Test Bank FIN 220 Chap010 PDF

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Chapter 10 - Valuation and Rates of Return

Chapter 10 Valuation and Rates of Return

Multiple Choice Questions 1. A 4-year bond pays 4% annual interest (paid semi-annually). It currently sells for $872.25. What is the bond's yield to maturity? A. 4.00% B. 4.59% C. 6.06% D. 7.78%

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-06 Determining Yield to Maturity from the Bond Price

2. A 20-year bond pays 12% on a face value of $1,000. If similar bonds are currently yielding 9%, what is the market value of the bond? A. Over $1,000 B. Under $1,000 C. Over $1,200 D. Not enough information given to tell

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-04 Time and Yield to Maturity—Impact on Bond Valuation

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Chapter 10 - Valuation and Rates of Return

3. A 10-year bond pays 8% annual interest (paid semi-annually). If similar bonds are currently yielding 6% annually, what is the market value of the bond? A. $1,000.00 B. $1,147.20 C. $1,148.77 D. $1,080.00

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-04 Time and Yield to Maturity—Impact on Bond Valuation

4. A 14-year zero-coupon bond was issued with a $1,000 par value and a yield to maturity of 9%. If similar bonds are currently yielding 12%, what is the approximate market value of the bond? A. $205 B. $299 C. $801 D. $1,000

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-04 Time and Yield to Maturity—Impact on Bond Valuation

5. A 10-year bond pays 11% interest on a $1,000 face value annually. If it currently sells for $1,195, what is its approximate yield to maturity? A. 8.33% B. 12.95% C. 11.00% D. 8.08%

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-06 Determining Yield to Maturity from the Bond Price

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Chapter 10 - Valuation and Rates of Return

6. An issue of preferred stock is paying an annual dividend of $5. The growth rate for the firm's common stock is 14%. What is the preferred stock price if the required rate of return is 11%? A. $45.45 B. $41.67 C. $35.71 D. $31.45

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-08 Valuation of Preferred Stock

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

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 10-01 Describe the valuation of a financial asset as based on the present value of future cash flows. Topic: 10-01 Valuation Concepts

8. An issue of common stock has just paid a dividend of $3.75. Its growth rate is 8%. What is its price if the market's rate of return is 16%? A. $25.01 B. $46.88 C. $50.63 D. $54.38

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-10 Valuation of Common Stock

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Chapter 10 - Valuation and Rates of Return

9. 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 6%. What is the required rate of return? A. 10.3% B. 10.1% C. 4.1% D. 6.0%

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-16 Variable Growth in Dividends

10. The market allocates capital to companies based on: A. risk. B. effectiveness. C. previous returns. D. need.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 10-02 Propose that the required rate of return in valuing an asset is based on the risk involved. Topic: 10-02 LO2 Yield

11. 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. changes at a constant level for each percentage change of yield to maturity and is an inverse relationship.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-04 Time and Yield to Maturity—Impact on Bond Valuation

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Chapter 10 - Valuation and Rates of Return

12. 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. Yields of similar securities

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 10-02 Propose that the required rate of return in valuing an asset is based on the risk involved. Topic: 10-02 LO2 Yield

13. An issue of common stock is expected to pay a dividend of $4.80 at the end of the year. Its growth rate is equal to 8%. If the required rate of return is 13%, what is its current price? A. $103.68 B. $36.92 C. $96.00 D. $48.00

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-10 Valuation of Common Stock

14. If expected dividends grow at 8% and the appropriate discount rate is 12%, what is the value of a share with an expected dividend of $2.33? A. $62.88 B. $19.41 C. $29.12 D. $58.25

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-10 Valuation of Common Stock

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Chapter 10 - Valuation and Rates of Return

15. The value of a common stock is based on its: A. past performance. B. divided yield. C. current earnings. D. future benefits to the holder.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-10 Valuation of Common Stock

16. The cost of common stock is usually greater than the simple dividend yield because: A. investors perceive risk in common stock. B. investors expect both a current dividend and future growth. C. dividends are not tax-deductible. D. the company must make profits before it can pay dividends.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-16 Variable Growth in Dividends

17. 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.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-16 Variable Growth in Dividends

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Chapter 10 - Valuation and Rates of Return

18. 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. cost of capital.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-10 Valuation of Common Stock

19. 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. Dividends are tax deductible

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-10 Valuation of Common Stock

