Finance Quiz Chapter 10+11

The dividend on preferred stock is most similar to …a.) a common stock with a constant growth in dividendsb.) a common stock with no growth in dividendsc.) common stock with a variable growth in dividendsd.) a certificate of deposit B.) a common stock with no growth in dividends
Which is a characteristic of the price of the preferred stock?a.) because the preferred stock has no maturity, the price analysis is similar to that of debtb.) since preferred stock dividends are fixed, they are tax-deductiblec.) preferred stock is valued as a perpetuityd.) none of these options are true c.) preferred stock is valued as a perpetuity
The value of common stock is based on its..a.) value of future benefits to the holderb.) current earningsc.) past performanced.) historic dividends a.) value of future benefits to the holder
The dividend valuation model stresses the a.) importance of dividends and legal rules for maximum paymentb.) relationship of dividends to earnings per sharec.) importance of earnings per shared.) relationship of dividends to market prices d.) relationship of dividends to market prices
As a bond approaches its maturity date, its sales price approaches a.) the price of comparable bondsb.) the par valuec.) US treasury bond pricesd.) the par adjusted for yield to maturity B.) the par value
According to traditional financial theory, the cost of capital curve is U shaped over the range of debt-equity mixesT or F True
A firm that does not earn the cost of capital in the long run will not maximize shareholder wealthT or F True
Although debt financing is generally cheaper than equity financing, financial managers should not use debt financing significantly above the industry standard because it can increase the firm’s overall cost of capital T or F True
The cost of debt, preferred stock, and common equity must all be adjusted for tax implicationsT or F False
Each project should be judged against a.) the exiting interest rate at that point in timeb.) the specific means of financing used to support its implementationc.) the cost of new common stock equityd.) none of these options are true d.) none of these options are true
The market determination required rate of return is the appropriate discount rate used in valuation calculationsT or F True
In estimating the market value of the bond, the coupon rate should be used as the discount rateT or F False
The yield to maturity is always equal to the interest payment of a bondT or F False
The “risk free rate of return” is equal to the inflation premium plus the real rate of returnT or F True
In a general sense, the value of any asset is thea.) value of past dividends and price increases for the assetb.) future value of the expected earnings discounted by the asset’s cost of capitalc.) present value of the cash flows expected to be received from the assetd.) value of the dividends received from the asset c.) present value of the cash flows expected to be received from the asset
A bond that has a “yield to maturity” greater than its coupon interest rate will sell fo a pricea.) at parb.) below parc.) that is equal to the face value of the bond plus the value of all interest paymentsd.) above par b.) below par
The longer the time to maturitya.) the less the bond price decrease from a decrease in interest ratesb.) the less the bond price increases from an increase in interest ratesc.) the greater the bond price increases from an increase in interest ratesd.) the greater the bond price increase from a decrease in interest rates d.) the greater the bond price increase from a decrease in interest rates
If the yield to maturity on a bond is greater than the coupon rate, you can assumea.) risk premiums have decreasedb.) interest rates have decreasedc.) the sales price is below pard.) the sales price is above par c.) the sales price is below par
The return measure that an investor demands for giving up current use of funds, without adjusting for purchasing power changes or the real rate of return, is the a.) discount rateb.) dividend yieldc.) inflation premiumd.) risk premium d.) risk premium
Explain the difference between coupon and discount bond. Be specific: What is coupon bond?an investment bond on which interest is paid by presenting coupons, periodic interest payments (interest expense on debt is tax deductible) What is a discount bond?A discount bond is a bond that is issued for less than its par (or face) value, or a bond currently trading for less than its par value in the secondary market.Difference: one sells at par and gets par redeemed at end, discount bond didn’t pay par value, paid present value (based on coupon rate)Principle difference: The key difference between a coupon rate and discount rate is that you pay par value for coupon in the beginning and get redeemed par at the end for coupon. But for discount bond you pay the discounted present value for the bond in the beginning, but get redeemed par value in the end.
TIPS Treasury Inflation Protection Securities: -provides protection from inflation- when a TIPS matures you are paid the adjusted principal or the original principle, whichever is greater-The principal of TIPS increases with inflation and decreases with deflation

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