Ownership
Common stock represents the position in a firm
Dividend
and is valued as the present value of its expected future stream.
are not
Common stock dividends specified by contract�they depend on the firm's earnings
Dividend Growth
The model values a common stock as the present value of its expected future cash flows at the firm's required rate of return on equity. Variations of this model are used to value constant growth stocks, zero growth stocks, and nonconstant growth stocks.
Free Cash Flows
The model is an alternative model used to value a firm, especially one that does not pay dividends or is privately held.
D. There are actually two differences between the discounted dividend and corporate valuation models: the expected cash flow stream and the discount rate used in the models are different. The discounted dividend model calculates the firm's stock price as
Which of the following statements is correct?
A. The only difference between the discounted dividend and corporate valuation models is the expected cash flow stream. Expected future dividends are the cash flow stream in the discounted dividend model and e
Par
The value of a bond is its stated face value or maturity value, and its coupon interest rate is the stated annual interest rate on the bond. The maturity date is the date on which the par value must be repaid.
Call
A provision gives the issuer the right to redeem the bonds under specified terms prior to their normal maturity date, although not all bonds have this provision.
Sinking Funds
Some bonds have provisions which require the issuer to systematically retire a portion of the bond issue each year.
Safer
Because sinking fund provisions facilitate their orderly retirement, bonds with these provisions are regarded as being
Lower
Because sinking fund provisions facilitate their orderly retirement, bonds with these provisions are regarded as being Safer so they will have coupon rates than similar bonds without these provisions.
Fixed
Bonds can be rate bonds with a constant coupon rate over the life of the bond,
Floating
Bonds can be Fixed rate bonds with a constant coupon rate over the life of the bond, or they can be rate bonds with a coupon rate that varies over time depending on the level of interest rates.
Zero Coupon
bonds pay no annual interest but are sold at a discount below par, thus compensating investors in the form of capital appreciation.
Putable
bonds contain a provision that allows holders to sell them back to the company prior to maturity at a prearranged price.
Convertible
bonds are exchangeable at the option of the holder for the issuing firm's common stock. Bonds can be issued with warrants giving the holder the option to purchase the firm's stock for a stated price, thereby providing a capital gain if the stock's price r
Income
bonds pay interest only if the firm has earnings, while an indexed (purchasing power) bond bases interest payments on an inflation index to protect the holder from inflation.
Fixed Assets
Mortgage bonds are backed by . First mortgage bonds are senior in priority to claims of second mortgage bonds. Debentures are long-term bonds that are not secured by a mortgage. Subordinated debentures are bonds having claims on assets only after senior d
Investment Grade
bonds are rated triple B or higher, and many banks and other institutional investors are legally limited to only holding these bonds. In contrast, junk bonds are high-risk, high-yield bonds.
Equal to
The value of a share of common stock depends on the cash flows it is expected to provide, and those flows consist of the dividends the investor receives each year while holding the stock and the price the investor receives when the stock is sold. The fina
Below
If the stock market is reasonably efficient, differences between the stock price and intrinsic value should not be very large and they should not persist for very long. When investing in common stocks, an investor's goal is to purchase stocks that are und
$29.47
Hubbard Industries just paid a common dividend, D0, of $1.70. It expects to grow at a constant rate of 4% per year. If investors require a 10% return on equity, what is the current price of Hubbard's common stock? Round your answer to the nearest cent. Do
$22.50
Carlysle Corporation has perpetual preferred stock outstanding that pays a constant annual dividend of $1.80 at the end of each year. If investors require an 8% return on the preferred stock, what is the price of the firm's perpetual preferred stock? Roun
$44.87
Assume today is December 31, 2013. Imagine Works Inc. just paid a dividend of $1.35 per share at the end of 2013. The dividend is expected to grow at 18% per year for 3 years, after which time it is expected to grow at a constant rate of 6% annually. The
Inverse
For fixed-rate bonds it's important to realize that the value of the bond has a(n)
relationship to the level of interest rates
Falls
If interest rates rise, then the value of the bond
Rises
if interest rates fall, then the value of the bond
Discount
A bond is one that sells below its par value. This situation occurs whenever the going rate of interest is above the coupon rate.
Increase
Over time its value will
approaching its maturity value at maturity
Premium
A bond is one that sells above its par value. This situation occurs whenever the going rate of interest is below the coupon rate.
Decrease
Over time its value will approaching its maturity value at maturity. A par value bond is one that sells at par; the bond's coupon rate is equal to the going rate of interest. Normally, the coupon rate is set at the going market rate the day a bond is issu
$929.76
Potter Industries has a bond issue outstanding with an annual coupon of 6% and a 10-year maturity. The par value of the bond is $1,000. If the going annual interest rate is 7%, what is the value of the bond? Round your answer to the nearest cent. Do not r
$928.94
Potter Industries has a bond issue outstanding with a 6% coupon rate with semiannual payments of $30, and a 10-year maturity. The par value of the bond is $1,000. If the going annual interest rate is 7%, what is the value of the bond? Round your answer to
Above
A company is more likely to call its bonds if they are able to replace their current high-coupon debt with less expensive financing. A bond is more likely to be called if its price is par�because this means that the going market interest rate is less than
Nominal
The interest rate on debt, r, is also equal to the risk-free rate plus a default risk premium plus a liquidity premium plus a maturity risk premium.
Short-term
The real risk-free rate of interest may be thought of as the interest rate on U.S. Treasury securities in an inflation-free world.
Greater
The the bond's risk of default, the higher the market rate.
Larger
The average default risk premium varies over time, and it tends to get when the economy is weaker and borrowers are more likely to have a hard time paying off their debts.
Less
Real assets are generally liquid than financial assets, but different financial assets vary in their liquidity
More
Assets with higher trading volume are generally liquid.
Decline
The prices of long-term bonds whenever interest rates rise
Interest
Because interest rates can and do occasionally rise, all long-term bonds, even Treasury bonds, have an element of risk called rate risk
Maturity
Therefore, a risk premium, which is higher the longer the term of the bond, is included in the required interest rate.
Interest, Reinvestment
While long-term bonds are heavily exposed to rate risk, short-term bills are heavily exposed to risk
Principal, Less
Although investing in short-term T-bills preserves one's , the interest income provided by short-term T-bills is stable than the interest income on long-term bonds.