Using the Constant Growth Model, a Decrease in the Required

question 44

Multiple Choice

Using the constant growth model, a decrease in the required rate of return from 15 to 13% combined with an increase in the growth rate from 5 to 6% would cause the price to

• A) Rise more than 50%.
• B) Rise less than 50%.
• C) Remain constant.
• D) Fall more than 50%.
• E) Fall less than 50%.

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Definitions:

Unamortized Discount

The portion of a bond issuance discount that has not yet been expensed to interest over the bond’s life.

Journal Entry

A record in accounting that notes the details of a financial transaction.

Face Value

The nominal value of a security stated by the issuer, which is the amount to be repaid at maturity in the case of a bond or the value represented by each share of stock.

Retired Bonds

Bonds that have been paid off or bought back by the issuer before or at maturity, effectively removing them from existence and relieving the issuer of further obligations.