Question 1

All else equal, higher expected cash flows associated with a financial asset results in a higher required rate of return on that financial asset.

Accepted Answer

A) True 
 B)False

Question 2

A share of perpetual preferred stock pays an annual dividend of $6 per share.If investors require a 12 percent rate of return, what should be the price of this preferred stock?

Accepted Answer

A)  $57.25 
B)  $50.00 
C)  $62.38 
D)  $46.75 
E)  $41.64 
A)  $57.25 
B)  $50.00 
C)  $62.38 
D)  $46.75 
E)  $41.64

Question 3

You are the owner of 100 bonds issued by Euler, Ltd.These bonds have 8 years remaining to maturity, an annual coupon payment of $80, and a par value of $1,000.Unfortunately, Euler is on the brink of bankruptcy.The creditors, including yourself, have agreed to a postponement of the next 4 interest payments (otherwise, the next interest payment would have been due in 1 year).The remaining interest payments, for Years 5 through 8, will be made as scheduled.The postponed payments will accrue interest at an annual rate of 6 percent, and they will then be paid as a lump sum at maturity 8 years hence.The required rate of return on these bonds, considering their substantial risk, is now 28 percent.What is the present value of each bond?

Accepted Answer

A)  $538.21 
B)  $426.73 
C)  $384.84 
D)  $266.88 
E)  $249.98 
A)  $538.21 
B)  $426.73 
C)  $384.84 
D)  $266.88 
E)  $249.98

Question 4

JRJ Corporation recently issued 10-year bonds at a price of $1,000.These bonds pay $60 in interest each six months.Their price has remained stable since they were issued, i.e., they still sell for $1,000.Due to additional financing needs, the firm wishes to issue new bonds that would have a maturity of 10 years, a par value of $1,000, and pay $40 in interest every six months.If both bonds have the same yield, how many new bonds must JRJ issue to raise $2,000,000 cash?

Accepted Answer

A)  2,400 
B)  2,596 
C)  3,000 
D)  5,000 
E)  4,275 
A)  2,400 
B)  2,596 
C)  3,000 
D)  5,000 
E)  4,275

Question 5

The prices of outstanding bonds are typically very close to the par value of the bond.

Accepted Answer

A) True 
 B)False

Question 6

The ____ yield is the percentage change in the value of an investment.

Accepted Answer

A)  interest 
B)  total 
C)  current 
D)  capital gains 
A)  interest 
B)  total 
C)  current 
D)  capital gains

Question 7

Modular Systems Inc.just paid dividend D0, and it is expecting both earnings and dividends to grow by 0 percent in Year 1 and 2, by 5 percent in Year 3, and at a rate of 10 percent in Year 4 and thereafter.The required return on Modular is 15 percent, and it sells at its equilibrium price, P0 = $49.87.What is the expected value of the next dividend,   ? (Hint: Draw a time line and then set up and solve an equation with one unknown,   .)

Accepted Answer

A)  It cannot be estimated without more data. 
B)  $1.35 
C)  $1.85 
D)  $2.35 
E)  $2.85 
A)  It cannot be estimated without more data. 
B)  $1.35 
C)  $1.85 
D)  $2.35 
E)  $2.85

Question 8

The present value of a $1,000 par value bond with an eight percent semi-annual coupon, five years to maturity and a six percent yield to maturity is $1,085.30.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following statements is correct?

Accepted Answer

A)  The discount or premium on a bond can be expressed as the difference between the coupon payment on an old bond which originally sold at par and the coupon payment on a new bond, selling at par, where the difference in payments is discounted at the new market rate. 
B)  The price of a coupon bond is determined primarily by the number of years to maturity. 
C)  On a coupon paying bond, the final interest payment is made one period before maturity and then, at maturity, the bond's face value is paid as the final payment. 
D)  The actual capital gains yield for a one-year holding period on a bond can never be greater than the current yield on the bond. 
E)  All of the above statements are false. 
A)  The discount or premium on a bond can be expressed as the difference between the coupon payment on an old bond which originally sold at par and the coupon payment on a new bond, selling at par, where the difference in payments is discounted at the new market rate. 
B)  The price of a coupon bond is determined primarily by the number of years to maturity. 
C)  On a coupon paying bond, the final interest payment is made one period before maturity and then, at maturity, the bond's face value is paid as the final payment. 
D)  The actual capital gains yield for a one-year holding period on a bond can never be greater than the current yield on the bond. 
E)  All of the above statements are false.