20. Which is a characteristic of the cost of preferred stock? A. Preferred stock dividends are fixed, they are tax deductible. B. Preferred stock has no maturity, the cost analysis is similar to that of debt. C. Preferred stock is valued as a perpetuity. D. The price earnings ratio stays the same.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-08 Valuation of Preferred Stock

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Chapter 10 - Valuation and Rates of Return

21. A higher interest rate (discount rate) would: A. increase the price of corporate bonds. B. reduce the price of preferred stock. C. increase the price of common stock. D. reduce the cost of dividends.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-08 Valuation of Preferred Stock

22. 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.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-04 Time and Yield to Maturity—Impact on Bond Valuation

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

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-08 Valuation of Preferred Stock

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Chapter 10 - Valuation and Rates of Return

24. 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 expected cash flows received from the asset. C. value of past dividends and price increases for the asset. D. future value of the expected cash flows to be received from the asset.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 10-01 Describe the valuation of a financial asset as based on the present value of future cash flows. Topic: 10-01 Valuation Concepts

25. 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. that is equal to the face value of the bond plus the value of all interest payments.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 10-03 Assess the current value (price) of bonds; preferred shares (perpetuals); and common shares based on the future benefits (cash flows). Topic: 10-04 Time and Yield to Maturity—Impact on Bond Valuation

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

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Hard Learning Objective: 10-02 Propose that the required rate of return in valuing an asset is based on the risk involved. Topic: 10-02 LO2 Yield

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Chapter 10 - Valuation and Rates of Return

27. Preferred stock has all, except 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

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-08 Valuation of Preferred Stock

28. A bond pays 9% yearly interest in semi-annual payments for 6 years. The current yield on similar bonds is 12%. To determine the market value of this bond, you must: A. find the interest factors (IFs) for 12 periods at 12%. B. find the interest factors (IFs) for 6 periods at 9%. C. find the interest factors (IFs) for 6 periods at 6%. D. find the interest factors (IFs) for 12 periods at 6%.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-04 Time and Yield to Maturity—Impact on Bond Valuation

29. A 15-year bond pays 11% on a face value of $1,000. If similar bonds are currently yielding 8%, what is the market value of the bond? A. Over $1,000 B. Under $1,000 C. Over $1,200 D. Under $800

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-04 Time and Yield to Maturity—Impact on Bond Valuation

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Chapter 10 - Valuation and Rates of Return

30. The risk premium is likely to be highest for: A. government bonds. B. corporate bonds. C. gold mining expedition. D. blue chip stock.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 10-02 Propose that the required rate of return in valuing an asset is based on the risk involved. Topic: 10-02 LO2 Yield

31. 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.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 10-02 Propose that the required rate of return in valuing an asset is based on the risk involved. Topic: 10-02 LO2 Yield

32. If in determining the yield to maturity on a bond at a given interest rate, you get a value below the current market price, in the next calculation you should use: A. a higher interest rate. B. a lower interest rate. C. a longer maturity. D. a higher coupon payment.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-04 Time and Yield to Maturity—Impact on Bond Valuation

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Chapter 10 - Valuation and Rates of Return

33. 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. preferred stock dividends pass tax free between corporations.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-08 Valuation of Preferred Stock

34. 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.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-10 Valuation of Common Stock

35. Which of the following is not a component of a bond's required rate of return? A. Risk premium B. Real rate of return C. Inflation premium D. Maturity payment

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-04 Time and Yield to Maturity—Impact on Bond Valuation

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Chapter 10 - Valuation and Rates of Return

36. 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. Preferred share D. Common share

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-04 Time and Yield to Maturity—Impact on Bond Valuation

37. The longer the time to maturity: A. the greater the price increase from a given increase in yield. B. the less the price increase from a given increase in yield. C. the greater the price increase from a given decrease in yield. D. the less the price increase from a given decrease in yield.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-05 Time to Maturity

38. The dividend on preferred shares is most similar to: A. common shares with no growth in dividends. B. common shares with constant growth in dividends. C. common shares with variable growth in dividends. D. a term deposit.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 10-04 Evaluate the yields on financial claims based on the relationship between current price and future expected cash flows. Topic: 10-11 No Growth in Dividends

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Chapter 10 - Valuation and Rates of Return

39. A "supernormal growth" firm is one in which: A. sales grow at a very rapid rate. B. the...