It Is Defined As The Process That Links Risk and R

It is defined as the process that links risk and return to estimate the worth of an asset or a
firm.
Answer: Valuation
estion 2 4 / 4 poin
What type of value refers to the amount that can be realized when an asset, or a group of
assets representing a part or even the whole of a firm, is sold separately from the operating
organization to which it belongs?
Liquidation value
estion 3 4 / 4 poin
As opposed to market value, book value refers to current values rather than future amounts.
False
estion 4 20 / 20 poin
Match the types of value with their correct description.
This refers to the amount of money that a firm would realize by selling

__2__ its assets and paying off its liabilities.
This estimates the value of a firm by looking at the statement of financial 1. Going-concern value
__5__ position/balance sheet.
2. Liquidation value
This value is a measure of the theoretical value of an asset as estimated
__3__ 3. Intrinsic value
using various scientific methods.
4. Market value
This is the price that the owner can receive from selling an asset in the
__4__ 5. Book value
market place.
This type of value depends on the firm’s ability to generate future cash
__1__ flows rather than on its balance sheet assets.
estion 5 4 / 4 poin
Marcus, a financial analyst, determines the share price of Jollibee Foods Corporation by
referring to the daily stock quotation report issued by the Philippine Stock Exchange. The
share price is an example of what type of value?
Answer
Market value
:
Question 6 0
4 / 4 points
If the intrinsic value of an asset exceeds its market value (price), investors will not consider
buying the asset since the asset becomes overvalued.
False
estion 9 4 / 4 poin
The following discusses the importance of understanding the valuation of financial securities,
except:
Identifying whether a security is overvalued or undervalued may not really matter for analysts and investors since other factors may
come into play whether to purchase or sell a security.
Match the explanation of why a thorough understanding of valuation is important to its

related sectors.
An understanding of valuation would help them estimate whether to buy

__1__ a specific security or sell it (if they already own it)
Decisions made by top management may affect a company's cash flow
and risk appetite, which would also have an effect on the valuation of its
__4__ 1. Investors
securities. Hence, these decision makers should understand the
relationship between management decisions and valuation of securities. 2. Analysts
A keen knowledge of valuation is significant to them since it is their job 3. Financial Managers
__3__ to give a reliable estimate of the price that their client firms are likely to 4. Corporate Managers
receive when issuing bonds or common/preferred stocks.
Pointing out whether a security is undervalued or overvalued would help
__2__ them earn greater financial rewards. Thus, they need to know the
fundamental concepts in valuation.
Question 12 0
0 / 10 points
The following are advantages of using the discounted cash flow (DCF) valuation, except:
DCF valuation requires far more explicit inputs and information than other valuation approaches.
estion 2 5 / 5 poin
The use of valuation models in investment decisions (i.e., in decisions on which assets are
undervalued and which are overvalued) are based upon a perception that markets are
inefficient and make mistakes in assessing value
True
Match the standard approaches to valuation with their descriptions
This approach serves as a way to estimate the intrinsic value of a

__2__
security
This valuation technique is appropriate to consider when a good set of
__1__ comparable entities is available and when serious undervaluation or
1. Relative valuation
overvaluation does not prevail in the market
2. Discounted cash flow valuation
The estimated value of a financial security is the present value of the
__2__
security’s expected future cash flows.
The value of a financial security is computed relative to how the market
__1__
prices of similar securities
estion 4 5 / 5 poin
This approach to valuation tends to work best for investors who have relatively short time
horizons, are judged based upon a relative benchmark (the market, other portfolio managers
following the same investment style etc.), and can take actions that can take advantage of the
relative mispricing
Answer: Relative valuation

estion 8 5 / 5 poin
When valuing an asset at any point in time, we make forecasts for the future. Since none of
us possess crystal balls, we have to make our best estimates, given the information that we
have at the time of the valuation.
True
estion 9 0 / 5 poin
The following statements are incorrect in relation to limitations in the valuation process,
except:
The bias in valuation starts with the companies we choose to value since we already begin with a perception about the company that
we are about to value.
The annual report and other financial statements include not only the accounting numbers but also management discussions of
performance. These do not contribute to bias since these are prepared using accounting standards.
Even if our information sources are impeccable, we have to convert raw information into inputs and use these inputs in models. Any
mistakes or misassessments that we make at either stage of this process will cause firm-specific uncertainty.
The performance of the economy as a whole does not contribute to the uncertainty in valuing assets or firms.
Match the different uncertainties in the valuation process with their descriptions:
The firm may do much better or much worse than we expected it to

