TIF_ch05 - Test Bank Chapter 5: VALUING BONDS AND STOCKS...

Download Document
Showing pages : 1 - 2 of 17
This preview has blurred sections. Sign up to view the full version! View Full Document
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 0 = 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
Background image of page 1
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. d 17. Which of the following statements (if any) are false? a. If we multiply each side of the equation, P 0 = D 1 / (r – g), by (r – g) / P 0 , and then add g to this expression, we will get: r = (D 1 /P 0 ) + g. b. The income component of the equation, r = (D 1 /P 0 ) + g, is (D 1 /P 0 ) 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 0 ) + g, is g and is called the capital gains yield. It is estimated by financial sources such as the Value Line Investment Survey. d.
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

Create a FREE account now to get started. Log In

The email address you entered is not valid. The email address you provided is already in use.
Your username must be at least 5 characters. Your username must consist of only alphanumeric characters. Your username must contain at least one letter. Your username contains inappropriate language. Another user has already claimed this username.
Your password must be at least 6 characters in length.
{[ $select.selected.label ]} Please select a valid school.
By creating an account you agree to our Privacy Policy, Terms of Use, and Honor Code.
Create my FREE account Processing...
Sign Up with Facebook

We will never post anything without your permission.

Already on Course Hero? Log In