BCOR 340 Chapter 7

What is the value of a stock if next year's dividend is $6, the discount rate is 11 percent and the constant rate of growth is 3 percent

$6/(.11-.03) = $75

If the growth rate (g) is zero, the capital gains yield is ______.

Zero

A person who brings buyers and sellers together is called a(n) ___________

Broker

The dividend yield is determined by dividing the expected dividend (D1) by the

Current Price (P0)

Using a benchmark PE ratio against current earnings yields a forecasted price called a _______

Target

What is the price of a stock at the end of one year (P1) if the dividend for year 2 (D2) is $5, the price for year 2 (P2) is $20 and the discount rate is 10%?

(5+20)/(1+0.10) = $22.73

A benchmark PE ratio can be determined using

-A company's own historical PEs -The PEs of similar companies

Preferred Stock has preference over common stock in the

-Distribution of corporate assets -Payment of dividends

Which of the following are cash flows to investors in stocks?

-Dividends -Capital Gains

Which of the following are reasons that make valuing a share of stock more difficult than valuing a bond?

-Dividends are unknown and uncertain -Stock has no set maturity -The required rate of return is unobservable

In the dividend discount model, the expected return for investors comes from which two sources?

-Growth Rate -Dividend Yield

Which of the following are rights of common stock holders?

-The right to vote on matters of importance -The right to share proportionally in any common dividends paid -The right to share proportionally in any residual value in the event of liquidation

A zero-growth stock pays a dividend of $2 per share and has a discount rate of 10%. What will the stock's price be?

2.00/.10 = 20.00

Suppose a firm's dividends are expected to grow at a rate of 15% (g1) for 3 years (t) then stabilize at 5% (g2) forever. If the firm just paid a $2 (D0) dividend and the discount rate is 10% (r), what is the value of a share of the firm's stock in year 3 (P3)?

D3=D0 x (1+g1)^t D4=D3 x (1+g2) P3= D4/(r-g2) $63.88

All else constant, the dividend yield will increase if the stock price _____.

Decreases

Which of the following represents the valuation of stock using a zero growth model?

Dividend/Discount Rate = D/R

Which of the following defines the primary market?

The primary market is where stocks are issued for the first time

The price of a share of common stock is equal to the present value of all ______ future dividends

Expected

A PE ratio that is based on estimated future earnings is known as a _______ PE ratio

Forward

Shares of stock are first brought to the market and sold to investors in the _________ market

Primary

What is the total return for a stock that currently sells for $100, is expected to pay a dividend in one year of $2, and has a constant growth rate of 8%

R=(2/100)+0.08 r= 10%