Ch. 30 - Financial Markets

Suppose Carlos has a 60 percent chance of not called ting $100,000 when his rich uncles dies in 10 years. Juanita wants to buy the rights to this possible inheritance from Carlos. How much is the possible inheritance currently worth to Carlos? Assume the interest rate is 9 percent.

$16,896

The P/E ratio, or price to earnings ratios of a stock, can be computed using which of the following formulas?

(Price of stock share) /(earnings per share)

Suppose you purchase shares in Acme Gadget Company for $10 per share. The company believes there is a 20 percent chance it will fail to earn discounted future profits of $1.85. What is the expected rate of return on your investment?

14.8 percent

Dividends are

The amount of corporate profit paid out for each share of stock.

If the expected rate of return decreases

Demand for loanable funds will decrease.

The risk premium is

Difference in rates of return on safe and risky investments.

lower interest rates

Reflect a lower opportunity cost of money

If a corporation issues bonds that it cannot sell, this is an indication that

The coupon rate is too low.

The advantage to a corporation of issuing bonds instead of stock is that

The owners keep control of the company.

Treasury bonds typically have lower coupon rates than corporate bonds because

There is a lower risk that the U.S. Treasury will default.