Quiz 10: Valuation and Rates of Return

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%

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

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

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

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%

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

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.

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

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%

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

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.

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

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

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

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.

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.

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.

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.

The cost of capital for common stock is K_e = (D₁/P_o)+ 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

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.

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.

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.

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.

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.

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.

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.

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

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%.

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

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

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.

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.

The price of preferred stock may react strongly to a change in k_p 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.

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

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

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

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.

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.

A "supernormal growth" firm is one in which: A) sales grow at a very rapid rate. B) the firm's earnings grow at a high rate for many years into the future. C) the firm's dividends grow alternatively at high,then low,rates. D) the firm's dividends grow at a high rate for several periods,then at a lower rate afterward.

To value the common stock of a supernormal growth firm,an analyst could forecast the length of the supernormal growth period and the dividends paid,and then find the: A) total of the dividends paid. B) total of the dividends paid and multiply by the length of the growth period. C) present value of the supernormal growth period's dividends. D) present value of the supernormal growth period's dividends and add the present value of the stock price at the end of the growth period.

The value of a supernormal growth firm's common stock is the present value of the: A) first year's dividend after the supernormal growth period. B) expected stock price at the start of the supernormal growth period. C) first year's dividends multiplied by (1 - the supernormal growth rate),divided by the required rate of return. D) expected stock price at the end of the supernormal growth period.

The longer the supernormal growth period for a firm's lasts,: A) the higher the value of its common stock. B) the lower the value of its common stock. C) the higher the value of its preferred stock. D) the lower the required rate of return used in finding the price of its common stock.

The method used for finding the value of a supernormal growth firm's common stock at the end of the supernormal growth period is similar to that used to find the value of: A) a firm's preferred stock. B) a firm's common stock,with a constant growth rate for its dividends. C) a firm's interest-paying bonds. D) a firm's percentage increase in sales growth.

A 10-year bond pays 8% annual interest (paid semi-annually).If similar bonds are currently yielding 5% annually,what is the market value of the bond? A) $1,000.00 B) $1,857.40 C) $1,233.84 D) $1,080.00

A 15-year zero-coupon bond was issued with a $1,000 par value and a yield to maturity of 8%.If similar bonds are currently yielding 10%,what is the market value of the bond? A) $239.39 B) $315.24 C) $800.00 D) $1,000.00

A 10-year bond pays 12% interest on a $1,000 face value annually.If it currently sells for $1,100,what is its approximate yield to maturity? A) 10.35% B) 10.91% C) 11.00% D) 12.00%

An issue of preferred stock is paying an annual dividend of $5.The growth rate for the firm's common stock is 12%.What is the preferred stock price if the required rate of return is 10%? A) $50.00 B) $41.67 C) $22.73 D) $5.00

An issue of common stock has just paid a dividend of $4.50.The dividend growth rate is 10%.What is its price if the market's rate of return is 16%? A) $82.50 B) $45.00 C) $28.13 D) $75.00

An issue of common stock is selling for $64.50.The year-end dividend is expected to be $3.30 assuming a constant growth rate of 7%.What is the required rate of return? A) 12.1% B) 10.1% C) 4.1% D) 5.1%

An issue of common stock is expected to pay a dividend of $4.00 at the end of the year.Its growth rate is equal to 8%.If the required rate of return is 15%,what is its current price? A) $103.68 B) $50.00 C) $26.67 D) $57.14

If expected dividends grow at 8% and the appropriate discount rate is 11%,what is the value of a share with an expected dividend of $2.50? A) $22.73 B) $31.25 C) $13.16 D) $83.33

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

A bond which has a yield to maturity less 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.

You want to buy 100 shares of Aquarific,Ltd.(AL).Your required rate of return is 12% and you expect AL's sales and earnings to grow by 5% annually beginning 4 years from today.Over the next 2 years AL is expected to break even.However,in year 3 AL is expected to earn $1.75 a share.What is the maximum price that you would pay for 100 shares of AL? A) $1,780 B) $1,589 C) $2,500 D) $1,869

Gamble and Johnson's (GJ)common shares are selling for $52.50.They are expected to pay a dividend of $2.25 next year and dividends should grow at a rate of 7% annually.What is your required rate of return on an investment in GJ common shares? A) 11.30% B) 19.25% C) 12.00% D) 15.75%

A bond with a coupon rate of 6%,paid quarterly,and 5 years to maturity is being offered in the market.If bonds with similar risks are currently being paid 3%,what is the price you would pay for this bond? A) $1,972 B) $1,139 C) $1,000 D) $862

The valuation of a financial asset is based on the concept of determining the present value of future cash flows.

The prices of financial assets are based on the expected value of future cash flows,discount rate,and past dividends.

The market determined required rate of return is also called the discount rate.

The discount rate depends on the market's perceived level of risk associated with an individual security.

By using different discount rates,the market allocates capital to companies based on their risk,efficiency,and expected returns.

In estimating the market value of a bond,the coupon rate should be used as the discount rate.

Most bonds promise both a periodic return and a lump-sum payment.

A 20-year bond pays 12% annual interest in semi-annual payments.The current market yield to maturity is 10%.The appropriate interest factors should use 5% for 40 periods (by tables or calculator).

The yield to maturity is always equal to the interest payment of a bond.

The price of a bond is equal to the present value of all future interest payments added to the present value of the principal.

The appropriate discount rate for bonds is called the yield to maturity.

A rise in yield to maturity would be coupled with an increase in the price of a bond.

