FIN 320 EXAM 2 - summary notes review
FIGURE 6
Which of the following claims about bonds and their conditions is untrue? A. Governments and
businesses sell bonds as securities to raise money from investors in exchange for a commitment
to make a payment in the future. B. The period of the bond is the amount of time until the
payback deadline. C. Bonds often pay their holders in two different ways. D. The coupon rate is
often stated as an effective yearly rate.
Determine which of the following Treasury security pairings will cost more, each with a $1,000
par value: a. Which is better: a zero-coupon bond with a three-year or five-year term? B. A
three-year bond with no coupon or a three-year bond with a 4% coupon? c. A two-year bond
with a 5% coupon or one with a 6% coupon?
A three-year zero-coupon bond is an example of this since the present value is greater and the
future value is obtained sooner. b. The three-year 4% coupon bond, as opposed to the
zero-coupon bond, which is a pure discount bond; the 4% coupon bond pays interest payments.
c. The two-year 6% coupon bond because, despite the same date, the coupon (interest) payments
are larger. Bonds having a high default risk typically have high yields. True
Why are U.S. Treasury securities' interest rates lower than those of comparable corporate bonds?
A. It is commonly believed that U.S. Treasury securities are risk-free. How do holders of
Zero-coupon bonds be paid on their investment? C. These bonds are bought below their face
value at a discount.
FIGURE 7
Which of the following options DOES NOT allow a company to raise its dividend? By boosting
its retention rate, B. Which of the following will NOT result in an increase in dividend payments
by a company? D. More shares may be issued. A company has two options for its earnings: it
may keep them or it can reinvest them. TRUE
What one of the following is false? A. It can be challenging to estimate dividends, especially for
the foreseeable future. B. A company can only distribute profits to investors or reinvest them. C.
High early profits growth rates are a common trait of successful fledgling companies. D. The
valuation of the company is based on the present dividend level divided by the equity cost of
capital plus the growth rate, under the constant dividend growth model.
A corporation with 10 members on its board of directors has 40% of its shares owned by you.
How much board representation is possible if the business uses cumulative voting? If the firm
uses straight voting, how much representation can you guarantee? How much board
representation is possible if the business uses cumulative voting? B. Cumulative voting enables
you to elect representatives to 44 board seats (40% of 10 seats) by casting all of your votes for 44
directors, giving you proportional representation. If the firm uses straight voting, how much
representation can you guarantee? A.With non-cumulative voting, each director is subject to a
single vote, and without a majority of the shares, it is impossible to guarantee that your
representation would prevail in any of the elections (you may lose each of the 10 elections by a
margin of 60% to 40%).
Which of the following claims about profitable and unprofitable growth is FALSE? A. If a
company cuts its dividend in order to boost investment, the stock price will rise provided that the
additional investment has a positive net present value (NPV). By keeping more of its profits,
B.A. company can accelerate its growth pace. D. A company must diversify if it wishes to raise
the share price of its stock. D. If a company keeps more of its profits, it will pay out fewer of
those profits as dividends.
Which of the following claims about the dividend-discount model is FALSE? A. The most basic
prediction for the company's future dividend growth is that it will continue to increase at a steady
pace indefinitely. B. The dividend discount model determines the stock's value by projecting the
amount of future dividends that will be paid to owners. D. As businesses become older, their
growth rates slow to those more characteristic of mature businesses. D. A company with rapid or
fluctuating growth cannot be valued using the dividend discount model.
Which of the following will provide a shareholder of a particular stock with cash flows? I. The
future sale of the shares II. Dividend payments made to shareholders by the company in which
the shares are held IV. During a stock split, the company where the shares are held increases the
total number of shares outstanding. SUMMARY: I and II
