Finance 300 Study Vocabs Exam 2 Fall 2020
As a general rule, which of the following are true of debt and equity?
- The maximum reward for owning debt is fixed - Equity represents an ownership interest.
True or False: it can be advantageous to have a staggered board because it provides "institutional memory."
- True
which of the following is usually a right common shareholders?
- Voting rights - The right to a proportional share of dividend.
The constant-growth model infers that __________.
Dividends change at a constant rate.
One common reason for having two classes of common stock with different voting rights is:
It is easier for insiders such as founding families to maintain control of the company.
Mathews company has two classes of common stock, and each share represents the same proportion of ownership in the company. Class A has 2 votes for each share. Class B has one vote per share. Which is more valuable?
- Class A
What are the three components of the nominal rate of return?
- Compensation for the inflation effect on the investment earnings. - Real rate of return. - Compensation for the inflation effect on the original investment.
The price of a share of common stock is equal to the present value of all ___________ future dividends.
- Espected
Which of the following is true about a multi-year typical bond's coupon
- It is a fixed annuity payment.
What is the price of a stock at the end of one year (P1) if the dividend for Year 2 (Div2) is $5, the price for year 2 (P2) is $20, and the discount rate is 10%?
P1 = ($5+20)/1.10= $22.73
Scott Corporation does not pay dividends. The PE ratio for its industry is 13.3, and Scott's EPS were $1.47. At what price should Scott's stock trade?
P1=Benchmark PE ratio x EPS1 =13.30 x $1.47=$19.55
If the growth rate (g) is zero, the capital gains yield is _________.
zero
When an investor sells a bond, the price received by a dealer is always the ___________. The price that represents what a dealer is willing to pay for security is _____________.
Bid price
Is a company required to pay preferred dividends?
No; the company may defer dividends on preferred stock; however they can not pay dividends to common shareholders until preferred dividends are paid.
You expect the following dividends from ABC Stock: Year 1 - $3.00 Year 2 - $2.00 Year 3 - $1.00 Your expect that from year 4 onward, the dividend will grow at a constant 3% growth rate. If your required rate of return is 7%, what is your estimate for the current stock price?
$26 The value is 3/1.07+2/1.07^2 +(1+1(1.03)/(0.07-0.03))/1.07^3 = 26.39
The ________ can be interpreted as the capital gains yield.
- Constant growth rate
All junk bonds typically have which of these features?
- High probability of default. - Less than investment-grade rating.
In case of default:
- Subordinated debt holders must give preference to other specified creditors.
If you are holding two identical bonds, except that one matures in 10 years and the other matures in 5 years, which bond's price will be more sensitive to interest rate risk?
- The 10-year bond
A benchmark PE ratio can be determine using:
- The EPs of similar companies - A company's own historical PEs
You own two bonds- one with a 5 percent coupon and one with a 6 percent coupon. Which one is more sensitive to interest rate risk, all other things being equal?
- The bond with the 5% coupon rate is more sensitive.
Bond ratings are based on the probability of default risk, which is the risk that______.
- The bond's issuer may not be able to make all the required payments
Why is the YTM of a discount bond greater than the bond's current yield?
- The current yield does not include the capital gain from the price discount.
If the rate of inflation is 3% and the real rate of return is 5%, the nominal rate is approximately ________ percent.
5%+3%=8%
The formula for valuing a constant stock is:
Po=D1/(R-g)
If an investment appreciates by 7% while the rate of inflation is 2 %, what is the nominal rate of return?
The nominal rate is the observed rate. which is 7%
YTM
Yield to maturity, the required rate of return of a bond.
One requirement of the dividend growth model is:
g<R g - r
A market is considered transparent if __________.
its prices and trading volume are easily observed
When the stock being valued does not currently pay dividends,
the dividend growth model can still be used based on the future dividends
A firm decides to raise money by issuing 5 million bonds with a par value of $5,000 each for 10 years at a coupon rate of 7%. At the time of issue, the bonds were sold for $5,500 each. What will the par value of the bonds be in year 5?
$5,000 per bond
Dusty Corporation has an issues of preferred stock that pays a dividend of 7% of its state value, which is $100. Which of the following would be a commonly used name for that preferred stock?
- $7 preferred
Which of the following is true about interest rate risk?
- All else equal, the lower the coupon rate, the greater the interest rate risk. - All else equal, the longer the time to maturity, the greater the interest rate risk.
