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Finance
Q:
Cortez, Inc., is expecting to pay out a dividend of $2.50 next year. After that it expects its dividend to grow at 7 percent for the next four years. What is the present value of dividends over the next five-year period if the required rate of return is 10 percent? (Do not round intermediate calculations. Round final answer to two decimal places.)A) $10.76B) $9.80C) $11.88D) $11.50
Q:
The constant-growth dividend model will provide invalid solutions when:
A) the growth rate of the stock exceeds the required rate of return for the stock.
B) the growth rate of the stock is less than the required rate of return for the stock.
C) the growth rate of the stock is equal to the risk-free rate.
D) None of the above.
Q:
Which of the following statements is NOT true about constant-growth stocks?
A) Cash dividend remains constant over time.
B) Mature companies with a history of stable growth show this pattern.
C) Dividends grow at a constant rate from one period to the next forever.
D) Far distant-dividends have a very small present value and add little to the stock's price.
Q:
Which of the following statements is NOT true about zero-growth stocks?
A) Dividend payment pattern remains constant over time.
B) The cash flow pattern resembles a perpetuity with a constant cash flow.
C) Dividend pattern for common stock of a company shows growth over time.
D) There is no growth in dividends over time.
Q:
Which of the following are the three simplifying assumptions that cover most stock growth patterns?
A) Dividends remain constant over time, dividends grow at a constant rate, and dividends are equal to zero.
B) Dividends have a zero-growth rate, dividends grow at a varying rate, and dividends are equal to zero.
C) Dividends remain constant over time, dividends grow at a constant rate, and dividends have a mixed growth pattern.
D) None of the above.
Q:
Which of the following statements is true about growth stocks?
A) These are stocks of firms that grow their sales at above-average rates and are expected to do so for a length of time.
B) These are stocks of firms that grow their earnings at above-average rates and are expected to do so for a length of time.
C) They generally pay dividends during their fast growth phase.
D) None of the above.
Q:
Which of the following statements is true about the general dividend valuation model?
A) It implies that the underlying value of a share of stock is determined by the market's expectations of the future dividends that the firm will generate.
B) It implies that the value of a firm's common stock can be determined only if the expected future dividends are infinite.
C) It implies that the value of a growth stock can be determined by forecasting the future price of the stock.
D) The model cannot be used to calculate the value of a common stock unless the dividends exceed the firm's expected growth rate.
Q:
Which of the following statements is NOT true about the general dividend valuation model?
A) The model does not assume any specific pattern for future dividends, such as a constant growth rate.
B) It makes a specific assumption about when the share of stock is going to be sold in the future.
C) The model calls for forecasting an infinite number of dividends for a stock.
D) The price of a share of stock is the present value of all expected future dividends.
Q:
Assume that you are considering the purchase of a stock which will pay dividends of $4.50 during the next year. Further assume that you will be able to sell the stock for $85.00 one year from today and that your required rate of return is 15 percent. How much would you be willing to pay for the stock today? (Round off to the nearest $0.01)A) $89.50B) $65.37C) $94.10D) $77.83
Q:
Applying the valuation procedure to common stocks is more difficult than applying it to bonds because:
A) the size and timing of the dividend cash flows are less certain than the coupon payments for bonds.
B) common stocks have no final maturity date.
C) unlike the rate of return, or yield, on bonds, the rate of return on common stock is not directly observable.
D) All of the above are true.
Q:
Which of the following statements is true?
A) Preferred stockholders are considered to be the true owners of public corporations.
B) Dividends paid to preferred stockholders are not fixed.
C) Preferred stockholders do not typically have voting rights.
D) Preferred stock can never be converted to common stock.
Q:
Preferred stock is sometimes treated like a debt security because:
A) legally preferred stock is a debt security.
B) preferred dividend payments are similar to bond interest payments and are fixed in nature regardless of the firm's earnings.
C) preferred dividends are deductible from taxable income just like interest payments on bonds.
D) preferred stock holders receive a residual value and not a stated value.
Q:
Owners of preferred stock:
A) have limited voting rights.
B) usually receive fixed dividend payments.
C) are given priority treatment over common stock with respect to dividends payments, and the claims against the firm's assets in the event of bankruptcy or liquidation.