Question 10

Marie Snell recently inherited some bonds (face value $100,000) from her father, and soon thereafter she became engaged to Sam Spade, a University of Florida marketing graduate.Sam wants Marie to cash in the bonds so the two of them can use the money to "live like royalty" for two years in Monte Carlo.The 2 percent annual coupon bonds mature on January 1, 2030, and it is now January 1, 2010.Interest on these bonds is paid annually on December 31 of each year, and new annual coupon bonds with similar risk and maturity are currently yielding 12 percent.If Marie sells her bonds now and puts the proceeds into an account which pays 10 percent compounded annually, what would be the largest equal annual amounts she could withdraw for two years, beginning today (i.e., two payments, the first payment today and the second payment one year from today)?

Accepted Answer

A)  $13,255 
B)  $29,708 
C)  $12,654 
D)  $25,305 
E)  $14,580 
A)  $13,255 
B)  $29,708 
C)  $12,654 
D)  $25,305 
E)  $14,580

Question 11

Ignoring default risk, since the coupon payments and maturity value of bonds are fixed the price of a bond does not change over time.

Accepted Answer

A) True 
 B)False

Question 12

If two firms have the same current dividend and the same expected growth rate, their stocks must sell at the same current price or else the market will not be in equilibrium.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following statements is correct?

Accepted Answer

A)  Expected returns as estimated by a marginal investor are sometimes positive, but realized returns are always negative. 
B)  Expected returns as estimated by a marginal investor are always positive, but realized returns are sometimes negative. 
C)  Expected returns as estimated by a marginal investor are sometimes negative, but realized returns are always positive. 
D)  Expected returns as estimated by a marginal investor are always negative, but realized returns are sometimes positive. 
A)  Expected returns as estimated by a marginal investor are sometimes positive, but realized returns are always negative. 
B)  Expected returns as estimated by a marginal investor are always positive, but realized returns are sometimes negative. 
C)  Expected returns as estimated by a marginal investor are sometimes negative, but realized returns are always positive. 
D)  Expected returns as estimated by a marginal investor are always negative, but realized returns are sometimes positive.

Question 14

You intend to purchase a 10-year, $1,000 face value bond that pays interest of $60 every 6 months.If your simple annual required rate of return is 10 percent with semiannual compounding, how much should you be willing to pay for this bond?

Accepted Answer

A)  $826.31 
B)  $1,086.15 
C)  $957.50 
D)  $1,431.49 
E)  $1,124.62 
A)  $826.31 
B)  $1,086.15 
C)  $957.50 
D)  $1,431.49 
E)  $1,124.62

Question 15

Due to unfavorable economic conditions, EFB Company's earnings and dividends are expected to remain unchanged for the next 3 years.After 3 years, dividends are expected to grow at a 10 percent annual rate forever.The last dividend was $2.00, and the required rate of return is 20 percent.What should be the current market value of EFB stock?

Accepted Answer

A)  $13.46 
B)  $14.51 
C)  $15.22 
D)  $16.03 
E)  $16.94 
A)  $13.46 
B)  $14.51 
C)  $15.22 
D)  $16.03 
E)  $16.94

Question 16

Vogril Company issued 20-year, zero coupon bonds with an expected yield to maturity of 9 percent.The bonds have a par value of $1,000 and were sold for $178.43 each.What is the expected interest expense on these bonds for Year 8?

Accepted Answer

A) 
$29.35 
B) 
$32.00 
C) 
$90.00 
D) 
$26.12 
E) 
$25.79 
A) 
$29.35 
B) 
$32.00 
C) 
$90.00 
D) 
$26.12 
E) 
$25.79

Question 17

The prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low-coupon bonds, other things equal and held constant.

Accepted Answer

A) True 
 B)False

Question 18

The value of a financial asset is positively related to the size of the cash flows and the discount rate appropriate for the riskiness of the cash flows.

Accepted Answer

A) True 
 B)False

Question 19

The market value of any real or financial asset, including stocks, bonds, or art work, can be found by determining future cash flows and then discounting them back to the present.

Accepted Answer

A) True 
 B)False

Question 20

The total expected future yield on a bond consists of a(n) ____ yield which is usually positive and a(n) ____ yield which can be positive or negative.

