Chapter 4: The Valuation of Long-Term Securities MCQs solved

Multiple-Choice Quiz

Chapter 4:   The Valuation of Long-Term Securities

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1. What's the value to you of a $1,000 face-value bond with an 8% coupon rate when your required rate of return is 15 percent?

More than its face value.

Less than its face value.

$1,000.

True.

2. If the intrinsic value of a stock is greater than its market value, which of the following is a reasonable conclusion?

The stock has a low level of risk.

The stock offers a high dividend payout ratio.

The market is undervaluing the stock.

The market is overvaluing the stock.

3. When the market's required rate of return for a particular bond is much less than its coupon rate, the bond is selling at:

a premium.

a discount.

cannot be determined without more information.

face value.

4. If an investor may have to sell a bond prior to maturity and interest rates have risen since the bond was purchased, the investor is exposed to

the coupon effect.

interest rate risk.

a perpetuity.

an indefinite maturity.

5. Virgo Airlines will pay a $4 dividend next year on its common stock, which is currently selling at $100 per share. What is the market's required return on this investment if the dividend is expected to grow at 5% forever?

4 percent.

5 percent.

7 percent.

9 percent.         Correct!

 ke = (D1/P0) + g

 ke = ($4/$100) + .05 = .09

6. If a bond sells at a high premium, then which of the following relationships hold true? (P₀ represents the price of a bond and YTM is the bond's yield to maturity.)

P₀ < par and YTM > the coupon rate.

P₀ > par and YTM > the coupon rate.

P₀ > par and YTM < the coupon rate.

P₀ < par and YTM < the coupon rate.

7. Interest rates and bond prices

move in the same direction.

move in opposite directions.

sometimes move in the same direction, sometimes in opposite directions.

have no relationship with each other (i.e., they are independent).

8. In the formula k_e = (D₁/P₀) + g, what does g represent?

the expected price appreciation yield from a common stock.

the expected dividend yield from a common stock.

the dividend yield from a preferred stock.

the interest payment from a bond.

9. In the United States, most bonds pay interest            a year, while many European bonds pay interest            a year.

once; twice

twice; once

once; once

twice; twice

10. The expected rate of return on a bond if bought at its current market price and held to maturity.

yield to maturity

current yield

coupon yield

capital gains yield