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Part A (50 marks)

Explain, with supporting reasons in not more than 100 words, whether the following statements below are True/False:

Profit maximization is not the goal of the firm because accounting profits do not accurately measure the timing and uncertainty of a company's cash flows.

A rational investor would prefer to receive Rs1,200 today rather than Rs100 per month for 12 months.

Proper diversification allows corporations to eliminate all of their risk.

Capital markets are all institutions and procedures that facilitate transactions in long-term financial instruments.

The present value of a single future sum of money is inversely related to both the number of years until payment is received and the discount rate.

A rational investor will always prefer an investment with a lower standard deviation of returns, because such investments are less risky.

The benefits of diversification occur as long as the investments in a portfolio are not perfectly positively correlated.

If a bond is selling below its face value, then its yield to maturity must be less than the bonds coupon rate.

Preferred stock is less risky than common stock, but more risky than debt.

Given the constant growth dividend valuation model, the expected percentage growth in value of a stock is equal to the capital gains yield for that stock.

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