__2__ perform, and the resulting earnings and cash flows will be very different
from our estimates.
1. Estimation Uncertainty
Even if a firm evolves exactly the way we expected it to, the
__3__ 2. Firm-specific Uncertainty
macroeconomic environment can change in unpredictable ways
3. Macroeconomic Uncertainty
Analysts need to convert raw information into inputs and use these
__1__ inputs in scientific models. There may be mistakes in the gathering of
information and/or assessing the results of the models.
Match the description with the type of common stock.
Stocks that have sole voting rights on certain company decisions but 1. Classified stocks
__3__
whose dividends are restricted for a certain period. 2. Golden Share
__1__ Stocks with special designation for specific company needs. 3. Founder's shares
__2__ Stock that can outvote all other stocks 4. VIP shares
estion 3 3 / 3 poin
Projected free cash flows should be discounted at the firm's weighted average cost of capital,
not required return on equity, to find the value of its operations.
True
estion 4 3 / 3 poin
Which of the following statements does not correctly describe the retention ratio?
It is the ratio of earnings paid as dividends to common stockholders
estion 5 0 / 3 poin
Under the discounted cash flow valuation model, the value assigned to a share of stock does
not depend on the length of time the investor plans to hold the stock.
True
False
estion 6 3 / 3 poin
Two constant growth stocks are in equilibrium, have the same price, and have the same
required rate of return. Which of the following statements is CORRECT?
If one stock has a higher dividend yield, it must also have a lower dividend growth rate.
estion 7 0 / 6 poin
estion 8 5 / 5 poin
A company adopted a policy of increasing the annual dividend on their common stock at a
constant rate of 3.75 percent annually. The firm has paid annual dividend of $1.10 today.
Predict the amount of annual dividends 5 years from now.
$1.32
estion 9 0 / 5 poin
Bright Future Insurance Corp.’s stock that has recently paid a dividend of $4.50 currently
sells at $50. The growth rate is expected to be constant at 3.5%. What is the stock’s expected
dividend yield for the coming year?
8.84%
9.32%
9.78%
10.26%
10.78%
If D1 = $1.50, g (which is constant) = 6.5%, and P0 = $56, what is the stock's expected
capital gains yield for the coming year?
6.50%
The common stock of Rise N' Shine Company sells for $38.25 a share. The stock is expected
to pay a dividend of $1.90 per share tomorrow when the annual dividend is distributed. BJ's
has established a pattern of increasing their dividends by 2.5 percent annually and expects to
continue doing so. What is the required rate of return on this stock?
4.41 percent
4.97 percent
7.47 percent
7.59 percent
7.38 percent
Blue Skies Airlines is expected to pay a dividend of $2.50 per share at the end of the year.
The dividend is expected to grow at a constant rate of 6.00% annually. The company's beta
is 1.15, the return on the market is 9.50%, and the risk-free rate is 4.00%. What is the
company's current stock price?
$57.80
$59.24
$60.72
$62.24
$63.80
Make It Big Company just paid a $4.40 annual dividend. The Company’s dividend growth rate
is 4 percent per annum. You would like to purchase 100 shares of stock in this firm but
realize that you will not have the funds to do so for another two years. If the required rate of
return is 14 percent, how much will you be willing to pay for the 100 shares by the time you
will be able to afford to make this investment?
$4,949
Assume that a company’s D0 was $1.25. Its dividends grows at a supernormal rate of 15% for
3 years, after which dividends are expected to stabilize, growing at a constant rate of 6%
forever. If the company's required return (rs) is 11%, what is its current stock price?
$34.50
$30.57
$31.52
$33.50
$32.49
Just Keep Swimmin’ Fish Co.'s most recent dividend was $3.10. The dividend growth rate is
expected to be 4% for the first 2 years and afterwards, becomes constant at 6%. The firm's
required return is 10.0%. What is the best estimate of the current stock price?
$95.43
$94.56
$72.46
$79.13
$88.85
Blooming Pot pays no dividend at the present time. The company plans to start paying an
annual dividend in the amount of $0.20 a share for three years commencing three years from
today. After that time, the company plans on paying a constant $1 a share dividend
indefinitely. How much are you willing to pay to buy a share of this stock if your required
return is 15 percent?
$3.66
A company has an expected dividend next year of $1.50 per share, a zero growth rate of
dividends, and a required return of 10 percent. The value of a share of the firm’s common
stock is _________.
$15
A stock is expected to pay a dividend of $5.00 at the end of the year. The dividend is
expected to decrease at a rate of 2.5% a year forever. If the company is in equilibrium and its
expected and required rate of return is 8%, which of the following statements is true?
The company’s current stock price is $90.91.

