02 Jan The most common valuation

Question 1. Question :

Consider a zero-coupon bond with a $1,000 face value and 10 years left until maturity. If the bond is currently trading for $459, then the yield to maturity on this bond is closest to __________.

7.5%

10.4%

9.7%

8.1%

Question 2. Question :

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?

$60

$40

$120

$80

Question 3. Question :

Which of the following statements is false?

Bond prices converge to the bond’s face value due to the time effect, but simultaneously move up and down due to unpredictable changes in bond yields.

As interest rates and bond yields fall, bond prices will rise.

Bonds with higher coupon rates are more sensitive to interest rate changes.

Shorter maturity zero coupon bonds are less sensitive to changes in interest rates than are longer-term zero coupon bonds.

Instructor Explanation: CH8.2

Points Received: 10 of 10

Comments:

Question 4. Question :

Which of the following statements is false?

Investors pay less for bonds with credit risk than they would for an otherwise identical default-free bond.

The yield to maturity of a defaultable bond is equal to the expected return of investing in the bond.

The risk of default, which is known as the credit risk of the bond, means that the bond’s cash flows are not known with certainty.

For corporate bonds, the issuer may default; that is, it might not pay back the full amount promised in the bond certificate.

Question 5. Question :

Which of the following statements is false?

A common approximation is to assume that in the long run, dividends will grow at a constant rate.

The dividend each year is the firm’s earnings per share (EPS) multiplied by its dividend payout rate.

There is a tremendous amount of uncertainty associated with any forecast of a firm’s future dividends.

During periods of high growth, it is not unusual for firms to pay out 100% of their earnings to shareholders in the form of dividends.

Question 6. Question :

Von Bora Corporation (VBC) is expected to pay a $2.00 dividend at the end of this year. If you expect VBC’s dividend to grow by 5% per year forever and VBC’s equity cost of capital is 13%, then the value of a share of VBS stock is closest to __________.

$25.00

$40.00

$15.40

$11.10

Question 7. Question :

When discounting dividends you should use:

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 8. Question :

Which of the following statements is false?

The total payout model allows us to ignore the firm’s choice between dividends and share repurchases.

By repurchasing shares, the firm increases its share count, which decreases its earning and dividends on a per-share basis.

The total payout model discounts the total payouts that the firm makes to shareholders, which is the total amount spent on both dividends and share repurchases.

In the dividend discount model we implicitly assume that any cash paid out to the shareholders takes the form of a dividend.

Question 9. Question :

Which of the following statements is false?

The fact that a firm has an exceptional management team, has developed an efficient manufacturing process, or has just secured a patient on a new technology is ignored when we apply a valuation multiple.

Valuation multiples have the advantage that they allow us to incorporate specific information about the firm’s cost of capital or future growth.

For firms with substantial tangible assets, the ratio of price to book value of equity per share is sometimes used.

Using multiples will not help us determine if an entire industry is overvalued.

Question 10. Question :

Which of the following statements is false?

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.