Which of the following are expected cash flows to investors in stocks?
- Capital gains - Dividends
A corporate bond's yield to maturity
- Changes over time - Can be greater than, equal to, or less than the bond
Suppose Bob owns 20 Shares and Vikki owns 30 shares in Good Company, and there are five members of the board of directors. Under which voting arrangement can Bob assure himself of a board member that represents his interests?
- Cumulative voting
Someone who maintains an inventory of stocks and buys and sells those stocks is known as a ________.
- Dealer
All else constant, the dividends yield will increase if the stock price __________.
- Decrease
Which of the following is not a difference between debt and equity?
- Equity is publicly trade while debt is not
True or False: Cumulative voting means board members are elected one at a time, with each shareholder casting his or her allotted votes for each seat on the board.
- False
What are some reasons why the bond market is so big?
- Federal government borrowing activity in the bond market is enormous. - Various state and local governments also participate in the bond market. - Many corporations have multiple bond issues outstanding.
A PE Ratio that is based on estimated future earning is known as a ___________ FE ratio.
- Forward
If a bond is selling at a discount from its par value, the YTM must be _______the coupon rate.
- Greater than
In an inflationary environment, the nominal rate will be ___________ the real rate.
- Greater than
The value of a firm is the function of its _________ rate and its _________ rate.
- Growth; - Discount
Assume you own a bond currently valued at $989. If the market rate of interest drops, the bond's current market value will______.
- Increase
As the maturity of a bond increases, interest rate risk ___________.
- Increase at a decreasing rate.
what are the sources of information for generating bond ratings?
- Information from the corporation being rated - Information collected by bond rating agency.
Stock price reporting has increasingly moved from traditional print media to the _______ in recent years.
- Internet
In general, a corporate bond's coupon rate __________.
- Is fixed until the bond matures.
which of the following are features of Common stock?
- It has no special preference in bankruptcy. - It generally has voting rights. - It has no special preference in receiving dividends.
Which of the following is true about a bond's face value?
- It is also known as the par value. - Its is the principal amount repaid at maturity.
what is the nominal rate of return on an investment?
- It is the rate that has not been adjusted for inflation.
When using trial and error to compute the yield to maturity (YTM) for 6 percent coupon bond that trades at a premium, the process can be shortened if the initial guess is ______ 6 percent.
- Lower than
WinWin Corporation has five board members, and each shareholder gets one vote per share. The company uses a straight board voting procedure. How does this arrangement affect minority shareholders?
- Minority shareholder would have enough votes to win any seat on the board.
Place the following bonds in order of security as defined in the Us.
- Mortgage bonds - Deben
Most voting in large corporations is done by proxy because:
- Most small shareholders do not attend the annual meeting
NASDAQ has which of these features?
- Multiple market maker system. - Computer network of securities dealers.
Which of the following occurs in the primary market?
- Newly shareholder stock are sold
When voting for the board of directors, the number of votes a shareholder is entitled to is generally determined as follows:
- One vote per share held
The constant growth formula calculates the stock price:
- One year prior (year t) to the first dividend payment (D_t+1)
Fundamentally, the business of the NYSE is to attract and process ________.
- Order Flow
Which of these is includes in the calculation of a bond's yield to maturity?
- Par Value - Current Price - Coupon Rate
Preferred stock has preference over common stock in the:
- Payment of dividends - distribution of corporate assets
A sinking fund is one type of:
- Payment provision
if a given set of cash flow is expressed in nominal terms and discounted at the nominal rate, the resulting present value will be the same as if the cash flows were expressed in real terms and discounted at the _________ rate.
- Real
Which of the following variables are required to calculate the value of a bond?
- Remaining life of Bond - Coupon rate - Market yield
The NYSE member who acts as a dealer in small number of securities is called a(n) __________.
- Specialist
Mota Motors has eight directors on its board, two of whom go up for election each year. This is an example of a:
- Staggered board
The goal of many successful organization is a(n) ________ rate of growth in dividends.
- Steady
Assume you own a bond that was issued by a blue-chip company. If the market rate of interest rises, what will happen to the value of your bond?
- The Bond value will fall
Suppose you own a 30-year bond issued by GE and a 2-year bond issued by PG with identical coupon rate and par values. which bond will you decrease in value more as interest rate rise?
- The GE bond will lose more because it has a longer maturity.
