Stock Valuation Practice Test
An example of a primary market transaction is buying 100 shares of Wal-Mart stock from your uncle. -
correct answersFalse
__________ have control of the firm since they have the right to elect a firms directors. - correct
answersCommon stockholders
The condition under which the expected return on a security is just equal to its required return is: -
correct answersequilibrium
The __________ is the value of an asset that in the mind of a particular investor is justified by the facts. -
correct answersintrinsic value
If the market is semistrong-form efficient, you can expect to outperform the overall market by observing
the past price history of an individual stock. - correct answersFalse
The price of a stock is: - correct answersthe present value of all expected future dividends, discounted at
the investors required return.
If a firm is experiencing a period of non-constant growth, its stock price cannot be calculated as the
present value of expected dividends. - correct answersFalse
Since preferred stock dividends are fixed, valuing preferred stock is roughly equivalent to valuing: -
correct answersa zero growth common stock.
Which of the following is most correct. - correct answersThere generally are large differences between
expected and realized returns
Two firms with the same dividend and growth rate must also have the same stock price. - correct
answersFalse
Which of the following statements is most correct?
If a market is strong-form efficient this implies that the returns on bonds and stocks should be identical.
If a market is weak-form efficient this implies that all public information is rapidly incorporated into
market prices.
If a market is semi-strong weak-form efficient this implies that all private information is rapidly
incorporated into market prices. - correct answersNone of the above statements is correct.
The constant growth model takes into consideration the capital gains earned on a stock. - correct
answersTrue
Studies almost unanimously show that you cannot make an abnormal profit in the U.S. market by using
inside information. - correct answersFalse
An initial public offering (IPO): - correct answersoccurs when a companys stock is offered to the public
for the first time.
, What bonds are issued by state and local governments? - correct answersMunicipal bonds
If a coupon bond is selling at par, its current yield: - correct answersequals its yield to maturity.
All else equal, if a bonds yield-to-maturity increases: - correct answersits price will fall.
The rate of return earned on a bond if it is called before its maturity date is its: - correct answersyield-to-
call.
_________ is the risk that a decline in interest rates will lead to a decline in income from a bond
portfolio. - correct answersreinvestment rate risk
The value of a bond is the present value of the future cash flows from the bond (consisting of the par
value at maturity and all intervening coupon payments). - correct answersTrue
The rate of return earned on a bond if it is held until maturity is its: - correct answersyield-to-maturity.
What bond are issued by the Federal government and have no default risk? - correct answersTreasury
bonds
All else equal, ________ bonds have more reinvestment rate risk than ________ bonds. - correct
answershigh-coupon; low-coupon
Convertible bond are bonds that may be converted (exchanged) into shares of common stock, at a fixed
price, at the option of the bondholder. - correct answersTrue
All else equal, short-term bonds have more reinvestment rate risk than do long-term bonds. - correct
answersTrue
Which of the following statements is most correct?
Junk bonds typically have a lower yield to maturity relative to investment grade bonds.
A debenture is a secured bond that is backed by some or all of the firms fixed assets.
Subordinated debt is paid before senior debt in the event of default. - correct answersNeither of the
statements above is correct.
A call provision gives the investor the right to force the issuer to buy the bonds back before maturity. -
correct answersFalse
A bond with a face value of $1,000 currently sells for a discount. Which of the following statements is
most correct? - correct answersThe bonds yield to maturity is greater than its coupon rate.
Bonds issued by corporations that are exposed to default risk are called: - correct answerscorporate
bonds.
Other things held constant, if a bond indenture contains a call provision, the yield to maturity that would
exist without such a call provision will generally be _________ the YTM with a call provision. - correct
answersLower than.
An example of a primary market transaction is buying 100 shares of Wal-Mart stock from your uncle. -
correct answersFalse
__________ have control of the firm since they have the right to elect a firms directors. - correct
answersCommon stockholders
The condition under which the expected return on a security is just equal to its required return is: -
correct answersequilibrium
The __________ is the value of an asset that in the mind of a particular investor is justified by the facts. -
correct answersintrinsic value
If the market is semistrong-form efficient, you can expect to outperform the overall market by observing
the past price history of an individual stock. - correct answersFalse
The price of a stock is: - correct answersthe present value of all expected future dividends, discounted at
the investors required return.
If a firm is experiencing a period of non-constant growth, its stock price cannot be calculated as the
present value of expected dividends. - correct answersFalse
Since preferred stock dividends are fixed, valuing preferred stock is roughly equivalent to valuing: -
correct answersa zero growth common stock.
Which of the following is most correct. - correct answersThere generally are large differences between
expected and realized returns
Two firms with the same dividend and growth rate must also have the same stock price. - correct
answersFalse
Which of the following statements is most correct?
If a market is strong-form efficient this implies that the returns on bonds and stocks should be identical.
If a market is weak-form efficient this implies that all public information is rapidly incorporated into
market prices.
If a market is semi-strong weak-form efficient this implies that all private information is rapidly
incorporated into market prices. - correct answersNone of the above statements is correct.
The constant growth model takes into consideration the capital gains earned on a stock. - correct
answersTrue
Studies almost unanimously show that you cannot make an abnormal profit in the U.S. market by using
inside information. - correct answersFalse
An initial public offering (IPO): - correct answersoccurs when a companys stock is offered to the public
for the first time.
, What bonds are issued by state and local governments? - correct answersMunicipal bonds
If a coupon bond is selling at par, its current yield: - correct answersequals its yield to maturity.
All else equal, if a bonds yield-to-maturity increases: - correct answersits price will fall.
The rate of return earned on a bond if it is called before its maturity date is its: - correct answersyield-to-
call.
_________ is the risk that a decline in interest rates will lead to a decline in income from a bond
portfolio. - correct answersreinvestment rate risk
The value of a bond is the present value of the future cash flows from the bond (consisting of the par
value at maturity and all intervening coupon payments). - correct answersTrue
The rate of return earned on a bond if it is held until maturity is its: - correct answersyield-to-maturity.
What bond are issued by the Federal government and have no default risk? - correct answersTreasury
bonds
All else equal, ________ bonds have more reinvestment rate risk than ________ bonds. - correct
answershigh-coupon; low-coupon
Convertible bond are bonds that may be converted (exchanged) into shares of common stock, at a fixed
price, at the option of the bondholder. - correct answersTrue
All else equal, short-term bonds have more reinvestment rate risk than do long-term bonds. - correct
answersTrue
Which of the following statements is most correct?
Junk bonds typically have a lower yield to maturity relative to investment grade bonds.
A debenture is a secured bond that is backed by some or all of the firms fixed assets.
Subordinated debt is paid before senior debt in the event of default. - correct answersNeither of the
statements above is correct.
A call provision gives the investor the right to force the issuer to buy the bonds back before maturity. -
correct answersFalse
A bond with a face value of $1,000 currently sells for a discount. Which of the following statements is
most correct? - correct answersThe bonds yield to maturity is greater than its coupon rate.
Bonds issued by corporations that are exposed to default risk are called: - correct answerscorporate
bonds.
Other things held constant, if a bond indenture contains a call provision, the yield to maturity that would
exist without such a call provision will generally be _________ the YTM with a call provision. - correct
answersLower than.