D) All of the above statements are true.
Q:
Which of the following statements is NOT true about preferred stock?
A) Preferred dividend payments are paid by the issuer with after-tax dollars.
B) Preferred dividends are tax deductible just like the interest on bonds.
C) Preferred stock holders have limited voting privileges relative to common-stock owners.
D) Preferred stocks are generally viewed as perpetuities because they have no fixed maturity.
Q:
Which of the following statements is NOT true about preferred stock?
A) Preferred stock represents ownership in the firm.
B) Preferred stockholders are not eligible for guaranteed dividend payments by the firm.
C) Preferred stock dividends are paid by the issuer with after-tax dollars.
D) Preferred stock holders have limited voting privileges relative to common-stock owners.
Q:
Which of the following is NOT a widely known stock market index?
A) The Dow Jones Industrial Average
B) The OTQ Composite Index
C) The New York Stock Exchange Index
D) The Standard and Poor's 500 Index
Q:
Which of the following statements is true about common stock?
A) Common stock is considered to have a fixed maturity.
B) Owners of common stock are guaranteed dividend payment by the firm.
C) Owners of common stock have the lowest-priority claim on the firm's assets in the event of bankruptcy.
D) Common-stock holders have unlimited liability toward the obligations of the corporation.
Q:
Which of the following statements is NOT true about common stock?
A) Common-stock holders have the right to vote on the election of the board of directors of their company.
B) Common stock is considered to have no fixed maturity.
C) Owners of common stock are guaranteed dividend payments by the firm.
D) Common-stock holders have limited liability toward the obligations of the corporation.
Q:
Which of the following statements is NOT true about auction markets?
A) In an auction market, buyers and sellers confront each other directly and bargain over price.
B) The participants can only communicate orally in auction markets.
C) The New York Stock Exchange is the best-known example of an auction market.
D) The auctioneer in an auction market is the specialist, who is designated by the exchange to represent orders placed by public customers.
Q:
Dealer markets are characterized by:
A) no time-consuming search for a fair deal.
B) a guarantee of order fulfillment because the dealer holds an inventory of securities.
C) improved market efficiency because dealers provide continuous bid and ask prices for securities.
D) All of the above characterize dealer markets.
Q:
Which of the following statements is true about dealer markets?
A) NYSE is the best-known example of a dealer market.
B) A dealer market involves time-consuming search for a fair deal.
C) The advantage of a dealer over a brokered market is that brokers cannot guarantee that an order will be executed promptly, while dealers can, because they have an inventory of securities.
D) All of the above are true of dealer markets.
Q:
In brokered markets:
A) the commission charged by brokers is a lower cost to buyers and sellers than the cost of direct search.
B) buyers and sellers are brought together for a commission.
C) brokers build a pool of price information through their extensive contacts.
D) All of the above are true of broker markets.
Q:
Which of the following statements is NOT true about broker markets?
A) Brokers bring buyers and sellers together to earn a fee, called a commission.
B) Brokers' extensive contacts provide them with a pool of price information that individual investors could not economically duplicate themselves.
C) Investors have an incentive to hire a broker because what they charge as a commission is less than the cost of direct search.
D) Brokers can guarantee an order because they have an inventory of securities.
Q:
The least efficient of all the different types of secondary markets is the:
A) auction market.
B) direct search market.
C) dealer market.
D) broker market.
Q:
Direct search markets are characterized by:
A) complete price information.
B) extensive broker and dealer participation.
C) private placement transactions and sale of common stock of small private companies.
D) a high level of efficiency.
Q:
In comparison to the NYSE,
A) NASDAQ has less company listed.
B) total share volume is lower on the NASDAQ.
C) firms listed on the NASDAQ tend to be smaller.
D) NASDAQ firms exceed NYSE listed firms in total capitalization.
Q:
Which of the following statements is NOT true about secondary markets?
A) In terms of market capitalization (total stock value) of the firms listed, the NASDAQ is the largest in the world and the NYSE is the second largest.
B) NASDAQ is the second-largest stock market in the United States.
C) Firms listed on the NYSE tend to be, on average, larger in size and their shares trade more frequently than those traded on NASDAQ.
