FINA 320 Quiz 3

You believe that the required return on Dynegy stock is 16% and that the expected dividend growth rate is 12%, which is expected to remain constant for the foreseeable future. Is the stock currently overvalued, undervalued, or fairly priced?

Cannot tell without more information

Dividend models suggest that ______________ determine the value of a financial asset to which the owner is entitled while holding the asset.

Future cash flows

If dividends on a common stock are expected to grow at a constant rate forever, and if you are told the most recent dividend paid, the dividend growth rate, and the appropriate discount rate today, you can calculate ______________. I. the price of the stock today II. the dividend that is expected to be paid ten years from now III. the expected stock price five years from now

I, II, and III

Which of the following statements is true? I. The dividend growth model only holds if, at some point in time, the dividend growth rate exceeds the stock's required return. II. An increase in the dividend growth rate will increase a stock's market value, all else the same. III. An increase in the required return on a stock will increase its market value, all else the same.

II only

A bond sold five weeks ago for $1,100. The bond is worth $1,150 in today's market. Assuming no changes in risk, which of the following is true?

Interest rates must be lower now than they were five weeks ago.

Which of the following statements regarding dividend yields is true?

It is analogous to the current yield for a bond.

Given no change in required returns, preferred stock prices will:

None of the above

Stocks are different from bonds because _____________

Stocks, unlike bonds, represent ownership

A bond sold five weeks ago for $1,100. The bond is worth $1,150 in today's market. Assuming no changes in risk, which of the following is false?

The coupon payment of the bond must have decreased.

The rate of return required by investors in the market for owning a bond is called the:

Yield to maturity

The rate of return required by investors in the market for owning a bond is called the:

Yield to maturity.

You are attempting to value a stock in a mature industry that is steadily shrinking in size. Of the stock valuation models studied, the most appropriate is the__________. .

constant growth model

The ________ is the annual coupon payment divided by the current price of the bond, and is not always an accurate indicator.

current yield

As illustrated using the dividend growth model, the total return on a share of common stock is comprised of a _____________.

dividend yield and a capital gains yield

For a discount bond, the current yield is ___________ the coupon rate, and the coupon rate is ______________ the yield to maturity.

greater than, less than

A bond with an annual coupon of $100 originally sold at par for $1,000. The current market interest rate on this bond is 9%. Assuming no change in risk, this bond will sell at a ___________ and present the seller (who bought the bond at initial issuance) of the bond today with a capital ____________. .

premium; gain

The ________ is the market of first sale in which companies first sell their authorized shares to the public.

primary market

Stocks are different from bonds because ________.

stocks, unlike bonds, represent residual ownership

As the rating of a bond increases (for example, from A, to AA, to AAA), it generally means that

the default risk decreases and the required rate of return decreases.

A bond that makes no coupon payments (and thus is initially priced at a deep discount to par value) is called a _______________ bond.

zero coupon