Raising Capital and Securities Evaluation
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Questions and Answers

What is the primary reason for a company to raise capital through an Initial Public Offering (IPO)?

  • To decrease the company's valuation
  • To pay off debts and fund growth opportunities (correct)
  • To reduce the company's dependence on venture capital
  • To increase the company's market share

    • Which of the following is NOT a method of conducting an IPO on the London Stock Exchange (LSE)?

  • Offer for sale
  • Intermediaries offer
  • Offer for subscription
  • Private placement (correct)

    • What is the term for the date when the issuer repays the face value of a bond?

  • Yield date
  • Maturity date (correct)
  • Face value date
  • Coupon date

    • What is the primary difference between a bond and a share?

    <p>The ownership structure</p> Signup and view all the answers

    What is the coupon rate of a bond?

    <p>The percentage of the face value that the bond pays in interest each year</p> Signup and view all the answers

    What is the face value of a typical UK bond?

    <p>£100</p> Signup and view all the answers

    What is the term for the interest paid on a bond?

    <p>Coupon</p> Signup and view all the answers

    Which of the following is an example of a company that has conducted an IPO?

    <p>Facebook</p> Signup and view all the answers

    What is the relationship between the yield of a bond and its coupon rate when it is priced at a discount?

    <p>The yield is greater than the coupon rate</p> Signup and view all the answers

    What is the formula for calculating the yield of a bond?

    <p>Y = (F - Pc) / t</p> Signup and view all the answers

    What is the effect of changes in interest rates on the price of bonds with lower coupons?

    <p>The price of bonds with lower coupons decreases more than bonds with higher coupons</p> Signup and view all the answers

    What is the yield of a bond that is priced at its face value?

    <p>The coupon rate</p> Signup and view all the answers

    What is the name of the constant rate of interest that discounts the bond's future payments to its current price?

    <p>Yield to redemption</p> Signup and view all the answers

    What is the method used to solve for the yield of a bond when t > 2?

    <p>Trial and error</p> Signup and view all the answers

    What is the relationship between the price of a bond and its yield?

    <p>The price of a bond is inversely proportional to its yield</p> Signup and view all the answers

    What is the formula for solving for x in the equation 106x2 + 6x - 98 = 0?

    <p>x = (-b + sqrt(b^2 - 4ac)) / 2a</p> Signup and view all the answers

    What is the primary factor that determines the yield of a corporate bond?

    <p>Interest rate that discounts future payments to the current value</p> Signup and view all the answers

    A bond sells at a premium when its coupon rate is _______ the current market interest rate

    <p>higher than</p> Signup and view all the answers

    What is the formula for the present value of a share using the dividend discount model?

    <p>P0 = ∑ [dt / (1 + r)^t] from t=1 to ∞</p> Signup and view all the answers

    If a bond pays a coupon more than once a year, its _______ exceeds its nominal yield

    <p>effective yield</p> Signup and view all the answers

    What is the value of P2 in the dividend discount model?

    <p>P1 / (1 + r) + d2 / (1 + r)^2</p> Signup and view all the answers

    What is the assumption made in the zero dividend growth model?

    <p>dt remains constant at any time</p> Signup and view all the answers

    What is the formula for the present value of a perpetuity of d?

    <p>d / r</p> Signup and view all the answers

    What is the estimated current price or value of the share in the dividend discount model?

    <p>P0</p> Signup and view all the answers

    What is the condition for the constant dividend growth model to make sense?

    <p>g &lt; r</p> Signup and view all the answers

    If the dividend growth rate is 8% and the required rate of return is 12%, what is the intrinsic value of the share if the current dividend is 25p?

    <p>166.67p</p> Signup and view all the answers

    What is the formula for the intrinsic value of a share in the case of supernormal dividend growth?

    <p>P0 = d0 / (r - s)</p> Signup and view all the answers

    What is the present value of a dividend stream that grows at a constant rate of 5% if the current dividend is 20p and the required rate of return is 15%?

    <p>133.33p</p> Signup and view all the answers

    What is the intrinsic value of a share if the dividend growth rate is 10% and the required rate of return is 18%?

    <p>100p</p> Signup and view all the answers

    What is the formula for the price of a share after 'n' years in the case of constant dividend growth?

    <p>Pn = Po (1 + g)^n</p> Signup and view all the answers

    What is the present value of a dividend stream that grows at a supernormal rate of 20% for 3 years and then grows at a constant rate of 5% if the current dividend is 15p and the required rate of return is 12%?

    <p>210.53p</p> Signup and view all the answers

    What is the condition for the supernormal dividend growth model to make sense?

    <p>s &gt; r</p> Signup and view all the answers

    What is the purpose of calculating the yield of a bond?

    <p>To determine the interest yield</p> Signup and view all the answers

    What is the formula to calculate the present value of a bond's future cash flows?

    <p>PV = 10 / (1 + Y/2)^(n/2)</p> Signup and view all the answers

    What is the effective yield of a bond with a nominal yield of 11.3374%?

    <p>11.659%</p> Signup and view all the answers

    What is the market convention for calculating the yield of a bond in the UK?

    <p>As a flat rate of interest</p> Signup and view all the answers

    What is the price of a 10% bond selling at a discount?

    <p>£95</p> Signup and view all the answers

    How often are coupons paid for a semi-annual coupon bond?

    <p>Every 6 months</p> Signup and view all the answers

    What is the classification of government bonds with a maturity of less than 5 years?

    <p>Short-term bonds</p> Signup and view all the answers

    What is the interest yield of a bond with a price of 98.90?

    <p>9.10%</p> Signup and view all the answers

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