The company’s dividend yield 5 years from now is expected to be 5.5%.
The constant growth model cannot be used because the growth rate is negative.
The company’s expected capital gains yield is 2.5%.
The company’s expected stock price at the beginning of next year is $46.43.
Based on the corporate valuation model, the value of a company’s operations is $1,200
million. The company’s balance sheet shows $80 million in accounts receivable, $60 million
in inventory, and $100 million in short-term investments that are unrelated to operations.
The balance sheet also shows $90 million in accounts payable, $120 million in notes payable,
$300 million in long-term debt, $50 million in preferred stock, $180 million in retained
earnings, and $800 million in total common equity. If the company has 30 million shares of
stock outstanding, what is the best estimate of the stock’s price per share?
$27.67
The current price of Corporation stock is $45.50 per share. Earnings next year should be
$2.5 per share and it should pay a $1.25 dividend. The P/E multiple is 13 times on average.
What price would you expect for DEF’s stock in the future?
$32.50
Consider the free cash flow approach to stock valuation. Eureka Solutions Company is
expected to have before-tax cash flow from operations of $500,000 in the coming year. The
firm's corporate tax rate is 30%. It is expected that $200,000 of operating cash flow will be
invested in new fixed assets. Depreciation for the year will be $100,000. After the coming
year, cash flows are expected to grow at 6% per year. The appropriate market capitalization
rate for unleveraged cash flow is 15% per year. The firm has no outstanding debt.
The projected free cash flow of Eureka Solutions Company for the coming year is ______
$180,000
Match the descriptions with the corresponding types of bonds.
A bond that pays a fixed

__1__ coupon interest rate.
A bond that does not pay any
coupon interest but sells at a 1. Fixed rate bond
__2__ discount or below par to 2. Zero coupon rate
compensate the investor. 3. Floating rate bond
A bond that pays variable
__3__ interest rates based on a
benchmark such as T-bills.
Question 2 3 / 3 points
1. The price of a fixed rate bond is relatively stable compared to that of a floating rate bond.
2. A zero coupon bonds is sold at a discount. The difference between the discounted price and the par value represents the return to the investor.
Only the first statement is false.
If interest rates are constant, the price of a bond issued at par will remain the same throughout the term of the bond.
True
1. The price of a bond issued at a premium decreases if the yield to maturity rate remains the same throughout the term of the bond.
2. The price of a bond issued at a discount increases if the yield to maturity rate remains the same throughout the term of the bond.

Only the second statement is false.
Both statements are true.
Both statements are false.

This question has not been graded.
The correct answer is not displayed for Written Response type questions.
1. The price of a bond issued at a premium decreases if the yield to maturity rate remains the same throughout the term of the bond.
2. The price of a bond issued at a discount increases if the yield to maturity rate remains the same throughout the term of the bond.


What is the current price of a $1,000 par value bond maturing in 12 years with a coupon rate of 14 percent, paid semiannually, that has
a YTM of 13 percent?
$1,060
A 3-year, $1,000 par value bond with an 8% annual coupon was issued at par a year ago. Today, the market interest rate on this bond is
11%. Which of the following statements is true?
The price of the bond has increased to $1,053.50.

The price of the bond has increased by $110.
The price of the bond has decreased to $948.62.