D) In the United States, most secondary market transactions are done on one of the many stock exchanges.
Q:
Which of the following statements is true about secondary markets in the United States?
A) In terms of market capitalization (total stock value) of the firms listed, the NASDAQ is the largest in the world and the NYSE is the second largest.
B) NASDAQ is an OTC (over-the-counter) market.
C) Firms listed on the NASDAQ tend to be, on average, larger in size, and their shares trade more frequently than those traded on NYSE.
D) In the United States, most secondary market transactions are done over the counter.
Q:
Which of the following statements is true about secondary markets?
A) In secondary markets, outstanding shares of stock are bought and sold among investors.
B) Most secondary market transactions directly affect the capital of the firm that issues the securities.
C) An active secondary market causes firms to sell their new debt or equity issues at a higher transaction cost of funds.
D) All of the above statements are true
Q:
The stocks owned by """"" represent about 35 percent of the total value of all corporate equity.
A) mutual funds.
B) pension funds.
C) foreign investors.
D) households.
Q:
The bond valuation model can be used to value perpetual preferred stocks.
A) True
B) False
Q:
Preferred stock with no fixed maturity can be valued as a perpetuity.
A) True
B) False
Q:
Failure to pay a preferred dividend signals to the market that the firm is in serious financial trouble.
A) True
B) False
Q:
The value of a supernormal growth stock is the present value of the mixed growth dividend payments and the present value of the constant-growth dividend payments.
A) True
B) False
Q:
Whenever the constant-growth rate for dividends exceeds the required rate of return on the common stock, the constant-growth model provides invalid solutions.
A) True
B) False
Q:
The constant-growth dividend model tells us that the current price of a share of stock is the next period dividend divided by the difference between the discount rate and the dividend growth rate.
A) True
B) False
Q:
The constant-growth stock has dividends growing at a constant rate over time.
A) True
B) False
Q:
A fast growing company will pay constant dividends over a period of time.
A) True
B) False
Q:
For a company that has no growth, dividends stay constant over time.
A) True
B) False
Q:
In the general dividend-valuation model, the price of a share of stock is the present value of all expected future dividends.
A) True
B) False
Q:
Valuation of common and preferred stock is done using a different valuation formula than that used for bonds.
A) True
B) False
Q:
The market considers preferred stock to be a debt security because the dividend payment is a fixed contractual obligation and has credit ratings like bonds.
A) True
B) False
Q:
Preferred dividend payments are fixed obligations of the firm, similar to the interest payments on corporate bonds.
A) True
B) False
Q:
Preferred stockholders are not guaranteed any dividend payments and have the lowest-priority claim on the firm's assets in the event of bankruptcy.
A) True
B) False
Q:
The common stockholders of a company have unlimited liability.
A) True
B) False
Q:
What economic factors affect the level and the shape of the yield curve? Explain.
Q:
Why does the default risk premium vary over the business cycle?
Q:
What is the marketability risk premium? Why should an issuing firm consider paying this premium?
Q:
Which of the following statements is true?
A) Downward sloping yield curves typically appear in the early to mid-period of a business expansion.
B) Interest rate risk premium always adds an upward bias to the slope of the yield curve.
C) If investors believe that inflation will be increasing in the near future, the yield curve will be downward sloping.
D) Downward-sloping yield curve is the yield curve most commonly observed.
Q:
Which of the following statements is true?
A) Investment grade bonds are those rated single B and higher.
B) Federal laws typically allow insurance companies and pension funds to purchase non-investment grade bonds.
C) Because investors are risk averse, they require a premium to purchase a security that exposes them to default risk.
D) All else equal, the higher a bond's rating the higher the coupon rate.
Q:
The three economic factors that affect the shape of the yield curve are:
A) the real rate of interest, the expected rate of inflation, and marketability.
B) the real rate of interest, the expected rate of inflation, and interest rate risk.
C) the nominal rate of interest, the expected rate of inflation, and default risk.
D) the real rate of interest, the nominal rate of interest, and currency risk.
Q:
Which one of the following statements is NOT true?
A) The relationship between yield to maturity and marketability is known as the term structure of interest rates.
B) The shape of the yield curve is not constant over time.
