1. If ROE < k then which of the following statement is correct

1. The firm offers superior investment opportunities.
2. The value of the firm decreases as plowback ratio b increases.
3. Investors prefer that they reinvest earnings in the firm at an inadequate rate of return rather than payout earnings as dividends.
4. The stock price is unaffected by the plowback ratio. Investors are indifferent.

2. Which of the following statements is correct with regard to bond valuation:

1. All else equal, the longer the time to maturity, the greater the interest rate risk.
2. All else equal, the higher the coupon rate, the greater the interest rate risk
3. When coupon rate is lower than the market interest rate, the bond will sell at a premium.
4. Bond price can rise as the market interest rate rises, as the present value of the bonds future cash flows is obtained by discounting at a higher interest rate