rate of interest then bond will be sold more than its par value. Most bonds have fixed coupon rates, meaning that no matter what the national interest rate may be and regardless of marker fluctuation the annual coupon payments remain static.

✅ The correct answer is A.
Situation in financial options in which strike price is less than current price of stock is classified as in-the-money. A call option is in the money (ITM) if the market price is above the strike price. A put option is in the money if the market price is below the strike price.

✅ The correct answer is A.
A usage of proceeds of new issue to retire issue with high-rate is classified as refunding operation. Refunding is the process of retiring or redeeming an outstanding bond issue at maturity by using the proceeds from a new debt issue. The new issue is almost always issued at a lower rate of interest than the refunded issue, ensuring significant reduction in interest expense for the issuer.

✅ The correct answer is D.
Betas tend to move towards 1.0 with passage of time are classified as adjusted betas. The Adjusted Beta is an estimate of a security’s future Beta. Adjusted Beta is initially derived from historical data, but modified by the assumption that a security’s true Beta will move towards the market average, of 1, over time.

✅ The correct answer is D.
Dividend will grow at non-constant rate for N periods and periods such as N is classified as terminal date and horizon date.

✅ The correct answer is C.
If market interest rate rises above coupon rate then bond will be sold below its par value. Once a bond is issued the issuing corporation must pay to the bondholders the bond’s stated interest for the life of the bond.

✅ The correct answer is A.
A project whose cash flows are more than capital invested for rate of return then net present value will be positive.

✅ The correct answer is D.
The value of bond depends on the coupon rate, years to maturity and expected yield to maturity.