C) As the general level of interest rises and falls over time, the yield curve shifts up and down and has different slopes.
D) Yield curves show graphically how market yields vary as term to maturity changes.
Q:
Downward-slopping yield curves are observed
A) when the economy is growing.
B) when the economy is stagnant.
C) before the beginning of a recession.
D) None of the above.
Q:
Which of the following statements is NOT true?
A) The risk that the lender may not receive payments as promised is called default risk.
B) Investors must pay a premium to purchase a security that exposes them to default risk.
C) U.S. Treasury securities are the best proxy measure for the risk-free rate.
D) All of the above are true statements.
Q:
Which of the following statements is true?
A) The lower the transaction costs are, the greater a security's marketability.
B) The interest rate, or yield, on a security varies with its degree of marketability.
C) U.S. Treasury bills have the largest and most active secondary market and are considered to be the most marketable of all securities.
D) All of the above are true.
Q:
Marketability is the ability of an investor
A) to sell a security quickly, at a low transaction cost, and at a price close to its fair market value.
B) to sell at a profit under all circumstances.
C) to sell the security above its par value.
D) None of the above
Q:
Stanley Hart invested in a municipal bond that promised an annual yield of 6.7 percent. The bond pays coupons twice a year. What is the effective annual yield (EAY) on this investment? (Round percentage to two decimal places.)
A) 13.4%
B) 6.81%
C) 6.70%
D) None of the above
Q:
Which of the following statements is true?
A) For a given change in market interest rates, the prices of higher-coupon bonds change more than the prices of lower-coupon bonds.
B) If market interest rates rise, a 1-year bond will fall in value more than a 10-year bond.
C) If interest rates rise, bond prices will rise.
D) If market interest rates rise, a 10-year bond will fall in value more than a 1-year bond.
Q:
Which of the following statements is true?
A) The longer the maturity of a security, the greater its interest rate risk.
B) If investors believe inflation will be subsiding in the future, the prevailing yield will be upward sloping.
C) The real rate of interest varies with the business cycle, with the lowest rates seen at the end of a period of business expansion and the highest at the bottom of a recession.
D) The interest rate risk premium always adds a downward bias to the slope of the yield curve.
Q:
Which one of the following statements is NOT true?
A) Interest rate risk is the risk that bond prices will change as interest rates change.
B) Interest rate changes and bond prices are inversely related.
C) As interest rates increase, bond prices increase.
D) Long-term bonds are more price volatile than short-term bonds of similar risk.
Q:
Which of the following statements is true?
A) Long-term bonds have lower price volatility than short-term bonds of similar risk.
B) As interest rates decline, the prices of bonds rise; and as interest rates rise, the prices of bonds decline.
C) All other things being equal, short-term bonds are riskier than long-term bonds.
D) Interest rate risk decreases as maturity increases.
Q:
Suppose an investor earned a semiannual yield of 6.4 percent on a bond paying coupons twice a year. What is the effective annual yield (EAY) on this investment? (Round to two decimal places.)A) 12.80%B) 6.40%C) 6.50%D) 13.21%.
Q:
Jorge Cabrera paid $980 for a 15-year bond 10 years ago. The bond pays a coupon of 10 percent semiannually. Today, the bond is priced at $1,054.36. If he sells the bond today, what will be his realized yield? (Round to the nearest percent.)A) 12%B) 8%C) 11%D) 9%
Q:
Rachel McGovern bought a 10-year bond for $921.77 seven years ago. The bond pays a coupon of 15 percent semiannually. Today, the bond is priced at $961.22. If she sold the bond today, what would be her realized yield? (Round to the nearest percent.)A) 17%B) 18%C) 9%D) 10%
Q:
Five years ago, Shirley Harper bought a 10-year bond that pays 8 percent semiannually for $981.10. Today, she sold it for $1,067.22. What is the realized yield on her investment? (Round to the nearest percent.)A) 7%B) 8%C) 11%D) 10%
Q:
Huan Zhang bought a 10-year bond that pays 8.25 percent semiannually for $911.10. What is the yield to maturity on this bond? (Round your percentage answer to two decimal places.)
