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5 Valuation of Bonds and Stocks Online Quiz Questions

Use this free practice quiz with 20 questions to review 5 Valuation of Bonds and Stocks, test your knowledge, and prepare for your next test or exam.

20 questions
01
True or false
1 point

True or false: Common stock, unlike a conventional bond, promises repayment of face value on a stated maturity date.

  1. A

    True

  2. B

    False

02
Fill in the blank
1 point

A conventional fixed-rate bond's value includes the present value of its coupon payments and the final repayment of its .

03
Choose one
1 point

Two investments have cash flows with the same amounts and timing, but one set of cash flows is more uncertain. Which discount-rate choice is most consistent with the valuation principles in the material?

  1. A

    Use a lower required return for the riskier cash flows.

  2. B

    Use a higher required return for the riskier cash flows.

  3. C

    Use the same required return regardless of risk.

04
Choose one
1 point

An investment is expected to pay $1,210 exactly two years from today. If the annual discount rate is 10%, what is its value today?

  1. A

    $1,000

  2. B

    $1,100

  3. C

    $1,210

  4. D

    $1,331

05
True or false
1 point

True or false: Holding the discount rate and timing constant, increasing expected future cash flows generally increases estimated present value.

  1. A

    True

  2. B

    False

06
Choose one
1 point

A conventional fixed-rate bond has a coupon rate of 5%, while comparable bonds require a 7% yield. Relative to its face value, how should this bond be priced?

  1. A

    It sells above face value.

  2. B

    It sells at face value.

  3. C

    It sells below face value.

07
Fill in the blank
1 point

In the Gordon growth model, rr represents the required .

08
Choose all
1 point

Using the Gordon growth model, select all changes that increase the estimated share value without violating the model's requirement that r>gr>g. Assume all unmentioned quantities remain constant.

  1. A

    Increase D1D_1, holding rr and gg constant.

  2. B

    Lower rr, while keeping it greater than gg.

  3. C

    Increase gg, while keeping it below rr.

  4. D

    Increase rr, holding D1D_1 and gg constant.

  5. E

    Set gg equal to or greater than rr.

09
Choose one
1 point

An analyst estimates a share's value at $50, while it currently trades for $55. Which conclusion is supported by the material?

  1. A

    The model estimate guarantees the price at which the share will trade.

  2. B

    The difference proves that the market price is incorrect.

  3. C

    The figures can differ because market expectations and valuation assumptions may differ.

10
Choose all
1 point

A bond pays coupons every six months, and its discount rate is given per six-month period. Select all choices that correctly align the cash-flow timing and discounting periods.

  1. A

    Count two discounting periods for each year of the bond's remaining term.

  2. B

    Discount each semiannual cash flow using a discount rate per half-year.

  3. C

    Treat the bond as paying one coupon per year.

  4. D

    Use an annual discount rate as though it were a per-half-year rate.

11
Written response
1 point

A company is expected to pay a $2.40 dividend per share next year. Dividends are expected to grow at 4% indefinitely, and the required return is 10%. Using the Gordon growth model, enter the estimated value in dollars per share, rounded to the nearest whole dollar.

12
Written response
1 point

A bond has a $1,000 face value, pays a 5% annual coupon, and matures in two years. Comparable bonds yield 7% annually. Calculate its price by discounting the annual coupons and face value, and enter the result in dollars rounded to the nearest cent.

13
Open ended
1 point

A company pays no dividends. Describe one cash-flow approach that could still be used to estimate its equity value, and state how the discount rate should relate to the cash flows being valued.

14
Choose one
1 point

A valuation includes cash flows received once each year. Which discount-rate period should be used so that the timing conventions match?

  1. A

    Use a monthly discount rate because the valuation includes multiple future payments.

  2. B

    Use an annual discount rate because the cash flows occur annually.

  3. C

    Use a discount rate expressed as a dollar amount per year.

  4. D

    Use a different discount-rate period for each annual cash flow.

15
Choose one
1 point

Which feature best explains why valuing common stock differs from valuing a conventional fixed-rate bond?

  1. A

    Common stock has a fixed maturity and repayment of face value.

  2. B

    Common stock promises periodic payments of a predetermined amount.

  3. C

    Common stock has no fixed maturity or promised payment, and its future cash flows are uncertain.

  4. D

    Common stock's future cash flows are known whenever a company pays dividends.

16
Choose one
1 point

An analyst raises the required return while keeping an asset's expected future cash flows unchanged. What happens to the asset's estimated present value?

  1. A

    The estimated present value falls because the future cash flows are discounted more heavily.

  2. B

    The estimated present value rises because investors require a greater return.

  3. C

    The estimated present value is unchanged because the cash flows have not changed.

  4. D

    The estimated present value rises only if the asset has a fixed maturity.

17
Choose one
1 point

An analyst wants to use the Gordon growth model for a stock with constant expected dividend growth. Which setup is appropriate?

  1. A

    Use the current market price as the dividend and require that growth exceeds the return.

  2. B

    Use the face value and coupon rate, with no restriction on the required return.

  3. C

    Use next year's dividend and require that the growth rate exceeds the required return.

  4. D

    Use next year's expected dividend per share and require that the required return exceeds the growth rate.

18
True or false
1 point

True or false: A valuation model's estimated value guarantees the price at which the asset will trade in the market.

  1. A

    True

  2. B

    False

19
Written response
1 point

A share is expected to pay dividends of $1.50\$1.50 in one year and $1.80\$1.80 in two years. You plan to sell it for $25.00\$25.00 immediately after receiving the second dividend. Using a required return of 10%10\%, what is the share's estimated value today? Round to the nearest cent; answers within $0.01\$0.01 are accepted.

20
Written response
1 point

An analyst is valuing cash flows available to a company's shareholders. Which required return should the analyst use to discount those cash flows?