Financial Management of the Firm Learnsmart
which of the following represents the valuation of stock using a zero-growth model?
dividends/discount rate
the price of a share of common stock is equal to the present value of all _____ future dividends
expected
someone who maintains an inventory of stocks and buys and sells those stocks is known as a
dealer
if the liquidity of a bond increases then the bond's yield will:
decrease
what is a discount bond
discount bonds are bonds that sell for less than face value
D1
dividend in one year
which one of the following is true about dividend growth patterns?
dividends may grow at a constant rate
one requirement of the dividend growth model is:
g<R
in general, a corporate bond's coupon rate:
is fixed until the bond matures
which of the following occurs in a primary market
newly-issued stocks are initially sold
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
the constant growth formula calculates the stock price:
one year prior (year t) to the first dividend payment (d t+1)
P1
price in one year
P0
price today
CAT bond
protects insurance companies from natural disasters
how is APR computed?
rate per period x number of periods per year
the goal of many successful organizations is a ______ rate of growth in dividends
steady
the two most important stock markets in the US are the new york stock exchange and :
the NASDAQ
which has a higher value, the bid price quote or the asked price quote?
the asked price quote is higher
what does the AAA rating assigned by S&P mean?
the firm is in a strong position to meet its debt obligations
most voting in large corporations is done by proxy because:
the small shareholders do not attend the annual meeting
if a $1000 par value bond is trading at a premium, the bond is:
trading for more than $1000 in the market
will is deciding whether or not to buy dang corporation stock, whose current price is $54.95. dang is 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
how much can a corporation expect to receive per bond if it sells 10-yr zero coupon bonds with a face value of $1000 if the market rate of interest is 9%?
$414.64
which of the following are cash flows to investors in stocks?
-capital gains -dividends
what info do we need to determine the value of stock using the zero-growth model?
-discount rate -annual dividend rate
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 -the rate of return required by the market is not easily observed -common stock cash flows are not known in advance
place bonds in order of security as defined in the US.
1. mortgage bonds 2. debentures
what is the coupon rate on a bond that has a par value of $1000, market value of $1,100, and a coupon interest payment of $100 per year?
10%
a limitation of bond ratings is that they:
focus exclusively on default risk
the NYSE member who acts as a dealer in a small number of securities is called a :
specialist
the dividend yield is determined by dividing the expected dividend by:
the current price
while the stock being valued does not pay dividends:
the dividend growth model can still be used
how is the real rate of return different from the nominal rate of return?
the real rate of return excludes inflation from the nominal rate
which of these are required to calculate the current value of the bond?
-par value -time remaining to maturity -applicable market rate -coupon rate
a PE ration that is based on estimated future earnings is known as a _____ PE ratio
forward
stock price reporting has increasingly moved from traditional print media to the _______ in recent years
internet
why is the bond market less transparent than the stock market?
many bond transactions are negotiated privately
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
fundamentally, the business of the NYSE is to attract and process:
order flow
a bond pays annual interest payments of $50, has a par value of $1000, and a market price of $1200. how is the coupon rate computed?
$50/$1000
a firm decides to raise money by issuing 5 million bonds with a par value of $5000 each for 10 years at a coupon rate of 7%. at the time of the issue, the bonds were sold for $5,500 each. what will the par value of the bonds be in year 5?
$5000 per bond.
how is a conventional bond different from a zero coupon bond?
- a conventional bond pays periodic interest while zeroes make no interest payments. -conventional bonds can sell at par, at a discount from par, or at a premium over par while zeroes can't.
a benchmark PE ratio can be determined using:
-PEs of similar companies -a company's own historical PEs
a bond has a quoted price of $984.63, a face value of $1000, a semi-annual coupon of $20, and a maturity of 10 years. match its current yield and its YTM
-YTM: 4.19% -current yield: 4.06%
a corporate bonds yield to maturity:
-can be greater than, equal to, or less than the bond's coupon rate -changes over time
NASDAQ has which of these features?
-computer network of securities dealers -multiple market maker system
which of the following variables are required to calculate the value of the bond?
-coupon rate -market yield -remaining life of bond
what information do we need to determine the value of stock using the zero-growth model?
-discount rate -annual dividend amount
preferred stock has preference over common stock in the:
-distribution of corporate assets -payment of dividends
which of the following institutions issue bonds that are traded in the bond market
-federal government -state governments -public corporations
which of these are included in the calculation of a bond's yield to maturity?
-par value -current price -coupon rate
the NYSE differs from the NASDAQ primarily because the NYSE has:
-specialists -an auction market -a physical location
which two prices can be found in the wall street journal's daily treasury bond listing?
-the asked price -the bid price
which of the following are common protective covenants?
-the firm must limit dividends to equity holders -a firm cannot merge with any other firm -the firm must maintain working capital at or above a specified level
what is the effective annual rate on a bond with a yield to maturity of 6% that pays semiannual interest?
