F301 Chapter 10

51. Valuation of financial assets requires knowledge of A. future cash flows. B. appropriate discount rate. C. past asset performance. D. a and b.

52. The market allocates capital to companies based on A. risk. B. efficiency. C. expected returns. D. all of these

53. In a general sense, the value of any asset is the A. value of the dividends received from the asset. B. present value of the cash flows received from the asset. C. value of past dividends and price increases for the asset. D. future value of the expected earnings discounted by the asset's cost of capital.

54. Which of the following financial assets is likely to have the highest required rate of return based on risk? A. Corporate bond. B. Treasury bill. C. Certificate of Deposit. D. Common stock.

55. A bond which has a yield to maturity greater than its coupon interest rate will sell for a price A. below par. B. at par. C. above par. D. what is equal to the face value of the bond plus the value of all interest payments.

56. Which of the following is not one of the components that makes up the required rate of return on a bond? A. Risk premium B. Real rate of return C. Inflation premium D. Maturity payment

57. A 20-year bond pays 6% on a face value of $1,000. If similar bonds are currently yielding 5%, what is the market value of the bond? Use annual analysis. A. Over $1,100 B. Under $1,000 C. Under $900 D. Not enough information given to tell

58. A ten-year bond, with par value equals $1000, pays 7% annually. If similar bonds are currently yielding 6% annually, what is the market value of the bond? Use semi-annual analysis. A. $700.00 B. $927.50 C. $1,074.70 D. $1,520.70

59. A 10-year zero-coupon bond that yields 5% is issued with a $1000 par value. What is the issuance price of the bond (round to the nearest dollar)? A. $614 B. $64 C. $6,140 D. None of these

60. A 15-year zero-coupon bond was issued with a $1000 par value to yield 8%. What is the approximate market value of the bond? A. $597 B. $315 C. $275 D. $482

61. Which of the following does not influence the yield to maturity for a security? A. Required real rate of return. B. Risk free rate. C. Business risk. D. Historic yields.

62. An increase in the riskiness of a particular security would NOT affect A. the risk premium for that security. B. the premium for expected inflation. C. the total required return for the security. D. investors' willingness to buy the security.

63. If the inflation premium for a bond goes up, the price of the bond A. is unaffected. B. goes down. C. goes up. D. need more information.

64. If the yield to maturity on a bond is greater than the coupon rate, you can assume: A. interest rates have decreased B. the price is below the par C. the price is above the par D. risk premiums have decreased

65. The risk premium is likely to be highest for A. U.S. government bonds. B. corporate bonds. C. utility company stock. D. either b or c.

66. The return measure that an investor demands for giving up current use of funds, without adjusting for purchasing power changes or the real rate of return, is the A. risk premium. B. inflation premium. C. dividend yield. D. discount rate.

67. A ten-year bond pays 7% interest on a $1000 face value annually. If it currently sells for $1,195, what is its approximate yield to maturity? A. 9.33% B. 3.46% C. 5.34% D. 4.52%

68. The relationship between a bond's price and the yield to maturity A. changes at a constant level for each percentage change of yield to maturity. B. is an inverse relationship. C. is a linear relationship. D. a and b.

69. The longer the time to maturity: A. the greater the price increase from an increase in interest rates. B. the less the price increase from an increase in interest rates. C. the greater the price increase from a decrease in interest rates. D. the less the price decrease from a decrease in interest rates.

70. What is the approximate yield to maturity for a five-year bond that pays 4% interest on a $1000 face value annually if the bond sells for $952? A. 5.4% B. 4.3% C. 6.5% D. 5.1%

71. A higher interest rate (discount rate) would A. reduce the price of corporate bonds. B. reduce the price of preferred stock. C. reduce the price of common stock. D. all of these.

72. A bond pays 7% yearly interest in semi-annual payments for 10 years. The current yield on similar bonds is 9%. To determine the market value of this bond, you must A. find the interest factors (IFs) for 20 periods at 9%. B. find the interest factors (IFs) for 10 periods at 7%. C. find the interest factors (IFs) for 10 periods at 4.5%. D. find the interest factors (IFs) for 20 periods at 4.5%.

73. A 15-year bond pays 9% on a face value of $1,000. If similar bonds are currently yielding 6%, what is the market value of the bond? Use annual analysis. A. Over $1,000 B. Under $1,000 C. Over $1,200 D. Not enough information to tell

74. A 10-year bond pays 5% on a face value of $1,000. If similar bonds are currently yielding 10%, what is the market value of the bond? Use annual analysis. A. Less than $900 B. More than $900 and less than $1100 C. More than $1100 D. Not enough information to tell

75. An issue of preferred stock is paying an annual dividend of $1.50. The growth rate for the firm's common stock is 5%. What is the preferred stock price if the required rate of return is 7%? A. $21.43 B. $30.00 C. $22.50 D. None of these

76. Which is a characteristic of the price of preferred stock? A. Since preferred stock dividends are fixed, they are tax deductible. B. Because preferred stock has no maturity, the price analysis is similar to that of debt. C. Preferred stock is valued as a perpetuity. D. None of these.

77. Preferred stock has all but which of the following characteristics? A. No stated maturity. B. A fixed dividend payment that carries a higher precedence than common stock dividends. C. The same binding contractual obligation as debt. D. Preferred lacks the ownership privilege of common stock.

78. The price of preferred stock may react strongly to a change in KP because A. preferred stock may be cumulative. B. preferred stock dividends have to be paid before common stock dividends. C. there is no maturity date. D. corporate recipients of preferred stock dividends may receive a partial tax exemption.

