Saint MBA570 week 4 quiz

1. The Sisyphean Company has a bond outstanding with a face value of $1,000 that reaches maturity in 15 years. The bond certificate indicates that the stated coupon rate for this bond is 8% and that the coupon payments are to be made semiannually. How much will each semiannual coupon payment be? (Points : 10) $60
$40
$120
$80

Question 2. 2. Which of the following statements is false? (Points : 10) The bond certificate typically specifies that the coupons will be paid periodically until the maturity date of the bond. The bond certificate indicates the amounts and dates of all payments to be made. The only cash payments the investor will receive from a zero coupon bond are the interest payments that are paid up until the maturity date. Usually the face value of a bond is repaid at maturity.

Question 3. 3. Which of the following statements is false? (Points : 10) If the bond trades at a discount, an investor who buys the bond will earn a return both from receiving the coupons and from receiving a face value that exceeds the price paid for the bond. Most coupon bond issuers choose a coupon rate so that the bonds will initially trade at, or very near to, par. Coupon bonds always trade for a discount. At any point in time, changes in market interest rates affect a bond's yield to maturity and its price.

Question 4. 4. A corporate bond which receives a BBB rating from Standard & Poor's is considered: (Points : 10) a junk bond. an investment grade bond. a defaulted bond. a high-yield bond.

Question 5. 5. The Sisyphean Company's common stock is currently trading for $25.00 per share. The stock is expected to pay a $2.50 dividend at the end of the year and the Sisyphean Company's equity cost of capital is 14%. If the dividend payout rate is expected to remain constant, then the expected growth rate in the Sisyphean Company's earnings is closest to __________. (Points : 10) 8% 6% 4% 2%

Question 6. 6. When discounting dividends you should use: (Points : 10) the weighted average cost of capital. the after tax weighted average cost of capital. the equity cost of capital. the before tax cost of debt.

Question 7. 7. Nielson Motors has a share price of $25 today. If Nielson Motors is expected to pay a dividend of $0.75 this year, and its stock price is expected to grow to $26.75 at the end of the year, then Nielson's dividend yield and equity cost of capital are: (Points : 10) 3.0% and 7.0% respectively. 3.0% and 10.0% respectively. 4.0% and 6.0% respectively. 4.0% and 10.0% respectively.

Question 8. 8. Defenestration industries plans to pay a $4.00 dividend this year and you expect that the firm's earnings are on track to grow at 5% per year for the foreseeable future. Defenestration's equity cost of capital is 13%. Assuming that Defenestration's dividend payout rate and expected growth rate remain constant, and Defenestration does not issue or repurchase shares, then Defenestration's stock price is closest to __________. (Points : 10) $50.00 $32.30 $22.25 $30.75

Question 9. 9. Which of the following statements is false? (Points : 10) If the profit opportunities from having private information are large, other individuals will attempt to gain the expertise and devote the resources needed to acquire it. When private information is relegated to the hands of a relatively small number of investors, these investors may be able to profit by trading on their information. When a buyer seeks to buy a stock, the willingness of other parties to sell the same stock suggests that they value the stock differently. Since stock markets aggregate the information and view of many different investors, we expect the stock price to react slowly to new publicly available information as the investors continue to trade until a consensus is reached as to the new value of the stock.

Question 10. 10. Which of the following statements is false? (Points : 10)

The most common valuation multiple is the price-earnings (P/E) ratio.
You should be willing to pay proportionally more for a stock with lower current earnings.
A firm's P/E ratio is equal to the share price divided by its earnings per share.
The intuition behind the use of the P/E ratio is that when you buy a stock, you are in sense buying the rights to the firm's future earnings and differences in the scale of firms' earnings are likely to persist.