Saint Leo MBA 570 quiz 4

$1,000
$602
$1040
$372

8.0%
3.4%
6.8%
9.2%

If a bond trades at a premium, its yield to maturity will exceed its coupon rate.
A bond that trades at a premium is said to trade above par.
When a coupon-paying bond is trading at a premium, an investor’s return from the coupons is diminished by receiving a face value less than the price paid for the bond.
Holding fixed the bond’s yield to maturity, for a bond not trading at par, the present value of the bond’s remaining cash flows changes as the time to maturity decreases.

a junk bond.
an investment grade bond.
a defaulted bond.
a high-yield bond.

We cannot use the general dividend discount model to value the stock of a firm with rapid or changing growth.
As firms mature, their growth slows to rates more typical of established companies.
The dividend discount model values the stock based on a forecast of the future dividends paid to shareholders.
The simplest forecast for the firm’s future dividends states that they will grow at a constant rate,g, forever.

2.5%
5.0%
10.0%
7.5%

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.

its capital expenditures in excess of depreciation.
its free cash flow net of increases in working capital.
its enterprise value in excess of debt owed.
the market value of equity plus debt.

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.

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.