79. The growth rate for the firm's common stock is 7%. The firm's preferred stock is paying an annual dividend of $3. What is the preferred stock price if the required rate of return is 8%? A. $3.00 B. $37.50 C. $50.00 D. None of these

80. Will an increase in inflation have a larger impact on the price of a bond or preferred stock? A. The bond. B. The preferred stock. C. The impact will be the same. D. There is not enough information to determine the relative impact.

81. The value of a common stock is based on its A. past performance. B. historic dividends. C. current earnings. D. value of future benefits to the holder.

82. The dividend valuation model stresses the A. importance of earnings per share. B. importance of dividends and legal rules for maximum payment. C. relationship of dividends to market prices. D. relationship of dividends to earnings per share.

83. A common stock which pays a constant dividend can be valued as if it were A. corporate bond. B. stock paying a growing dividend. C. preferred stock. D. discount bond.

84. The dividend on preferred stock is most similar to: A. common stock with no growth in dividends. B. common stock with constant growth in dividends. C. common stock with variable growth in dividends. D. certificate of Deposit.

85. An issue of common stock's most recent dividend is $1.75. Its growth rate is 5.7%. What is its price if the market's rate of return is 7.7%? A. $24.63 B. $87.50 C. $92.50 D. None of these

86. An issue of common stock is selling for $57.20. The year end dividend is expected to be $2.32 assuming a constant growth rate of 4%. What is the required rate of return? A. 10.3% B. 10.1% C. 8.1% D. None of these

87. An issue of common stock is expected to pay a dividend of $5.15 at the end of the year. Its growth rate is equal to 6%. If the required rate of return is 10%, what is its current price? A. $128.75 B. $36.92 C. $96.00 D. None of these

88. If expected dividends grow at 7% and the appropriate discount rate is 9%, what is the value of a stock with an expected dividend of $1.00? A. $62.88 B. $19.41 C. $29.12 D. $50.00

89. Stock valuation models are dependent upon A. expected dividends, future dividend growth and an appropriate discount rate. B. past dividends, flotation costs and bond yields. C. historical dividends, historical growth and an appropriate discount rate. D. all of these.

90. If a company's stock price (Po) goes up, and nothing else changes, Ke (the required rate of return) should A. go up. B. go down. C. remain unchanged. D. need more information.

91. An issue of common stock has just paid a dividend of $2.00. Its growth rate is equal to 4%. If the required rate of return is 7%, what is its current price? A. $19.04 B. $80.00 C. $69.33 D. None of these

92. An issue of common stock is expected to pay a dividend of $3 at the end of the year. Its growth rate is equal to 3%, and the current share price is $40. What is the required rate of return on the stock? A. Between 7% and 10% B. Between 10% and 12% C. Between 12% and 14% D. Between 14% and 17%

93. The cost of capital for common stock is ke= (D1/Po) + g. What are the assumptions of the model? A. Growth (g) is constant to infinity. B. The price earnings ratio stays the same. C. The firm must pay a dividend to use this model. D. All of these are assumptions of the model.

94. Required return by investors is directly influenced by all of the following except: A. Inflation B. U.S. Treasury rates C. Dividends D. Risk

95. All of the following would likely cause a firm to raise capital at a lower cost except: A. Higher times interest earned B. Higher profit margin C. Increased market share D. Higher debt to asset ratio

96. The required return by investors is important to financial managers for all of the following reasons except: A. It influences the firm's cost of financing B. It influences their stock price C. It is the primary driver of their financial ratios D. It helps when pricing new issues of securities

97. The market allocates capital to firms based on all of the following except: A. Higher risk requires lower returns due to higher expectations B. Level of efficiency C. Expected returns D. Degree of past performance

98. Market Enterprises would like to issue bonds and needs to determine the approximate rate they would need to pay investors. A firm with similar risk recently issued bonds with the following current features a 5% coupon rate, 10 years until maturity, and a current price of $1,150. At what rate would Market Enterprises expect to issue their bonds, assuming annual interest payments? A. 3.2% B. 5.9% C. 5% D. 4.8%

99. Star Corp. issued bonds 2 years ago with a 7% coupon rate. Their bonds are currently trading for $928 in the market. Which of the following most likely has occurred since the time of issue? A. Interest rates decreased B. Inflation increased C. Risk decreased D. Real rates of return decreased

100. Two years ago, Maple Enterprises issued 4%, 20 years bonds and Temple Corp issued 4%, 10 year bonds. Since their time of issue, interest rates have increased. Which of the following statements is true of each firm's bond prices in the market, assuming they have equal risk? A. Maple's decreased more than Temple's B. Temple's decreased more than Maple's C. Maple's increased more than Temple's D. They are both priced the same

101. The following adjustments must be made when interest is paid semi-annually vs. annually except: A. Annual Interest rate divided by 2 B. Total Number of years divided by 2 C. Annual yield to maturity divided by 2 D. Annual Coupon payment divided by 2

102. Doug has been approached by his broker to purchase a bond for $795. He believes the bond should yield 8%. The bond pays 5% annual coupon rate and has 12 years left until maturity. What should Doug's analysis of the bond indicate to him? A. The bond is undervalued, purchase B. The bond is undervalued, do not purchase C. The bond is overvalued, purchase D. The bond is overvalued, do not purchase

103. Which of the following regarding preferred stock is true? A. If the price decreases, required rate of return has decreased B. If the required rate of return increases, the price decreases C. If the required rate of return increases, the price increases D. The price in the market remains at par