A) 7.60%
B) 8.68%
C) 9.66%
D) 10.67%
Q:
John Wong purchased a five-year bond today at $1,034.66. The bond pays 6.5 percent semiannually. What will be his yield to maturity? (Round to the closest answer.)
A) 6.7%
B) 6.2%
C) 3.25%
D) 5.7%
Q:
Alice Trang is planning to buy a six-year bond that pays a coupon of 10 percent semiannually. Given the current price of $878.21, what is the yield to maturity on these bonds? (Round to the closest answer.)
A) 11%
B) 12%
C) 13%
D) 14%
Q:
Shawna Carter wants to invest her recent bonus in a four-year bond that pays a coupon of 11 percent semiannually. The bonds are selling at $962.13 today. If she buys this bond and holds it to maturity, what would be her yield? (Round to the closest answer.)
A) 11.5%
B) 11.8%
C) 12.5%
D) 12.2%
Q:
Jane Almeda is interested in a 10-year bond issued by Roberts Corp. that pays a coupon of 10 percent annually. The current price of this bond is $1,174.45. What is the yield that Jane would earn by buying it at this price and holding it to maturity? (Round to the closest answer.)
A) 7.1%
B) 7.5%
C) 8.9%
D) 8.5%
Q:
Nathan Akpan is planning to invest in a seven-year bond that pays annual coupons at a rate of 7 percent. It is currently selling at $927.23. What is the current market yield on such bonds? (Round to the closest answer.)A) 10.4%B) 9.5%C) 8.4%D) 7.5%
Q:
Jenny LePlaz is looking to invest in a five-year bond that pays annual coupons of 6.25 percent and currently sells at $912.34. What is the current market yield on such bonds? (Round to the closest answer.)A) 9.5%B) 8.5%C) 6.5%D) 7.5%
Q:
Which one of the following statements is NOT true of realized yield?
A) The realized yield is the return earned on a bond given the cash flows actually received by the investor.
B) The realized yield is equal to the yield to maturity even if the bond is sold prior to maturity.
C) It is the interest rate at which the present value of the actual cash flows generated by the investment equals the bond's price at the time of sale of the bond.
D) All of the above are true.
Q:
The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments:
A) exceed the price of the bond.
B) equal to zero.
C) equal to the price of the bond.
D) less than the price of the bond.
Q:
Which one of the following statements is true of a bond's yield to maturity?
A) The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments equal to the price of the bond.
B) It is the annual yield that the investor earns if the bond is held to maturity, and all the coupon and principal payments are made as promised.
C) A bond's yield to maturity changes daily as interest rates increase or decrease.
D) All of the above are true.
Q:
Jarmine Corp., is planning to fund a project by issuing 10-year zero coupon bonds with a face value of $1,000. Assuming semiannual compounding of interest, what will be the price of these bonds if the appropriate discount rate is 14 percent? (Round your answer to the nearest dollar.)
A) $852
B) $258
C) $419
D) $841
Q:
Robertsons, Inc., is planning to expand its specialty stores into five other states and finance the expansion by issuing 15-year zero coupon bonds with a face value of $1,000. If your opportunity cost is 8 percent and similar coupon-bearing bonds will pay semiannually, what will be the price at which you will be willing to purchase these bonds? (Round your answer to the nearest dollar.)
A) $308
B) $383
C) $803
D) $866
Q:
The U.S. Treasury has issued 10-year zero coupon bonds with a face value of $1,000. Assume that the bond compounds interest semiannually. What will be the current market price of these bonds if the opportunity cost for similar investments in the market is 6.75 percent? (Round your answer to the nearest dollar.)
A) $684
B) $860
C) $515
D) $604
Q:
Shana Norris wants to buy five-year zero coupon bonds with a face value of $1,000. Her opportunity cost is 8.5 percent. Assuming annual compounding, what would be the current market price of these bonds? (Round your answer to the nearest dollar.)
A) $1,023
B) $665
C) $890
D) $1,113
Q:
Jeremy Kohn is planning to invest in a 10-year bond that pays a 12 percent coupon. The current market rate for similar bonds is 9 percent. Assume semiannual coupon payments. What is the maximum price that should be paid for this bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.)
A) $951
B) $882
C) $1,033
D) $1,195