Peter Trager FIN300 - Chapter 7 & 8

The price of a share of common stock is equal to the present value of all ___ future dividends.

expected

A PE ratio that is based on estimated future earnings is known as a ____ PE ratio.

forward

One requirement of the dividend growth model is:

g<R

If a bond is selling at a discount from its par value, the YTM must be _____ the coupon rate

greater than

The value of a firm is a function of its ___ rate and its ___ rate.

growth; discount

As the maturity of a bond increases, interest rate risk

increases at a decreasing rate

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

The goal of many successful organizations is a ______ rate of growth in dividends.

steady

In case of default:

subordinated debt holders must give preference to other specified creditors

Match the terms relating to stock valuation: -P1 -D1 -R -Po

-Price in one year -Dividend in one year -Discount rate -Price today

Which of the following institutions issue bonds that are traded in the bond market?

-Public corporations -State governments -The federal government

Which of the following variables are required to calculate the value of a bond?

-Remaining life of bond -Coupon rate -Market yield

Which two prices can be found in the Wall Street Journal's daily Treasury bond listing?

-The bid price -The asked price

hen the stock being valued does not currently pay dividends

the dividend growth model can still be used based on the future dividends

If the growth rate (g) is zero, the capital gains yield is ___.

zero

Which of the following are expected cash flows to investors in stocks?

-Capital gains -Dividends

Which of these are required to calculate the current value of a bond?

-Coupon rate -Time remaining to maturity -Par value -Applicable market rate

Matthews 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 class is more valuable?

Class A

When the stock being valued does not pay dividends,

the dividend growth model can still be sued based on the future dividends

A $1,000 par value bond has a coupon rate of 8 percent and pay interest semiannually. If the bond is sold 2 months before the next coupon payment, the accrued interest will be ____.

$1,000 * (0.08/2) * (4/6) = $26.67

ABC CO. issued 1 million 6% annual coupon bonds that mature in 10 years. The face value is $1000 per bond. What are the expected cash flows from one of these bonds?

$60 in interest at the end of each year for 10 years and a $1,000 repayment of principal at the end of 10 years.

How is a zero coupon bond different from a conventional bond?

-Zero coupons bonds are always issued at a discount -Zero coupon bonds make no interest payments

A benchmark PE ratio can be determined using:

-a company's own historical PEs -the PEs of similar companies

A corporate bond's yield to maturity:

-changes over time -can be greater than, equal to, or less than the bond's coupon rate

Three special case patterns of dividend pattern growth include:

-non-constant growth -zero growth -constant growth

The NYSE differs from the NASDAQ primarily because the NYSE has:

-specialists -an auction market -a physical location

If an investment appreciates by 7% while the rate of inflation is 2%, what is the nominal rate of return?

7%; the nominal rate is the observed rate- in this case the appreciation is the observed rate. It includes inflation.

A bond's YTM will exceed its current yield when the bond is selling at

A discount

The. ____ can be interpreted as the capital gains yield

Constant growth rate

What is the definition of a bond's time to maturity?

It is the number of years until the face value is due to be repaid.

What does the clean price for a bond request?

The quoted price, which excludes interest accrued since the last coupon date.

The bid-ask spread represents the

dealer's profit

Most voting in large corporations is done by proxy because:

most small shareholders do not attend the annual meeting.

Which of the following occurs in the primary market?

Newly-issued stocks are initially sold

A market is considered transparent if ______.

its prices and trading volume are easily observed

What are three important features of Treasury notes and bonds?

-Highly liquid -Default-free -Taxable

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 multi-year typical bond's coupon?

It is a fixed annuity payment

What is accrued interest?

Interest that has been earned but not yet received.

An asset's value is determined by the present value of its _____ cash flows.

future

What is the present value of the annual interest payments on a 10-year, $1,000 par value bond with coupon rate of 10 percent paid annually, if the yield on similar bonds is 9 percent?

$641.77 PV = (0.10 x $1,000) x (1-1/1.09^10)/0.09 = $641.77

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

You expect the following dividends from ABC Stock: Year 1- $3.00 Year 2- $2.00 Year 3 $1.00 You 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?

(3/1.07) + (2/1.07^2) + (1+(1.03)/(0.07-0.03))/1.07^3 = $26.39

Which of the the following is true about interest rate risk?

-All else equal, the longer the time to maturity, the greater the interest rate risk. -All else equal, the lower the coupon rate, the greater the interest rate risk.

Which of these is included in the calculation of a bond's yield to maturity?

-Current price -Coupon rate -Par value

What information do we need to determine the value of stock using the zero-growth model?