What are some features of the OTC market for bonds?
- The OTC has no designated physical location. - OTC dealers are connected electronically.
Which two prices can be found in the Wall Street Journal's daily Treasury bond listing?
- The bid price - The asked price
Which of the following entities declares a dividend?
- The board of directors
Which of the following are common protective covenants?
- The firm cannot merge with any other firm. - The firm must maintain working capital at or above a specified level. - The firm must limit dividends to equity holders.
what does a Moody's bond rating of C typically indicate?
- The issuer is in default.
Which of the following are reasons why it is more difficult to value common stock than it is to value bonds?
- The life of a common stock is essentially forever. - Common stock cash flows are not known in advance. - The rate of return required by the market is not easily observed.
Which is smore transparent, the stock market or the bond market?
- The stock market is more transparent
Which of the following are usually included in a bond's indenture?
- The total amount of bonds issued - The repayment Arrangements
Which of these are required to calculate the value of a Bond?
- Time remaining to maturity - Coupon Rate - Par Value - Applicable Market rate
What information is needed to compute a bond's yield-to-maturity?
- Time to maturity - Coupon rate - The bond's current price
Why did Disney issue 100-year bonds, dubbed "Sleeping Beauty" bonds, in the 1990s?
- To lock-in historically low interest rate for a long time.
What is a corporate bond's yield to maturity (YTM)?
- YTM is the expected return for an investor who buys the bond today and holds it to maturity. - YTM is the prevailing market rate for bonds with similar features.
One reason corporations use staggered boards is that:
- it makes takeover attempts less likely to be successful
In which way(s) is preferred stock like a bond?
- preferred stock sometimes has a sinking fund, giving it a set maturity like bonds. - Some preferred stock has credit ratings, like bonds. - Preferred shareholders receive a stated dividend, similar to interest on bond. - Preferred shareholders receive a stated value if the firm liquidates, like bondholders.
What is a real rate of return?
-it is a rate of return that has been adjusted for inflation. -it is a percentage change in buying power.
If the dividend received next year is $2, the discount rate is 10%, and the stock is currently priced at $25, the constant growth rate must be _______ percent.
2
A bond pays annual interest payments of $50, has a par value of $1,000, and a market price of $1,200. How is the coupon rate computed?
50/1000
Which of the following spreadsheet functions can be used to calculate the YTM on a bond paying 5% annual coupons with $1,000 par value if the bond costs $943.82? The bond was purchase on 1/1/2015 and mature on 1/1/2030
= YIELD(1/1/2015,1/1/2030,0.05,94.382,100,1)
A bond's YTM will exceed it current yield when the bond is selling at _________.
A discount
A zero-growth model for stock valuation distinguished by a _______.
Constant dividend growth rate.
What is the coupon rate on a bond that has a par value of $1,000, a market value of $1,100, and a coupon interest payment of $100 per year?
Coupon rate = $100/$1,000 = 10%
What is a bond current yield?
Current yield = Annual coupon payment/current price
Which one of the following is true about dividend growth patterns?
Dividends may grow at a constant rate.
Which of the following represents the valuation of stock using a zero-growth model?
Dividends/Discount rate
The relationship between bond prices and market rate of interest is
Inverse; if the market rate of interest rises, bond prices will fall
What is the value of the stock if next year's dividend is $6, the discount rate is 11% and the constant rate of growth is 3%?
P0=$6/(.11-.03)=%75
Match the terms relating to stock valuation. P1 D1 R Po
P1 = Price in 1 year D1 = Dividend in 1 year R = Discount rate Po = Price today
An asset's value is determined by the present value of its __________ cash flows.
Future
The dividend yield is determined by dividing the expected dividend (D1) by:
The current price (Po)
Bonds
When a corporation or government wishes to borrow money from the public on a long-term basis, it usually does so by issuing or selling debt securities that are generically.
Will is deciding whether or not to buy Dang Corporation stock whose price is $54.95. Dang paid a dividend of $2.17 this year. Will estimates that dividends will grow very quickly, at a rate of 12%, for the next four years. After that, he expects the dividend growth rate to fall to 5% should will buy the stock if his required rate of return is 10%?
Yes; using the two stage growth model, the stock's value is $58.06
CHAPTER 8: STOCK VALUATION
the process by which the underlying value of a stock is established on the basis of its forecasted risk and return performance