The price of the bond has decreased by $73.31.
A 25-year, $1,000 par value bond has an 8.5% annual coupon. The bond currently sells for $875. If the yield to maturity remains at its
current rate, what will the price be 5 years from now?
$882.90
What is the yield to maturity, to the nearest percent, for the following bond: current price is $908, coupon rate is 11 percent, $1,000 par
value, interest paid annually, eight years to maturity?
13 percent
13 percent
What is the approximate yield to maturity for a $1,000 par value bond selling for $1,120 that matures in 6 years and pays 12 percent
interest annually?
9.4 percent
A company issued bonds bearing a coupon rate of 12 percent, pay coupons semiannually, have 3 years remaining to maturity, and are
currently priced at $940 per bond. What is the yield to maturity?
14.54%
If a bond sells at par, its current yield equals its yield to maturity.
True
A 4-year, P1,000 par value bond with a 6% annual coupon interest rate was selling for P1,050 a year ago. Today, the same bond sells
for P1,020 . How much is the total return? Which of the following statements is false?
The current yield is 5.71%

The capital gains yield is -2.86%
The total return is 2.86%
The yield to maturity is 4.60%
An issuer will call a bond when interest rates decrease.
True
A company has a bond outstanding with 2 years to maturity, a 8% coupon paid quarterly, and a $1,000 par value. The bond has a 6%
nominal yield to maturity, but it can be called in 1 year at a price of $1,040. What is the bond's nominal yield to call?
7.95%
A company's bonds currently sell for $1,250. They pay a $120 annual coupon, have a 15-year maturity, and a $1,000 par value, but
they can be called in 5 years at $1,050. Assume that no costs other than the call premium would be incurred to call and refund the
bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. What is the
difference between this bond's YTM and its YTC? (Choose the nearest answer.)
2.11%
Calculate the effective annual rate for an interest rate of 10 percent with calculations done on a monthly basis:
10.47 percent
Which investment option is better?
Option A: 5% compounded monthly

Option B: 5.025% compounded semi-annually
Option A because it has a lower EAR.
Option A because it has a higher EAR.

Option B because it has a lower EAR.
Option B because it has a higher EAR.
Match the descriptions with the corresponding risks.
The risk that future cash flow

__2__ will be invested at lower
interest rates.
The risk that an issuer will not 1. Interest rate risk
__3__ be able to make all promised 2. Reinvestment rate risk
payments. 3. Default risk
The risk that bond prices will
__1__ decrease due to increase in
interest rates.
1. Long-term bonds have low reinvestment rate risk and high interest rate risk.
2. High-coupon bonds have low reinvestment risk and high interest rate risk.