-Discount rate -Annual dividend amount

Preferred stock has a preference over common stock in the:

-Distribution of corporate assets -Payments of dividends

In the dividend discount model, the expected return for investors come from which two sources?

-Dividend Yield -Growth Rate

As a general rule, which of the following are true of debt and equity?

-Equity represents an ownership interest -The maximum reward for owning debt is fixed

Which of the following are true about a bond's face value?

-It is the principal amount repaid at maturity -It is also known as the par value

NASDAQ has which of these features?

-Multiple market maker system. -Computer network of securities dealers.

Which of the following terms apply to a bond?

-Par Value -Coupon Rate -Time to Maturity

Place the following bonds in order of security as defined in the US

1. Mortgage Bonds 2. Debentures

What is the clean price of a $1,000 par value bond with a 12 percent coupon, payable semiannually, if the bond's dirty price is $1,050 and the next semiannual coupon payment is due in 4 months?

Accrued interest for the past two months = $60 x 2/6 = $20 Clean Price = $1050 - $20 = $1030

What is a bond's current yield?

Current yield = Annual coupon payment ÷ Current Price

Which of the following is NOT a difference between debt and equity?

Equity is publicly traded while debt is not

Assume you own a bond currently valued at $989. If the market rate of interest drops, the bond's current market value will ____.

Increase

A bond's yield to maturity considers the interest earnings and the change in the bond's price while the current yield considers ______.

Interest earnings only

What is a real rate of return?

It is a rate 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.

Which one of the following is the most important source of risk from owning bonds?

Market interest rate fluctuations

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?

No minority shareholder would have enough votes to win any seat on the board.

What is the price of a stock at the end of one year (P1) if the dividend for Year 2 (D2) is $5, the price for Year 2 (P2) is $20, and the discount rate is 10%?

P1 = ($5 + 20)/1.10 = $22.73

Suppose you own a 30-year bond issued by GE and a 2-year bond issued by PG with identical coupon rates and par values. Which bond will you decrease in value more as interest rates rise?

The GE bond will lose more because it has a longer maturity.

What is the bid price?

The bid price is the price at which a dealer is willing to buy securities

Which of the following entities declares a dividend?

The board of directors

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

What is the difference between a bond's "clean price" and its "dirty price"?

The clean price excludes interest accrued since the last coupon payment, while the dirty price includes accrued interest.

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.

True or false: In general, the price that is paid for a bond will exceed its quoted price

True

True or false: it can be advantageous to have a staggered board because it provides "institutional memory."

True

True or false: the price you actually pay to purchase a bond will generally exceed the clean price.

True

A bond has a quoted price of $984.36, a face value of $1000, semi-annual coupon of $20, and a maturity of 10 years. Match its current yield and it's YTM below. YTM Current Yield 4.06% 4.19%

YTM = 4.19% Current Yield = 4.06%

If a $1,000 face value U.S Treasury bond is quoted at 99.5, then the bond can be purchased

at 99.5 percent of face value plus any accrued interest

A person who brings buyers and sellers together is called a

broker

the bid-ask spread represents the _____.

dealer's profit

All else constant, the dividend yield will increase if the stock price _____.

decreases

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.

Fundamentally, the business of the NYSE is to attract and process ____________.

order flow

Will is deciding whether or not to buy Dang Corporation stock, whose current 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 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.

In which ways is a preferred stock like a bond?

-Preferred shareholders receive a stated value if the firm liquidates, like bondholders -Preferred shareholders receive a stated dividend, similar to interest on a bond -Some preferred stock has credit ratings, like bonds. -Preferred stock sometimes has a sinking fun, giving it a set maturity like bonds.

What information is needed to compute a bond's yield-to-maturity?

-The bond's current price -Time to maturity -Coupon 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. -Common stock cash flows are not know in advance. -The rate of return required by the market is not easily observed.

Which of the following are usually included in a bond's indenture?

-The repayment arrangements -The total amount of bonds issued

Which of the following is usually a right of common shareholders?

-The right to a proportional share of dividends paid. -Voting rights.

For investors in the stock market, dividends from stocks are fixed and guaranteed, while capital gains are variable and not guaranteed

False

The relationship between bond prices and the market rate of interest is ___.

inverse; if the market rate of interest rises, bond prices will fall.

A bond's yield to maturity considers the interest earnings and the change in the bond's price while the current yield considers _____.

interest earnings only

as the maturity of a bond increases, interest rate risk _____.

increases at a decreasing rate

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

Stock price reporting has increasingly moved from traditional print media to the _______ in recent years.

Internet