Question 1

A bond issued by a Canadian company that is denominated in Swiss Francs and sold inSwitzerland would be an example of a foreign bond.

Accepted Answer

A) True 
 B)False

Question 2

An efficient market is a market that allocates funds to their most productive uses as a result of competition among wealth-maximizing investors that determines and publicizes prices which are believed to be close to their true values.

Accepted Answer

A) True 
 B)False

Question 3

_________is a guide to the firm's value if it is assumed that investors value the earnings of a given firm in the same way they do the average firm in the industry.

Accepted Answer

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

Question 4

The Eurocurrency market is a market for short-term bank deposits denominated in U.S. dollars or other easily convertible currencies.

Accepted Answer

A) True 
 B)False

Question 5

The yields on Treasury bills are generally higher than those on any other marketable securities due to their virtually risk-free nature.

Accepted Answer

A) True 
 B)False

Question 6

__________in the beta coefficient normally causes __________in the required return and therefore __________in the price of the stock, all else remaining the same.

Accepted Answer

A)  A decrease; a decrease; a decrease 
B)  An increase; an increase; a decrease 
C)  An increase; a decrease; an increase 
D)  An increase; an increase; an increase

Question 7

A share of stock is expected to pay a $4 dividend next year, and investors have expectations of a12% return. If dividends are expected to grow at 5% per year indefinitely into the future, a share ofstock is worth $57.14.

Accepted Answer

A) True 
 B)False

Question 8

Any action taken by the financial manager that increases risk will also increase the required return.

Accepted Answer

A) True 
 B)False

Question 9

A mutual fund is a type of financial intermediary that obtains funds through sale of shares and uses proceeds to acquire bonds and stocks issued by various business and governmental units.

Accepted Answer

A) True 
 B)False

Question 10

Interest rate risk is the chance that interest rates will change and thereby change the required return and bond value.

Accepted Answer

A) True 
 B)False

Question 11

__________is the value of the firm's ownership in the event that all assets are sold for their exact accounting value and the proceeds remaining after paying all liabilities (including preferred stock)are divided among common stockholders.

Accepted Answer

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

Question 12

If expected return is less than required return on an asset, rational investors will

Accepted Answer

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

Question 13

If the required return is greater than the coupon rate, a bond will sell at

Accepted Answer

A)  a premium. 
B)  book value. 
C)  a discount. 
D)  par.

Question 14

The purpose of the restrictive debt covenant that imposes fixed assets restrictions is to limit the amount of fixed-payment obligations.

Accepted Answer

A) True 
 B)False

Question 15

An 8 percent preferred stock with a market price of $110 per share and a $100 par value pays a cash dividend of __________.

Accepted Answer

A)  $8.80 
B)  $4.00 
C)  $8.00 
D)  $80.00

Question 16

The market price of outstanding issues often varies from par because

Accepted Answer

A)  the maturity date has changed. 
B)  old bonds sell for less than new bonds. 
C)  the market rate of interest has changed. 
D)  the coupon rate has changed.

Question 17

Restrictive covenants are contractual clauses in long-term debt agreements that place certain operating and financial constraints on the borrower.

Accepted Answer

A) True 
 B)False

Question 18

A firm has a balance sheet common shares account with a value of $260,000. The firm has 10,000common shares outstanding. If the retained earnings account has a value of $250,000, the commonstock originally sold for

Accepted Answer

A)  $30/share. 
B)  $25/share. 
C)  $24/share. 
D)  $26/share.

Question 19

Because a rise in interest rates, and therefore the required return, results in an increase in bond value, bondholders are typically more concerned with dropping interest rates.

Accepted Answer

A) True 
 B)False

Question 20

Preferred stock is often considered a quasi-debt since it yields a fixed periodic payment.

Accepted Answer

A) True 
 B)False

Exam 8: Valuation of Financial Securities

A bond issued by a Canadian company that is denominated in Swiss Francs and sold inSwitzerland would be an example of a foreign bond.

An efficient market is a market that allocates funds to their most productive uses as a result of competition among wealth-maximizing investors that determines and publicizes prices which are believed to be close to their true values.

_________is a guide to the firm's value if it is assumed that investors value the earnings of a given firm in the same way they do the average firm in the industry.

The Eurocurrency market is a market for short-term bank deposits denominated in U.S. dollars or other easily convertible currencies.

The yields on Treasury bills are generally higher than those on any other marketable securities due to their virtually risk-free nature.

in the beta coefficient normally causes in the required return and therefore __in the price of the stock, all else remaining the same.

A share of stock is expected to pay a $4 dividend next year, and investors have expectations of a12% return. If dividends are expected to grow at 5% per year indefinitely into the future, a share ofstock is worth $57.14.

Any action taken by the financial manager that increases risk will also increase the required return.

A mutual fund is a type of financial intermediary that obtains funds through sale of shares and uses proceeds to acquire bonds and stocks issued by various business and governmental units.

Interest rate risk is the chance that interest rates will change and thereby change the required return and bond value.

__________is the value of the firm's ownership in the event that all assets are sold for their exact accounting value and the proceeds remaining after paying all liabilities (including preferred stock) are divided among common stockholders.

If expected return is less than required return on an asset, rational investors will

If the required return is greater than the coupon rate, a bond will sell at

The purpose of the restrictive debt covenant that imposes fixed assets restrictions is to limit the amount of fixed-payment obligations.

An 8 percent preferred stock with a market price of $110 per share and a $100 par value pays a cash dividend of __________.

The market price of outstanding issues often varies from par because

Restrictive covenants are contractual clauses in long-term debt agreements that place certain operating and financial constraints on the borrower.

A firm has a balance sheet common shares account with a value of $260,000. The firm has 10,000common shares outstanding. If the retained earnings account has a value of $250,000, the commonstock originally sold for

Because a rise in interest rates, and therefore the required return, results in an increase in bond value, bondholders are typically more concerned with dropping interest rates.

Preferred stock is often considered a quasi-debt since it yields a fixed periodic payment.