finance ch 10

Valuation of financial assets requires knowledge of future cash flows and appropriate discount rate
The market allocates capital to companies based on: risk
The relationship between a bond’s price and the yield to maturity is an inverse relationship
Which of the following does not influence the yield to maturity for a security? Yields of similar securities
The value of a common stock is based on its: future benefits to the holder
The cost of common stock is usually greater than the simple dividend yield because investors expect both a current dividend and future growth
The dividend valuation model stresses the: relationship of dividends to market prices
Stock valuation models are dependent upon expected dividends, future dividend growth, and an appropriate discount rate
The cost of capital for common stock is Ke = (D1/Po) + g. What are the assumptions of the model? Growth (g) is constant to infinity
Which is a characteristic of the cost of preferred stock? Preferred stock is valued as a perpetuity.
A higher interest rate (discount rate) would: reduce the price of preferred stock.
An increase in the riskiness of a particular security would NOT affect: the premium for expected inflation.
A common stock which pays a constant dividend can be valued as if it were: a preferred stock
In a general sense, the value of any asset is the: present value of the expected cash flows received from the asset.
A bond which has a yield to maturity greater than its coupon interest rate will sell for a price: below par
The return measure that an investor demands for giving up current use of funds, without adjusting for purchasing power changes, is the: risk premium
Preferred stock has all, except which of the following characteristics? The same binding contractual obligation as debt
The risk premium is likely to be highest for: gold mining expedition.
If the inflation premium for a bond goes up, the price of the bond: goes down
If in determining the yield to maturity on a bond at a given interest rate, you get a value below the current market price, in the next calculation you should use a lower interest rate.
The price of preferred stock may react strongly to a change in kp because: there is no maturity date
If a company’s stock price (Po) goes up, and nothing else changes, Ke (the required rate of return) should: go down
Which of the following is not a component of a bond’s required rate of return? Maturity payment
Which of the following financial assets is likely to have the highest required rate of return based on risk? common shares
The longer the time to maturity: the greater the price increase from a given decrease in yield
The dividend on preferred shares is most similar to: common shares with no growth in dividends
A “supernormal growth” firm is one in which the firm’s dividends grow at a high rate for several periods, then at a lower rate afterward.
To value the common stock of a supernormal growth firm, an analyst could forecast the length of the supernormal growth period and the dividends paid, and then find the: present value of the supernormal growth period’s dividends and add the present value of the stock price at the end of the growth period.
The value of a supernormal growth firm’s common stock is the present value of the: expected stock price at the end of the supernormal growth period
The longer the supernormal growth period for a firm’s lasts,: the higher the value of its common stock.
The method used for finding the value of a supernormal growth firm’s common stock at the end of the supernormal growth period is similar to that used to find the value of: a firm’s common stock, with a constant growth rate for its dividends
A lower interest rate (discount rate) would: increase the price of common stock.
A bond which has a yield to maturity less than its coupon interest rate will sell for a price:Multiple above par.

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