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Test Bank Chapter 5: VALUING BONDS AND STOCKS EFS I. True or False (Definitions and Concepts) T 1. A bond is a long-term obligation for borrowed money. F 2. A bond debenture is the contract detailing the terms of a bond. (FALSE: Should be indenture instead of debenture.) T 3. A call provision gives the issuer the right to pay off the bonds prior to their maturity by paying a call price. F 4. The fair price of a bond is the future value of its promised future coupon and principal payments. (FALSE: Should be present value instead of future value.) T 5. The current yield equals the annual coupon payment divided by the closing dollar price. F 6. Because a change in the required return causes a change in a bond's fair price, owning a bond is not risky. (FALSE: Should be risky instead of not risky.) F 7. A balloon provision gives the firms an option of calling the bond before its maturity by buying the bond back. (FALSE: Should be call instead of balloon.) T 8. A zero coupon bond (or pure discount bond) is a bond that pays only a terminal value. T 9. Common stockholders are the owners of the firm. F 10. Common stock payment obligations are typically viewed like debt obligations. (FALSE: Should be preferred instead of common). T 11. Earnings can be paid out in dividends or retained by the firm to finance ongoing productive activities. F 12. A high payout ratio emphasizes income at the expense of growth since a higher rate of dividend payout indicates more retained earnings for growth. (FALSE: Should be less retained earnings instead of more retained earnings.) T 13. The expression P = D 1 / (r g) is the value of a perpetuity growing at a constant rate (g). T 14. The expected rate of return for a stock is often called a capitalization rate. T 15. A high P/E (which is often deemed good) can also result from a bad year. II. Multiple Choice (Definitions and Concepts) b 16. Common stockholders are the owners of the firm. Which of the following is true? a. Stockholders do not elect the firm's directors b. If the firm is liquidated, the stockholders share proportionately after the claimants with higher legal priority are paid. c. In terms of claims, common stockholders rank ahead of preferred stockholders but below bondholders. d. b & c d 17. Which of the following statements (if any) are false? a. If we multiply each side of the equation, P = D 1 / (r g), by (r g) / P , and then add g to this expression, we will get: r = (D 1 /P ) + g. b. The income component of the equation, r = (D 1 /P ) + g, is (D 1 /P ) and is called the dividend yield. It can be found in financial publications such as the Wall Street Journal. c. The capital gains component of the equation, r = (D 1 /P ) + g, is g and is called the capital gains yield. It is estimated by financial sources such as the Value Line Investment Survey.... View Full Document

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