1. Investment grade rating will allow a bond issuer to raise capital cheaply.
2. Junk bond rating will require a higher return for investors.
The Cheeky Cherub Inc. has just paid a dividend of $2.00 per common stock. The long-run growth is expected to be 5.4%. If
investors' required rate of return is 11.4%, what is the stock price?
$35.13
Question 2 1 / 1 point
Daydream Co. stock currently sells for $25 and is expected to pay a dividend of $1 in the coming year. If the expected growth rate
is constant at 6%, what is the stock's expected capital gains yield a year from today?
6.00%
Beauty Within Co.'s expected year-end dividend is $3.20, its required return is 11.00%, its dividend yield is 6.00%, and its growth
rate is expected to be constant in the future. What is LOL's expected stock price in 7 years?
$75.04
Clear Skies Inc. just paid a dividend of $2.64. Analysts expect the company's dividend to grow by 20% this year, by 10% in Year
2, and at a constant rate of 5% in Year 3 and thereafter. The required rate of return on this stock is 8.00%. What is the best
estimate of the stock's current market value?
$110.49
Waterfall Inc.'s last dividend was $1.75. Its dividend growth rate is expected to be constant at 25% for 3 years, after which
dividends are expected to grow at a rate of 6% forever. Its required return is 12%. What is the best estimate of the current stock
price?
$65.31
$66.95
$49.50
$60.38
$44.94
The current price of Gray Corporation stock is $45.50 per share. Earnings next year should be $2.5 per share and it should pay a
$1.25 dividend. The P/E multiple is 13 times on average. What price would you expect for DEF's stock in the future?
$32.50
Based on the corporate valuation model, Humble Bee Honey Co.'s total corporate value is $2,400 million. The company's balance
sheet shows $240 million of notes payable, $600 million of long-term debt, $100 million of preferred stock, $360 million of retained
earnings, and $1,600 million of total common equity. If the company has 30 million shares of stock outstanding, what is the best
estimate of its price per share?
$48.67
A 10% preferred stock with a market price of $110 per share and a $100 par value pays a cash dividend of _________.
$10.00
Illusion Co.'s stock is currently selling for $150.00 per share and the firm's dividends are expected to grow at 5 percent
indefinitely. In addition, Illusion Co.'s most recent dividend was $5.50. If the expected risk free rate of return is 3 percent, the
expected market return is 8 percent, and Tangshan has a beta of 1.2, Tangshan's stock would be _________.
overvalued
Illa Illa Co. has an issue of preferred stock outstanding that has a fixed annual dividend of $2. The required return on the preferred stock has
been estimated to be 8 percent. The value of the preferred stock is _________.
$25
$4
$16
$8
Stay Corp.'s common stock is expected to pay a dividend of $5.00 forever and currently sells for $42. What is the required rate of return?
11.90%
Flow Away, Inc. expects to generate free-cash flows of $300,000 per year for the next five years. Beyond that time, free cash flows are
expected to grow at a constant rate of 8 percent per year forever. Flow Away's average cost of capital is 14 percent, the market value of the
firm's debt is $115,000, and LBC has a 250,000 shares of stock outstanding, what is the value of Flow Away's stock?
$15.34
$14.88
$14.05
$13.50
Numb, Inc.'s common stock currently pays no dividends. The company plans to begin paying dividends beginning 4 years from today. The first
dividend will be $6.00 and dividends will grow at 4 percent per year thereafter. Given a required return of 13 percent, what would you pay for
the stock today?
$40.89
$46.20
$46.68
$42.52
If D1 = $3.75, g (which is constant) = 5.5%, and P0 = $132, what is the stock's expected total return for the coming year?
8.34%
Rebirth, Inc. is presently enjoying relatively high growth because of a surge in the demand for its new product. Management expects earnings
and dividends to grow at a rate of 25% for the next 4 years, after which competition will probably reduce the growth rate in earnings and
dividends to zero, i.e., g = 0. The company's last dividend, D0, was $1.25, its beta is 1.20, the market risk premium is 5.50%, and the risk-free
rate is 3.00%. What is the current price of the common stock?
$29.05
Lilac Inc. forecasts a free cash flow of $35 million in Year 3, i.e., at t = 3, and it expects FCF to grow at a constant rate of 5.5% thereafter.
Assuming the pre-tax WACC is 14%, the post-tax WACC is 10.0% and the cost of equity is 15.0%, what is the horizon, or continuing, value in
millions at t = 3?
$997
$862
$821
$950
$905
My Sea Company is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 25 percent a year
for the next three years and then decreasing the growth rate to 6 percent per year. The company just paid its annual dividend in the amount
of $0.80 per share. What is the current value of one share of this stock if the required rate of return is 17 percent?
$15.06
$12.94
$11.17
$14.27
$12.14
A stock market analyst is evaluating the common stock of Celebrity Co. She estimates that the company's operating income (EBIT) for the
next year will be $800 million. Furthermore, she predicts that Celebrity Co. will require $255 million in gross capital expenditures (gross
expenditures represent capital expenditures before deducting depreciation) next year. In addition, next year's depreciation expense will be
$75 million, and no changes in net operating working capital are expected. Free cash flow is expected to grow at a constant annual rate of 6
percent a year. The company's WACC is 9 percent, its cost of equity is 14 percent, and its before-tax cost of debt is 7 percent. The company
has $900 million of debt, $500 million of preferred stock, and has 200 million outstanding shares of common stock. The firm's tax rate is 40
percent. Using the free cash flow valuation method, what is the predicted price of the stock today?
$11.75
$43.00
$55.50
$108.83
$96.33
An analyst has collected the following information about Flu Inc.:
 Projected EBIT for the next year $300 million.

