True or False 1If an investor buys enough stocks he or she c

True or False

1.If an investor buys enough stocks, he or she can, through diversification, eliminate all of the market risk inherent in owning stocks, but as a general rule it will not be possible to eliminate all diversifiable risk.

2.For capital budgeting and cost of capital purposes, the firm should always consider retained earnings as the first source of capital (i.e., use these funds first) because retained earnings have no cost to the firm

3.Other things held constant, an increase in the cost of capital will result in a decrease in a project’s IRR.

4.A call provision gives bondholders the right to demand, or “call for” repayment of a bond. Typically, companies call bonds if interest rates rise.

5.A zero coupon bond is a bond that pays no interest and is offered (and initially sells) at par. These bonds provide compensation to investors in the form of capital appreciation

6.The NPV method is based on the assumption that projects’ cash flows are reinvested at the project’s risk-adjusted cost of capital.

Solution

Solution for question 1

If an investor buys enough stocks, he or she can, through diversification, eliminate all of the market risk inherent in owning stocks, but as a general rule it will not be possible to eliminate all diversifiable risk.

Hence, given statement is true.

Solution for question 2

For capital budgeting and cost of capital purposes, the firm should always consider retained earnings as the first source of capital (i.e., use these funds first) because retained earnings have no cost to the firm.

Hence, given statement is true.

Solution for question 3

Since IRR of the project is not affected by the cost of capital so other things held constant, an increase in the cost of capital will not affect a project’s IRR.

Hence, given statement is false.

Solution for question 4

A call provision gives company or issuer the right to demand, or “call for” repayment of a bond. Typically, companies call bonds if interest rates rise.

Hence, given statement is false.

Solution for question 5

A zero coupon bond is a bond that pays no interest and is offered (and initially sells) at par. These bonds provide compensation to investors in the form of capital appreciation

Hence, given statement is true.

Solution for question 6

The NPV method is based on the assumption that projects’ cash flows are reinvested at the project’s risk-adjusted cost of capital.

Hence, given statement is true.