Question 1. Question
:
Consider a zero-coupon bond with a $1,000 face value and 10
years left until maturity. If the bond is currently trading for $459, then the
yield to maturity on this bond is closest to __________.
7.5%
10.4%
9.7%
8.1%
Question 2. Question
:
The Sisyphean Company has a bond outstanding with a face
value of $1,000 that reaches maturity in 15 years. The bond certificate
indicates that the stated coupon rate for this bond is 8% and that the coupon
payments are to be made semiannually. How much will each semiannual coupon
payment be?
$60
$40
$120
$80
Question 3. Question
:
Which of the following statements is false?
Bond prices converge to the bond’s face value
due to the time effect, but simultaneously move up and down due to
unpredictable changes in bond yields.
As interest rates and bond yields fall, bond
prices will rise.
Bonds with higher coupon rates are more
sensitive to interest rate changes.
Shorter maturity zero coupon bonds are less
sensitive to changes in interest rates than are longer-term zero coupon bonds.
Instructor Explanation: CH8.2
Points Received: 10 of 10
Comments:
Question 4. Question
:
Which of the following statements is false?
Investors pay less for bonds with credit risk
than they would for an otherwise identical default-free bond.
The yield to maturity of a defaultable bond is
equal to the expected return of investing in the bond.
The risk of default, which is known as the
credit risk of the bond, means that the bond’s cash flows are not known with
certainty.
For corporate bonds, the issuer may default;
that is, it might not pay back the full amount promised in the bond
certificate.
Question 5. Question
:
Which of the following statements is false?
A common approximation is to assume that in
the long run, dividends will grow at a constant rate.
The dividend each year is the firm’s earnings
per share (EPS) multiplied by its dividend payout rate.
There is a tremendous amount of uncertainty
associated with any forecast of a firm’s future dividends.
During periods of high growth, it is not
unusual for firms to pay out 100% of their earnings to shareholders in the form
of dividends.
Question 6. Question
:
Von Bora Corporation (VBC) is expected to pay a $2.00
dividend at the end of this year. If you expect VBC’s dividend to grow by 5%
per year forever and VBC’s equity cost of capital is 13%, then the value of a
share of VBS stock is closest to __________.
$25.00
$40.00
$15.40
$11.10
Question 7. Question
:
When discounting dividends you should use:
the weighted average cost of capital.
the after tax weighted average cost of
capital.
the
equity cost of capital.
the before tax cost of debt.
Question 8. Question
:
Which of the following statements is false?
The
total payout model allows us to ignore the firm’s choice between dividends and
share repurchases.
By
repurchasing shares, the firm increases its share count, which decreases its
earning and dividends on a per-share basis.
The total payout model discounts the total
payouts that the firm makes to shareholders, which is the total amount spent on
both dividends and share repurchases.
In the dividend discount model we implicitly
assume that any cash paid out to the shareholders takes the form of a dividend.
Question 9. Question
:
Which of the following statements is false?
The fact that a firm has an exceptional
management team, has developed an efficient manufacturing process, or has just
secured a patient on a new technology is ignored when we apply a valuation
multiple.
Valuation multiples have the advantage that
they allow us to incorporate specific information about the firm’s cost of
capital or future growth.
For firms with substantial tangible assets,
the ratio of price to book value of equity per share is sometimes used.
Using multiples will not help us determine if
an entire industry is overvalued.
Question 10. Question
:
Which of the following statements is false?
The most common valuation multiple is the
price-earnings (P/E) ratio.
You should be willing to pay proportionally
more for a stock with lower current earnings.
A firm’s P/E ratio is equal to the share price
divided by its earnings per share.
The intuition behind the use of the P/E ratio
is that when you buy a stock, you are in sense buying the rights to the firm’s
future earnings and differences in the scale of firms’ earnings are likely to
persist.
