# Quiz 10: Valuation and Rates of Return

Business

Q 1Q 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%

Free

Multiple Choice

D

Q 2Q 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

Free

Multiple Choice

C

Q 3Q 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

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Multiple Choice

C

Q 4Q 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

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Multiple Choice

Q 5Q 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%

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Multiple Choice

Q 6Q 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

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Multiple Choice

Q 7Q 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.

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Multiple Choice

Q 8Q 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

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Multiple Choice

Q 9Q 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%

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Multiple Choice

Q 10Q 10

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

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Multiple Choice

Q 11Q 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.

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Multiple Choice

Q 12Q 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

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Multiple Choice

Q 13Q 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

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Multiple Choice

Q 14Q 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

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Multiple Choice

Q 15Q 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.

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Multiple Choice

Q 16Q 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.

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Multiple Choice

Q 17Q 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.

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Multiple Choice

Q 18Q 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.

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Multiple Choice

Q 19Q 19

The cost of capital for common stock is K

_{e}= (D_{1}/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 deductibleFree

Multiple Choice

Q 20Q 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.

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Multiple Choice

Q 21Q 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.

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Multiple Choice

Q 22Q 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.

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Multiple Choice

Q 23Q 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.

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Multiple Choice

Q 24Q 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.

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Multiple Choice

Q 25Q 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.

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Multiple Choice

Q 26Q 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.

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Multiple Choice

Q 27Q 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

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Multiple Choice

Q 28Q 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%.

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Multiple Choice

Q 29Q 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

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Multiple Choice

Q 30Q 30

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

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Multiple Choice

Q 31Q 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.

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Multiple Choice

Q 32Q 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.

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Multiple Choice

Q 33Q 33

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.Free

Multiple Choice

Q 34Q 34

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.Free

Multiple Choice

Q 35Q 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

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Multiple Choice

Q 36Q 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

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Multiple Choice

Q 37Q 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.

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Multiple Choice

Q 38Q 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.

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Multiple Choice

Q 39Q 39

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.

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Multiple Choice

Q 40Q 40

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.

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Multiple Choice

Q 41Q 41

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.

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Multiple Choice

Q 42Q 42

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.

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Multiple Choice

Q 43Q 43

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.

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Multiple Choice

Q 44Q 44

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

Free

Multiple Choice

Q 45Q 45

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

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Multiple Choice

Q 46Q 46

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%

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Multiple Choice

Q 47Q 47

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

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Multiple Choice

Q 48Q 48

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

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Multiple Choice

Q 49Q 49

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%

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Multiple Choice

Q 50Q 50

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

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Multiple Choice

Q 51Q 51

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

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Multiple Choice

Q 52Q 52

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.

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Multiple Choice

Q 53Q 53

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.

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Multiple Choice

Q 54Q 54

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

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Multiple Choice

Q 55Q 55

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%

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Multiple Choice

Q 56Q 56

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

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Multiple Choice

Q 57Q 57

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

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True False

Q 58Q 58

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

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True False

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True False

Q 60Q 60

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

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True False

Q 61Q 61

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

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True False

Q 62Q 62

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

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True False

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True False

Q 64Q 64

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).

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True False

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True False

Q 66Q 66

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

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True False

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True False

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True False

Q 69Q 69

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

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True False

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True False

Q 71Q 71

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

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True False

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True False

Q 73Q 73

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

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True False

Q 74Q 74

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).

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True False

Q 75Q 75

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

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True False

Q 76Q 76

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

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True False

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True False

Q 78Q 78

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

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True False

Q 79Q 79

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

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True False

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True False

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True False

Q 82Q 82

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

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True False

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True False

Q 84Q 84

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

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True False

Q 85Q 85

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

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True False

Q 86Q 86

Future share value is equal to P

_{o}= D_{1}/K_{e}- g,assuming constant growth in dividends.Free

True False

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True False

Q 88Q 88

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

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True False

Q 89Q 89

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

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True False

Q 90Q 90

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

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True False

Q 91Q 91

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

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True False

Q 92Q 92

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.

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True False

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True False

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True False

Q 95Q 95

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

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True False

Q 96Q 96

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.

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True False

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True False

Q 98Q 98

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

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True False

Q 99Q 99

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

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True False

Q 100Q 100

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

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True False

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True False

Q 102Q 102

If g is greater than k,the model P = D

_{1}/(K - g)would not work because it would produce a negative value for a common stock.Free

True False

Q 103Q 103

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.

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True False

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Essay

Q 105Q 105

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%

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Essay

Q 107Q 107

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?

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Essay

Q 108Q 108

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.

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Q 109Q 109

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?

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Q 110Q 110

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.

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Q 111Q 111

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.

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Q 112Q 112

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%

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Q 113Q 113

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).

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Q 114Q 114

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?

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Q 115Q 115

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?

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