 Projected depreciation expense for the next year $50 million.
 Projected capital expenditures for the next year $100 million.
 Projected increase in operating working capital next year $60 million.
 Tax rate 40%.
 WACC 10%.
 Cost of equity 13%.
 Market value of debt and preferred stock today $500 million.
 Number of shares outstanding today 20 million.
The company's free cash flow is expected to grow at a constant rate of 6 percent a year. The analyst uses the corporate value model
approach to estimate the stock's intrinsic value. What is the stock's intrinsic value today?
$87.50
$62.50
$110.71
$25.00
$212.50
The current price of stock is $24 per share. Earnings next year should be $3 per share and it should pay a $2 dividend. The P/E multiple is 6
times on average. What price would you expect for DEF's stock in the future?
$18
The current price of Empty Cup Co. stock is $26.50 per share. Earnings next year should be $2 per share and it should pay a $1 dividend. The
P/E multiple is 15 times on average. What price would you expect for Empty Cup's stock in the future?
$30.00
Which of the following statements is CORRECT?
The stock valuation model, V0 = D1/(rs − g), assumes that the required rate of return is
constant.
The dividend yield on a constant growth stock must equal its expected total return minus
its expected capital gains yield.
The stock valuation model, V0 = D1/(rs − g), can be used only for firms whose growth rates
exceed their required return.
The stock valuation model, V0 = D1/(rs − g), cannot be used for firms that have negative
growth rates.
A stock's dividend yield can never exceed its expected growth rate.
The common stock of a company pays a constant dividend of $1.50 per year. It has been that way for 10 years and is expected to remain so
in the foreseeable future. By this information, the intrinsic value of the stock will
increase over time.
decrease over time.

also remain constant.
increase when the market rate of return/cost of equity increases.
decrease when the market rate of return/cost of equity increases.

The underlying assumption of the discounted dividend model is that a stock is worth:
the present value of the future cash flows which it generates.
If a stock's dividend is expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? Assume that the
stock is in equilibrium.
The stock's price one year from now is expected to be 5% above the current price.
An increase in which of the following will increase the current value of a stock according to the dividend growth model?
I. dividend amount
II. number of future dividends, provided the current number is less than infinite
III. discount rate
IV. dividend growth rate
I, II, and IV only
Coin Co. has a dividend-paying stock with a total return for the year of -6.5 percent. Which one of the following must be true?
The stock has a negative capital gains yield.

Far Eastern University and STI College have the same price and are in equilibrium, but Far Eastern University has the higher required rate of
return. Which of the following statements is not false?
If Far Eastern University has a lower dividend yield than STI College, its expected capital
gains yield must be higher than STI College's.
The required returns of Stocks X and Y are rx = 10% and ry = 12%. Which of the following statements is correct?
If the market is in equilibrium, and if Stock Y has the lower expected dividend yield, then it
must have the higher expected growth rate.
Which of the following statements is correct?
The constant growth model takes into consideration the capital gains investors expect to
earn on a stock.
Two firms with the same expected dividend and growth rate must also have the same stock
price.
It is appropriate to use the constant growth model to estimate a stock's value even if its
growth rate is never expected to become constant.
The price of a stock is the present value of all expected future dividends, discounted at the
dividend growth rate.
If a stock has a required rate of return rs = 12%, and if its dividend yield is expected to grow
at a constant rate of 5%, this implies that the stock's dividend yield is also 5%.
When the required return is constant but different from the coupon rate, the price of a bond as it approaches its maturity date will
remain constant.
decrease.
approach par.
increase.
Connor Co. has a bond outstanding with 15 years to maturity, an 8.75% coupon paid semiannually, and a $1,000 par value. The bond has a
6.50% nominal yield to maturity, but it can be called in 6 years at a price of $1,050. What is the bond's nominal yield to call?
5.27%
The XYZ Co. has two bonds outstanding that are the same except for the maturity date. Bond A matures in 8 years, while Bond B matures in
12 years. If the required return changes by 10%
Bond B will have a greater change in price.

Which financing option is cheaper for the issuing company?
Option X: 3% compounded semi-annually
Option Z: 2.98% compounded continuously
Option X because it has a higher EAR
Option X because it has a lower EAR.
Option Z because it has a higher EAR.