6.09%
if an investment appreciates by 7% while the rate of inflation is 2%, what is the nominal rate of return?
7%
how is investing in US Treasury bonds different from investing in corporate bonds
-interest from US Treasuries is exempt from taxes at state level but corporate interest is not -treasury issues have no default risk
which of the following is a feature of common stock?
-it generally has voting rights -it has no special preference in receiving dividends -it has no special preference in bankruptcy
which of the following are true about a bond's face value?
-it is the principal amount repaid at maturity -it is known as the par value
all junk bonds typically have which of these features?
-less than investment-grade rating -high probability of default
which of the following is usually a right of common shareholders?
-the right to a proportional share of dividends paid -voting rights -the right to purchase a proportional share of new stock issued.
the us government borrows money by issuing:
-treasury bills -treasury notes -treasury bonds
which of these correctly identify differences between treasury bonds and corporate bonds?
-treasury bonds offer certain tax benefits to investors that corporate bonds cannot offer -treasury bonds are issued by the US government while corporate bonds are issued by corporations -treasury bonds are free of default risk while corporate bonds are exposed to default risk
when the US government wants to borrow money for the long-term (more than one year) it issues:
-treasury notes -treasury bonds
which of the following are common shapes for the term structure of interest rates?
-upward sloping -downward sloping -humped
the degree of interest rate risk depends on:
the sensitivity of the bond's price to interest rate changes
dusty corporation has an issue 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 these is included in the calculation of a bond's yield to maturity?
-current price -coupon rate -par value
which of these is included in the calculation of a bonds yield to maturity?
-current price -par value -coupon rate
what are three important features of treasury notes and bonds?
-default free -taxable -highly liquid
in the dividend discount model, the expected return for investors comes from which two sources?
-growth rate -dividend yield
which of the following are usually included in a bond's indenture?
-the repayment arrangements -the total amount of bonds issued
how is a zero coupon bond different from a conventional bond
-zero coupon bonds are always issued at a discount -zero coupon bonds make no interest payments
the growth rate is zero, the capital gains yield is:
0
what is the bid price?
price at which a dealer is willing to buy securities
how is a zero coupon bond different from a conventional bond?
-zero coupon bonds make no interest payments -zero coupon bonds are always issued at discount
a zero growth stock pays a dividend of $2 per share and has the discount rate of 10%. what will the stock's price be?
20.00
at what tax rate will you be indifferent between a muni that yields 7% and a comparable corporate bond yielding 9%? assume no state taxes.
22.2%
if you are in the 20% tax bracket, what is your aftertax yield on a par value municipal bond yielding 5%? ignore state and local taxes
5%
if the term structure of interest rates is upward-sloping, then:
long-term rates are higher than short-term rates
Winwin corporation has 5 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?
no minority shareholder would have enough votes to win any seat on the board
put bond
owner can force issuer to repay prior to maturity at a stated price
the federal government can raise money from financial markets to finance markets to finance its deficits by:
issuing bonds`
what is the real rate of return?
it is a rate of return that has been adjusted for inflation
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.
what is the nominal rate of return on an investment?
it is the actual percentage change in the dollar value of an investment
one reason corporations use staggered boards is that:
it makes takeover attempts less likely to be successful
a market is considered transparent if
its prices and trading volume are easily observed
a zero coupon bond is a bond that
makes no interest payments
which of the following entities declares a dividend?
the board of directors
a bond's YTM will exceed its current yield when the bond is selling at:
a discount
three special case patterns of dividend growth include:
-non-constant growth -constant growth -zero growth
which of the following terms apply to a bond
-par value -coupon rate -time to maturity
in which ways is preferred stock like a bond?
-preferred stock sometimes has a sinking fund, giving it a set maturity like bonds -preferred shareholders receive a stated value if the firm liquidates, like bondholders -some preferred stock has credit ratings, like bonds -preferred shareholders receive a stated dividend, similar to interest on a bond
which of the following variables are required to calculate the value of a bond?
-remaining life of bond -coupon rate -market yield
R
disconut rate
the constant-growth model infers that:
dividends change at a constant rate
what is the current yield on a $1000 par value bond that sells for $900 if the coupon rate is 10%?
11.11%
if the rate of inflation is 3% and the real rate of return is 9%, the nominal rate is approximately ___ percent
12%
in terms of time to maturity, US Treasury notes and bonds have initial maturities ranging from __ to __ yrs
2-30
structured note
based on financial securities commodities or currencies
a person who brings buyers and sellers together is called:
broker
convertible bond
can be exchanged for shares of stock
if a given set of cash flows is expressed in nominal terms and discounted at a 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
mota motors has 8 directors on its board, two of whom go up for election each year. this is an example of a:
staggered board
when valuing a stock, the advantage to considering the stock price in the distant future (rather than a more near-term price) as a cash flow is that:
when discounted to present value, a stock price in the distant future is nearly zero
the value of a firm is the function of its ___ rate and its ___ rate
growth;discount