Question

Which of the following statements about sinking fund is true?

		Sinking fund provision facilitates the orderly retirement of the bond issue.
		Sinking funds are designed to protect bondholders, so it never hurts the bondholders in any situations.
		A company would use sinking fund for open market purchase of bond if interest rate is below coupon rate.
		A company would prefer to use sinking fund to call bond if interest rate is above coupon rate.

Which of following statements is not correct?

		Inflation expectations and investor risk aversion can affect stock prices.
		Company-specific risk and the change of dividend growth rate g can affect stocks prices.
		Since managers are “agents” of shareholders, their goal should be stock price maximization.
		Common stock represents ownership and ownership implies control, so stockholders directly elect directors and hire top management.

Which of the following statements is correct?

		WACC is the average rate of return required by the company’s shareholders.
		A firm’s intrinsic value is the sum of all the future expected free cash flows when converted into today’s dollars. It is always equal to the firm’s market value.
		WACC is the average rate of return required by the company’s debtholders.
		A firm’s intrinsic value is not the same as the book value of the firm.

Answer 1

1. Sinking funds are designed to protect bondholders, so it never hurts the bondholders in any situations.

2. The following is not true.

Since managers are “agents” of shareholders, their goal should be stock price maximization.

Their goal is to maximise the sahreholders wealth

3. A firm’s intrinsic value is not the same as the book value of the firm.