Option Z because it has a lower EAR.
A bond has a coupon interest rate of 8%, paid quarterly. What is the effective annual rate of interest?
8.24%
Which of the following statements is true?
The most likely explanation for an inverted yield curve is that investors expect inflation to
increase.
Inverted yield curves can exist for Treasury bonds, but because of default premiums, the
corporate yield curve can never be inverted.
The most likely explanation for an inverted yield curve is that investors expect inflation to
decrease.
If the yield curve is inverted, short-term bonds have lower yields than long-term bonds.
The higher the maturity risk premium, the higher the probability that the yield curve will be
inverted.
Norm Co.'s bonds have a 10-year maturity, a 6.25% semiannual coupon, and a par value of $1,000. The going interest rate (rd) is 4.75%,
based on semiannual compounding. What is the bond's price?
1,118.31
Statement 1: A 10-year coupon bond would have more reinvestment rate risk than a 5-year coupon bond, but all 10-year coupon bonds have
the same amount of reinvestment rate risk.
Statement 2: The short the amount of time until a bond's maturity, the more responsive is its market value to a given change in the required
return.
Which of the following statements is true?
A bond is likely to be called if it sells at a discount below par.
A bond is likely to be called if its market price is equal to its par value.
A bond is likely to be called if its coupon rate is below its YTM.
Even if a bond's YTC exceeds its YTM, an investor with an investment horizon longer than
the bond's maturity would be worse off if the bond were called.
A bond is likely to be called if its market price is below its par value.
Natsuki Co. recently issued noncallable bonds that mature in 10 years. They have a par value of $1,000 and an annual coupon of 5.5%. If the
current market interest rate is 7.0%, at what price should the bonds sell?
$850.47
$872.28
$917.01
$829.21
$894.65
A bond with a face value of $1,000 matures in 12 years and has a 9 percent semiannual coupon. (that is, bond pays a $45 coupon every six
months.) The bond has a nominal yield to maturity of 7.5%, and it can be called in 4 years at a call price of $1,045. What is the bond's
nominal yield to call?
6.61%
5.68%
9.98%
3.31%
11.36%
What is the current price of a $1,000 par value bond maturing in 5 years with a coupon rate of
10 percent, paid quarterly, that has a YTM of 12 percent?
$927.90
$925.61
$977.10
$657.55
Statement 1: The value of a bond with semiannual interest is greater than a bond with annual interest, everything else the same.
Statement 2: The length of the maturity on a bond offering affects its cost. In general, the longer the maturity, the higher the cost.
Only Statement 1 is true.
Garnt Co.'s bonds currently sell for $1,280 and have a par value of $1,000. They pay a $135 annual coupon and have a 15-year maturity, but
they can be called in 5 years at $1,050. What is their yield to call (YTC)?
7.45%
Joey Co.'s bonds currently sell for $1,080 and have a par value of $1,000. They pay a $100 annual coupon and have a 15-year maturity, but
they can be called in 5 years at $1,125. What is their yield to maturity (YTM)?
8.56%
9.93%
10.43%
9.46%
9.01%
Chris Co. has issued a bond which has a $1,000 par value and a 15 percent annual coupon interest rate. The bond will mature in ten years
and currently sells for $1,250. Using this information, the yield to maturity on Chris's bond is _________.
10.79%
A firm has an issue of $1,000 par value bonds with a 12% stated interest rate outstanding. The issue pays interest annually and has 10 years
remaining to its maturity date. If bonds of similar risk are currently earning 8%, the firm's bond will sell for _________ today.
$1,268.20
Statement 1: Upward-sloping yield curves result from higher future inflation expectations, lender preferences for shorter maturity loans, and
greater supply of short-term as opposed to long-term loans relative to their respective demand.
Statement 2: In a practical sense, the longer the term of a bond, the smaller the default risk associated with the bond.
A 10-year bond has an annual coupon rate of 12%. The coupon rate will remain fixed until the bond matures. The bond has a yield to
maturity of 8%. Which of the following statements is true?
If market interest rates remain unchanged, the bond's price one year from now will be
lower than it is today.
If market interest rates remain unchanged, the bond's price one year from now will be
higher than it is today.
The bond is currently selling at a price below its par value.
If market interest rates decline, the price of the bond will also decline.
The bond should currently be selling at its par value.
A 10-year, $1,000 par value bond has an 8% annual coupon. The bond currently sells for $774. If the yield to maturity remains at its current
rate, what will the price be 3 years from now?
$817.46
A 4-year, $1,000 par value bond with a 7% annual coupon was issued for P996 a year ago. Today, the market interest rate on this bonds is
5%. Which of the following statements is true?
The price of the bond has increased by $74.92
The price of the bond has increased by $23.05.

