gyu mcqs and questions before midterm 1

Question 1

Which of the following statements is false?

a) Zero coupon bonds are deep-discount bonds.
b) Zero coupon bonds are often created when cash flows are stripped from traditional bonds.
c) Floating rate bonds provide protection against decreasing interest rates.
d) There are two forms of return available for Canada Savings Bond buyers: regular interest and compound interest.

Answer 1

c) Floating rate bonds provide protection against decreasing interest rates.

Question 2

Describe the relationship between bond interest rate risk and the coupon rate, the market yield, and the term to maturity

Answer 2

The higher the coupon rate, the higher the market yield, and the lower the term to maturity, the lower the interest rate risk (duration), all else being equal.

Question 3

A firm can increase its dividend payout by doing any one of the following, except:

a) by increasing its after-tax profit (net income)
b) by decreasing the number of shares it has outstanding
c) by increasing its retention rate
d) by increasing its dividend payout rate

Answer 3

c) by increasing its retention rate

Question 4

Which of the following is not a limitation of the DDM?

d) It cannot be applied to firms without dividend payments.
b) It can be applied only to constantly growing firms.
c) It cannot be used to value private firms.
d) It cannot be applied to firms with negative earnings

Answer 4

d) It cannot be applied to firms with negative earnings

Question 5

Which of the following is false regarding the relative valuation approach?

a) The most commonly used one is the P/E ratio approach.
b) The M/B ratio may be used instead of the P/E ratio if the firm has negative earnings.
c) We can use the average P/E ratio of the firm’s industry when appropriate.
d) The leading P/E ratio can be estimated as (Payout ratio) (1 + g)/(k − g).

Answer 5

d) The leading P/E ratio can be estimated as (Payout ratio) · (1 + g)/(k − g).

Question 6

High P/E ratios tend to indicate that a firm will , all things being equal.

a) grow quickly
b) grow at the same speed as the average firm
c) grow slowly
d) not grow

Answer 6

a) grow quickly

Question 7

List three reasons why one firm may have a higher leading P/E ratio than a comparable firm

Answer 7

1. A lower required rate of return.
2. A lower retention ratio, or a higher payout ratio.
3. A higher expected growth rate.