Accepted Answer

A)  current; interest 
B)  capital gain; current 
C)  interest; current 
D)  interest; capital gain 
A)  current; interest 
B)  capital gain; current 
C)  interest; current 
D)  interest; capital gain

All else equal, higher expected cash flows associated with a financial asset results in a higher required rate of return on that financial asset.

A share of perpetual preferred stock pays an annual dividend of $6 per share.If investors require a 12 percent rate of return, what should be the price of this preferred stock?

The prices of outstanding bonds are typically very close to the par value of the bond.

The ____ yield is the percentage change in the value of an investment.

The present value of a $1,000 par value bond with an eight percent semi-annual coupon, five years to maturity and a six percent yield to maturity is $1,085.30.

Which of the following statements is correct?

Ignoring default risk, since the coupon payments and maturity value of bonds are fixed the price of a bond does not change over time.

If two firms have the same current dividend and the same expected growth rate, their stocks must sell at the same current price or else the market will not be in equilibrium.

Which of the following statements is correct?

You intend to purchase a 10-year, $1,000 face value bond that pays interest of $60 every 6 months.If your simple annual required rate of return is 10 percent with semiannual compounding, how much should you be willing to pay for this bond?

Vogril Company issued 20-year, zero coupon bonds with an expected yield to maturity of 9 percent.The bonds have a par value of $1,000 and were sold for $178.43 each.What is the expected interest expense on these bonds for Year 8?

The prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low-coupon bonds, other things equal and held constant.

The value of a financial asset is positively related to the size of the cash flows and the discount rate appropriate for the riskiness of the cash flows.

The market value of any real or financial asset, including stocks, bonds, or art work, can be found by determining future cash flows and then discounting them back to the present.

The total expected future yield on a bond consists of a(n) yield which is usually positive and a(n) yield which can be positive or negative.

An Overview of Finance

Financial Assets Instruments

Financial Markets and the Investment Banking Process

Financial Intermediaries and the Banking System

The Cost of Money Interest Rates

Business Organizations and the Tax Environment

Analysis of Financial Statements

Financial Planning and Control

Time Value of Money

Risk and Rates of Return

The Cost of Capital

Capital Budgeting

Capital Structure and Dividend Policy Decisions

Working Capital Management

Investment Concepts

Security Valuation and Selection

Filters

Exam 10: Valuation Concepts

All else equal, higher expected cash flows associated with a financial asset results in a higher required rate of return on that financial asset.

A share of perpetual preferred stock pays an annual dividend of $6 per share.If investors require a 12 percent rate of return, what should be the price of this preferred stock?

The prices of outstanding bonds are typically very close to the par value of the bond.

The ____ yield is the percentage change in the value of an investment.

The present value of a $1,000 par value bond with an eight percent semi-annual coupon, five years to maturity and a six percent yield to maturity is $1,085.30.

Which of the following statements is correct?

Ignoring default risk, since the coupon payments and maturity value of bonds are fixed the price of a bond does not change over time.

If two firms have the same current dividend and the same expected growth rate, their stocks must sell at the same current price or else the market will not be in equilibrium.

Which of the following statements is correct?

You intend to purchase a 10-year, $1,000 face value bond that pays interest of $60 every 6 months.If your simple annual required rate of return is 10 percent with semiannual compounding, how much should you be willing to pay for this bond?

Vogril Company issued 20-year, zero coupon bonds with an expected yield to maturity of 9 percent.The bonds have a par value of $1,000 and were sold for $178.43 each.What is the expected interest expense on these bonds for Year 8?

The prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low-coupon bonds, other things equal and held constant.

The value of a financial asset is positively related to the size of the cash flows and the discount rate appropriate for the riskiness of the cash flows.

The market value of any real or financial asset, including stocks, bonds, or art work, can be found by determining future cash flows and then discounting them back to the present.

The total expected future yield on a bond consists of a(n) ____ yield which is usually positive and a(n) ____ yield which can be positive or negative.

An Overview of Finance

Financial Assets Instruments

Financial Markets and the Investment Banking Process

Financial Intermediaries and the Banking System

The Cost of Money Interest Rates

Business Organizations and the Tax Environment

Analysis of Financial Statements

Financial Planning and Control

Time Value of Money

Risk and Rates of Return

The Cost of Capital

Capital Budgeting

Capital Structure and Dividend Policy Decisions

Working Capital Management

Investment Concepts

Security Valuation and Selection

Filters

The total expected future yield on a bond consists of a(n) yield which is usually positive and a(n) yield which can be positive or negative.