Statement 1: Low quality (low rated) bonds provide lower returns than high quality (high rated) bonds.
Statement 2: The possibility that the issuer of a bond will not pay the contractual interest or principal payments as scheduled is called default
risk.
Only Statement 1 is false.
Only Statement 2 is false.
A 5-year, P1,000 par value bond with a 4% annual coupon interest rate was selling for P1,050 a year ago. Today, the same bond sells for
P1,065 . Which of the following statements is true?
The capital gains yield is 6.5%.

The yield to maturity is 2.67%.
The total return is 5.24%.
The current yield is 3.76%.
Calculate the value of a $1,000 bond which has 10 years until maturity and pays quarterly interest at an annual coupon rate of 12%. The
required return on similar-risk bonds is 20%.
$845.66
$835.45
$2,201.08
$656.77
Ryotaro Co. has a bond issue outstanding with an annual coupon rate of 7 percent and 4 years remaining until maturity. The par value of the
bond is $1,000. Determine the current value of the bond if the present market conditions justify a 14 percent required rate of return. The
bond pays interest annually.
$536.38
$1,126.42
$796.04
$1,000.00
$791.00
Sharla Co. issued 15-year, noncallable, 7.5% annual coupon bonds at their par value of $1,000 one year ago. Today, the market interest rate
on these bonds is 5.5%. What is the current price of the bonds, given that they now have 14 years to maturity?
$1,077.01
$1,132.95
$1,104.62
$1,162.00
$1,191.79
What is the approximate yield to maturity for a $1,000 par value bond selling for $1,120 that matures in 6 years and pays 12 percent interest
annually?
9.40%
A 15-year, $1,000 par value bond has a 12% annual coupon. The bond currently sells for $1,152. If the yield to maturity remains at its
current rate, what will the price be 5 years from now?
1,122.80
607.95
1,253.33
1,152.00
A 2-year, $1,000 with a 8% coupon interest rate paid quarterly is selling for $990. What is the yield to maturity?
8.54%
12.00%
11.00%
14.00%
13.00%

It Is Defined As The Process That Links Risk and R

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It Is Defined As The Process That Links Risk and R

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It is defined as the process that links risk and return to estimate the worth of an asset or a

Match the types of value with their correct description.

This refers to the amount of money that a firm would realize by selling

Match the explanation of why a thorough understanding of valuation is important to its

An understanding of valuation would help them estimate whether to buy

Match the standard approaches to valuation with their descriptions

This approach serves as a way to estimate the intrinsic value of a

Answer: Relative valuation

The firm may do much better or much worse than we expected it to

Match the description with the type of common stock.

It is the ratio of earnings paid as dividends to common stockholders

The company’s current stock price is $90.91.

Match the descriptions with the corresponding types of bonds.

A bond that pays a fixed

Only the first statement is false.

Only the first statement is false.

Both statements are false.

Only the first statement is false.

Both statements are false.

The price of the bond has increased to $1,053.50.

The price of the bond has decreased to $948.62.

The current yield is 5.71%

Option A: 5% compounded monthly

Option A because it has a lower EAR.

Option A because it has a higher EAR.

The risk that future cash flow

Only the first statement is false.

Both statements are true.

Both statements are true.

 Projected EBIT for the next year $300 million.

Which of the following statements is CORRECT?

increase over time.

decrease over time.

increase when the market rate of return/cost of equity increases.

decrease when the market rate of return/cost of equity increases.

the present value of the future cash flows which it generates.

The stock has a negative capital gains yield.

Bond B will have a greater change in price.

Option X: 3% compounded semi-annually

Option Z: 2.98% compounded continuously

Option X because it has a higher EAR

Option X because it has a lower EAR.

Option Z because it has a higher EAR.

Both statements are false.

A bond is likely to be called if it sells at a discount below par.

A bond is likely to be called if its coupon rate is below its YTM.

10 percent, paid quarterly, that has a YTM of 12 percent?

Only Statement 1 is true.

Both statements are true.

Both statements are false.

Only Statement 2 is true.

Both statements are true.

Only Statement 2 is true.

Both statements are false.

Only Statement 1 is true.

The bond is currently selling at a price below its par value.

The bond should currently be selling at its par value.

The price of the bond has increased to $1,054.46.

The price of the bond has increased by $74.92

The price of the bond has increased by $23.05.

Only Statement 1 is false.

Both statements are false.