Problem 1. Market-determined required rate of return is the same thing as discount rate, according to the text.
a. True
b. False
Problem 2. When the market interest rate exceeds the coupon rate, bonds sell for less than face value.
a. True
b. False
Problem 3. The yield to maturity is defined as the discount rate that makes the present value of the bond's payments equal its price.
a. True
b. False
Problem 4. Common stock usually represents a perpetuity.
a. True
b. False
Problem 5. Required rate of return = real rate of return + inflation premium + risk premium
a. True
b. False
Problem 6. Price-earnings ratio represents a multiplier applied to current earnings to determine the value of a share of stock.
a. True
b. False
Problem 7. Supernormal growth pattern is often experienced by firms in mature industries.
a. True
b. False
Problem 8. If the annual dividend of a preferred stock is $10 and the required rate of return is 10%, then the price of the preferred stock would be:
a. $10
b. $90
c. $100
d. $110
Problem 9. According to the constant growth dividend valuation model, if dividends were $2.00, required rate of return is 12%, and the dividends grow at a constant rate of 7% per year, the price of the stock would be:
a. $24
b. $40
c. $48
d. $60
Problem 10. What is the approximate price of a bond if par value is $1000, interest rate of (coupon) 9%, matures in 20 years and the present yield to maturity is 6%?
a. $910
b. $1245
c. $1344
d. $1485