Which of the following is a true statement regarding publicly tradedstocks and bonds?O A share of common stock is generally easier to value in practice than a bond.O Market interest rates and bond prices move in the same direction.O The constant dividend growth model can be used to value stocks only if the dividend growthrate remains constant.O The price of a stock is greater than the present value of all future dividends.

The constant dividends model is a stock valuation model that assumes that the dividends of a company…

Answered: Which of the following is a true…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter7: Common Stock: Characteristics, Valuation, And Issuance

Section: Chapter Questions

Problem 11QTD

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What effect does the trend in stock prices (subsequent to issue) have on a firm’s ability to raise funds through: (a) convertibles and (b) warrants?
Market equity beta measures the covariability of a firms returns with all shares traded on the market (in excess of the risk-free interest rate). We refer to the degree of covariability as systematic risk. The market prices securities so that the expected returns should compensate the investor for the systematic risk of a particular stock. Stocks carrying a market equity beta of 1.20 should generate a higher return than stocks carrying a market equity beta of 0.90. Nonsystematic risk is any source of risk that does not affect the covariability of a firms returns with the market. Some writers refer to nonsystematic risk as firm-specific risk. Why is the characterization of nonsystematic risk as firm-specific risk a misnomer?
A dividend valuation model such as the following is frequent. where: Pi = the current price of Common Stock i D1 = the expected dividend in Period 1 ki = the required rate of return on Stock i gi = the expected constant-growth rate of dividends for Stock i Identify the three factors that must be estimated for any valuation model, and explain why these estimates are more difficult to derive for common stocks than for bonds . Explain the principal problem involved in using a dividend valuation model to value: (1) companies whose operations are closely correlated with economic cycles. (2) companies that are of very large and mature. (3) companies that are quite small and are growing rapidly.
Which of the following statement is incorrect?a. A high proportion of the value for a growth stock comes from past eamingsb. The convex shape of the bond price-yield curve shows the curve is steeper for lower interest ratesc. Callable bonds give bond issuer the right to retire the bond before its maturity date.d. Preferred shares typically have a fixed dividend, whereas the dividend from common shares is determined by a firm's board of directors every year.e. Preferred shares usually have less voting rights than common sharesABC Inc. just paid a dividend of $1.1. It expects its earnings and dividends to increase at a rate of 8% per year for 3 years and then increase at a rate of 3% per year indefinitely. What is the value of the stock today if the required return is 11%? The value of the stock today is $Note: Please retain at least 4 decimal places in your calculations and at least 2 decimal places in your answer.
How would changes in the general stock and bond markets lead to changes in the required rate of return on a firm’s stock?
Which of the following holds true about the Stock market? a. It is for Purchase and sale of goods. b. It facilitates Purchase and sale of securities continuously c. It is for New issue of Bonds d. It is a Market for New issue of Shares
Discuss how changes in the general stock and bond markets could lead to changes in the required rate of return on a firm’s stock
What would you expect to happen to an all-equityfirm’s stock price if its management announceda recapitalization under which debt would beissued and used to repurchase common stock?
An analyst is trying to determine the intrinsic value of a certain share. Which of the following is true with regards to the methods of stock valuation? a. Discounting techniques does not involve forecasting future dividends b. Free cash flow is important in discounted dividend model c. Aside from the intrinsic value, the market value of the firm can also be determined by free cash flow model d. Non-constant growth stock is valuated in the same way as preferred stock
Which statement is false regarding the Capital Asset Pricing Model? A. The beta coefficient of a stock is constant. B. The risk free rate is usually based on the treasury bill yield. C. Market risk premium is the difference between market return and the risk free rate. D. The cost of retained earnings is equal to the cost of new shares issued.
A firm is planning to issue bonds to make an equity repurchase to increase its stock price. It is basing its analysis on the fact that there will be fewer shares outstanding after the repurchases, and higher earnings per share. Will the higher earnings per share always translate into a higher stock price? a. No b. Depends on stock price c. Yes d. Indifferent
Why do technical analysts look at the moving average of a company’s stock price, and why do they look at trend lines? (Did you know that technical analysis is used for bond investing too?)

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