The total required real rate of return is equal to the nominal rate of return plus the inflation premium.

Historically the real rate of return has been 2 to 3%.

The required rate of return is payment given to the investor for forgoing present consumption.

The inflation premium is based on past and current inflation levels.

The risk-free rate of return is equal to the inflation premium plus the real rate of return.

The risk premium is equal to the required yield to maturity minus the risk-free rate (the real rate of return and the inflation premium).

The risk premium is primarily concerned with business risk,financial risk,and economic risk.

The longer the maturity of a bond,the greater the impact on price to changes in market interest rates.

As time to maturity increases,bond price sensitivity decreases.

The price of preferred stock is determined by dividing the fixed dividend payment by the required rate of return.

Preferred stock is compensated for not having ownership privileges with a fixed dividend stream supported by a binding contractual obligation (of interest on debt).

The variable growth model is useful for firms in emerging industries.

The value of a share is the present value of the expected stream of future dividends.

Valuation of a common stock with no dividend growth potential is treated in the same manner as preferred stock.

The constant growth valuation formula is P_o = D₁/g - K_e.

To use a dividend valuation model,a firm must have a constant growth rate and the discount rate must not exceed the growth rate.

The drawback of the future share value procedure is that it does not consider dividend income.

Future share value is equal to P_o = D₁/K_e - g,assuming constant growth in dividends.

Firms with great potential tend to trade at low P/E ratios.

The variable growth dividend model can be used for both constant and variable growth stocks.

Preferred stock with a 10% dividend would be valued the same as a common stock with a zero dividend growth rate.

When the interest rate on a bond and its yield to maturity are equal,the bond will trade at par value.

Business risk relates to the inability of the firm to meet its debt obligations as they come due.

The further the yield to maturity of a bond moves away from the bond's coupon rate the greater the price-change effect will be.

The price-earnings ratio is another tool used to measure the value of common stock.

Firm's with bright expectations for the future,tend to trade at high P/E ratios.

The fact that small businesses are usually illiquid does not affect their valuation process.

Even though the Canada Revenue Agency tries to minimize occurrences,small business owners often intermingle business and personal expenses in order to minimize taxable income.

Supernormal growth implies that the number of the company's employees is rising rapidly.

The higher the growth rate during a period of supernormal growth,the higher the share's value.

If a share has supernormal growth for five years,only the present value of the first four years needs to be calculated.

The price of a supernormal growth stock includes the present value of the stock's price at the end of the supernormal growth period.

A mortgage bond is less risky than a debenture but more risky than a common share.

If g is greater than k,the model P = D₁/(K - g)would not work because it would produce a negative value for a common stock.

The risk-free rate of return is the interest rate that compensates the investor for the current use of funds and loss of purchasing power due to inflation,but not for taking risks.

List and explain the factors that influence the investors required rate of return.

The preferred stock of Laura's Shiny Things Inc.pays an annual dividend of $8.00.What is the price of the preferred stock if the required return is: A)4% B)8% C)12%

How is a supernormal growth firm's common stock valued?

The Morgan Music Company has common and preferred stock outstanding.The preferred stock pays an annual dividend of $9 per share,and the required rate of return for similar preferred stocks is 8%.The common stock paid a dividend of $2.00 per share last year,but the company expected that earnings and dividends will grow by 30% for the next two years before dropping to a constant 5% growth rate afterward.The required rate of return on similar common stocks is 11% What is the per-share value of the company's preferred and common stock?

The Nickelodeon Manufacturing Co.has a series of $1,000 par value bonds outstanding.Each bond pays interest semi annually and carries a coupon rate of 7%.Some bonds are due in 3 years while others are due in 10 years.If the required rate of return on bonds is 10%,what is the current price of A)the bonds with 3 years to maturity? B)the bonds with 10 years to maturity? C)Explain the relationship between the number of years until a bond matures and its price.

Fullerton Company's bonds are currently selling for $1,157.75 per $1,000 par-value bond.The bonds have a 10% coupon rate (paid annually)and will mature in 10 years.What is the yield to maturity?

Madison Corporation has outstanding,a $1,000 par value bond paying annual interest of 7%.The bond matures in 20 years.If the present yield to maturity for this bond is 9%,calculate the current price of the bond using annual compounding.

Washington Corporation has a $1,000 par value bond outstanding paying annual interest of 8%.The bond matures in 20 years.If the present yield to maturity for this bond is 10%,calculate the current price of the bond.

The preferred stock of Gapers Inc.pays an annual dividend of $6.50.What is the price of the preferred stock if the required return is: A)6% B)8% C)10%

State Street Corp.will pay a dividend on common stock of $4.80 per share at the end of the year.The required return on common stock (Ke)is 13.2%.The firm has a constant growth rate of 7.2%.Compute the current price of the stock (Po).

Perot Marketing is expected to pay $2.40 per share in dividends at the end of the next 12 months.The growth rate in dividends is expected to be constant at 9% per year.If the stock is selling for $51.30 per share,what is the required rate of return?

The Weatherfield Way Construction Company has common and preferred stock outstanding.The preferred stock pays an annual dividend of $7.50 per share,and the required rate of return for similar preferred stocks is 11%.The common stock paid a dividend of $3.00 per share last year,but the company expected that earnings and dividends will grow by 25% for the next two years before dropping to a constant 9% growth rate afterward.The required rate of return on similar common stocks is 13% What is the per-share value of the company's preferred and common stock?