CFIN EXAM 2 TEST BANK QUESTIONS WITH CORRECT DETAILED ANSWERS GRADED A+
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CFIN
CFIN EXAM 2 TEST BANK QUESTIONS WITH CORRECT DETAILED ANSWERS GRADED A+
The constant growth model used for evaluating the price of a share of common stock can also be used to find the price of perpetual preferred stock or any other perpetuity. T/F - Answer-T
Other things held constant, P/E rati...
CFIN EXAM 2 TEST BANK QUESTIONS
WITH CORRECT DETAILED ANSWERS
GRADED A+
The constant growth model used for evaluating the price of a share of common stock
can also be used to find the price of perpetual preferred stock or any other perpetuity.
T/F - Answer-T
Other things held constant, P/E ratios are higher for firms with "high growth" prospects.
At the same time, P/E are lower for riskier firms, other things held constant. These two
factors, growth prospects and riskiness, may either be offsetting or reinforcing as P/E
determinats. - Answer-T
The net income that firm earns can either be paid out to shareholders as ______ or can
be reinvested in the company as _____ - Answer-Dividends; retained earnings
What is the account that shows the difference the stock "par value" and what new
stockholders paid when they bought newly issued shares? - Answer-Additional paid in
capital
Shareholders exert control of the management of the firm by - Answer-electing board
members who can replace management
Stock owned by the organizers of
the firm who have sole voting
rights are: - Answer-founders' shares
A corporation that is owned by a few individuals who are typically associated with the
firm's management is a ____ corporation. - Answer-Closely held
Certificates representing ownership in stocks of foreign companies, which are held in a
trust bank located in the country the stock is traded are called: - Answer-American
Depository Receipts (ADR)
Assuming "g" will remain constant, the dividend yield is a good measure of the required
return on a common stock under which of the following circumstances? - Answer-g = 0
If the expected rate of return on a stock exceeds the required rate, - Answer-The stock
is a good buy
, Which of the following statements is correct? - Answer-The constant growth DCF model
can be used to value a stock only if the stock's dividends are expected to grow forever
at a constant rate which is less than the required rate of return on the stock.
Alpha's preferred stock currently has a market price equal to $80 per share. If the
dividend paid on this stock is $6 per share, what is the required rate of return investors
are demanding from Alpha's preferred stock? - Answer-7.5%
A share of perpetual preferred stock pays an annual dividend of $6 per share. If
investors require a 12 percent rate of return, what should be the price of this preferred
stock? - Answer-$50.00
A share of preferred stock pays a quarterly dividend of $2.50. If the price of this
preferred stock is currently $50, what is the simple annual rate of return? - Answer-20%
preffered stock - Answer-Preferred stock typically has limited or no voting rights, but its
holders are paid dividends or receive repayment priority in the event the corporation is
liquidated
the last dividend on the spirex corporation's common stock was $4.00, and the expected
growth rate (g) is 10 %. if you require of return of 20%, what is the highest price you
should be willing to pay for this stock? - Answer-$44.00
A share of common stock has a current price of $82.50, and is expected at a constant
rate (g) of 10 %. If you requires a 14 % rate of return, what is the current dividend on
this stock? - Answer-$3.00
A 'call provision' gives bondholders the right to demand or call for, repayment of a bond.
Typically, calls are exercised if interest rise, because when rates rise the bondholder
can get the principal amount back and reinvest it elsewhere at high rates. - Answer-F
Regardless of the size of the coupon payment, the price of a bond moves in the
opposite direction from interest rate movements, for example, if interest rates rise bond
prices fall. - Answer-T
A bond's value will increase as interest rates rise over time. - Answer-F
You have just noticed in the financial pages of the local newspaper that you can buy a
bond ($1000 par) for $800. If the coupon rate is 10%, with annual interest payments,
and there are 10 years to maturity. Should you make the purchase if your required
return on investments of this type os 12%? - Answer-Yes
A bond with a $100 annual interest payments and $1000 face value with 5 years to
maturity would sell for a premium if interest rates were below 9% and would sell for a
discount if interested rates were greater than 11%. - Answer-T
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