Question 1

T-bills are sold by the Bank of Canada, who acts as the federal government's bank.

Accepted Answer

A) True 
 B)False

Question 2

Mega Inc. is expected to pay a dividend of $2.00 per share next year. The dividends are expected togrow at a constant rate of 5% per year indefinitely. If investors require a 12% return on Mega stock,what is the current price?

Accepted Answer

A)  $32.00 
B)  $16.67 
C)  $30.00 
D)  $28.57

Question 3

The longer the time to maturity for a bond, the_________interest rate risk.

Accepted Answer

A)  greater 
B)  there is no relationship between interest rate risk and time to maturity 
C)  lower 
D)  more stable

Question 4

A call feature is a feature that allows preferred stockholders to change each share into a stated number of shares of common stock.

Accepted Answer

A) True 
 B)False

Question 5

A trustee is a paid party representing the bond issuer in the bond indenture.

Accepted Answer

A) True 
 B)False

Question 6

Al is trying to decide which of two bonds to buy. Bond H is a 10 percent coupon, 10-year maturity,$1,000 par, January 1, 2000 issue paying annual interest. Bond F is a 10 percent coupon, 10-yearmaturity, $1,000 par, January 1, 2000 issue paying semiannual interest. The market required returnfor each bond is 10 percent. When using present value to determine the prices of the bonds, Al will find that

Accepted Answer

A)  the price of H is greater than F. 
B)  the price of F is greater than H. 
C)  there is no difference in price. 
D)  he needs more information before determining the prices.

Question 7

The tax deductibility of interest lowers the cost of debt financing, thereby causing the cost of debt financing to be lower than the cost of equity financing.

Accepted Answer

A) True 
 B)False

Question 8

Because preferred stock is a form of ownership and has no maturity date, its claims on income and assets are secondary to those of the firm's creditors.

Accepted Answer

A) True 
 B)False

Question 9

__________is the actual amount each common stockholder would expect to receive if the firm's assets are sold, creditors and preferred stockholders are repaid, and any remaining money is divided among the common stockholders.

Accepted Answer

A)  Liquidation value 
B)  Book value 
C)  The present value of the dividends 
D)  The P/E multiple

Question 10

A sinking-fund requirement is a restrictive provision often included in a bond indenture providing for periodic payments representing only interest and a large lump-sum payment at the maturity of the loan representing the entire loan principal.

Accepted Answer

A) True 
 B)False

Question 11

Assume you bought a $1,000, 8% annual coupon bond one year ago for $750, and sold it today for $810. What was your holding period yield?

Accepted Answer

A)  8.00% 
B)  18.67% 
C)  2.47% 
D)  17.28%

Question 12

Debentures such as convertible bonds are unsecured bonds only creditworthy firms can issue.

Accepted Answer

A) True 
 B)False

Question 13

If the expected return is above the required return on an asset, rational investors will

Accepted Answer

A)  sell the asset, which will drive the price up and cause the expected return to reach the level of the required return. 
B)  sell the asset, which will drive the price down and cause the expected return to reach the level of the required return. 
C)  buy the asset, which will drive the price up and cause the expected return to reach the level of the required return. 
D)  sell the asset, since the price is expected to decrease.

Question 14

The conversion feature of a bond is a feature that is included in almost all corporate bond issues that gives the issuer the opportunity to repurchase bonds at a stated price prior to maturity.

Accepted Answer

A) True 
 B)False

Question 15

In the OTC market, the prices at which securities are traded result from both competitive bids and negotiation.

Accepted Answer

A) True 
 B)False

Question 16

Common stocks are difficult to value for all the following reasons EXCEPT

Accepted Answer

A)  cash flows are not known. 
B)  the rate of return required by the market is difficult to establish. 
C)  the Board of Directors changes periodically. 
D)  the life of the investment is essentially forever.

Question 17

Emmy Lou, Inc. has an expected dividend next year of $5.60 per share, a growth rate of dividends of 10 percent, and a required return of 20 percent. The value of a share of Emmy Lou, Inc.'s common stock is__________.

Accepted Answer

A)  $56.00 
B)  $28.00 
C)  $18.67 
D)  $22.40

Question 18

Public offering is the sale of a new security issue, typically debt or preferred stock, directly to an investor or group of investors.

Accepted Answer

A) True 
 B)False

Question 19

Financial markets are intermediaries that channel the savings of individuals, businesses and government into loans or investments.

Accepted Answer

A) True 
 B)False

Question 20

Cumulative preferred stocks are preferred stocks for which all passed (unpaid) dividends in arrears must be paid along with the current dividend prior to the payment of dividends to common stockholders.

Accepted Answer

A) True 
 B)False

Exam 8: Valuation of Financial Securities

T-bills are sold by the Bank of Canada, who acts as the federal government's bank.

Mega Inc. is expected to pay a dividend of $2.00 per share next year. The dividends are expected togrow at a constant rate of 5% per year indefinitely. If investors require a 12% return on Mega stock,what is the current price?

The longer the time to maturity for a bond, the_________interest rate risk.

A call feature is a feature that allows preferred stockholders to change each share into a stated number of shares of common stock.

A trustee is a paid party representing the bond issuer in the bond indenture.

The tax deductibility of interest lowers the cost of debt financing, thereby causing the cost of debt financing to be lower than the cost of equity financing.

Because preferred stock is a form of ownership and has no maturity date, its claims on income and assets are secondary to those of the firm's creditors.

__________is the actual amount each common stockholder would expect to receive if the firm's assets are sold, creditors and preferred stockholders are repaid, and any remaining money is divided among the common stockholders.

A sinking-fund requirement is a restrictive provision often included in a bond indenture providing for periodic payments representing only interest and a large lump-sum payment at the maturity of the loan representing the entire loan principal.

Assume you bought a $1,000, 8% annual coupon bond one year ago for $750, and sold it today for $810. What was your holding period yield?

Debentures such as convertible bonds are unsecured bonds only creditworthy firms can issue.

If the expected return is above the required return on an asset, rational investors will

The conversion feature of a bond is a feature that is included in almost all corporate bond issues that gives the issuer the opportunity to repurchase bonds at a stated price prior to maturity.

In the OTC market, the prices at which securities are traded result from both competitive bids and negotiation.

Common stocks are difficult to value for all the following reasons EXCEPT

Emmy Lou, Inc. has an expected dividend next year of $5.60 per share, a growth rate of dividends of 10 percent, and a required return of 20 percent. The value of a share of Emmy Lou, Inc.'s common stock is__________.

Public offering is the sale of a new security issue, typically debt or preferred stock, directly to an investor or group of investors.

Financial markets are intermediaries that channel the savings of individuals, businesses and government into loans or investments.

Cumulative preferred stocks are preferred stocks for which all passed (unpaid) dividends in arrears must be paid along with the current dividend prior to the payment of dividends to common stockholders.