Ch 7 B.F.
If there are nine directors that need to be elected, how many shares do you need to own in order to guarantee a seat on the board under straight voting?
50 percent of the stock + 1 share
True or false: For investors in the stock market, dividends from stocks are fixed and guaranteed, while capital gains are variable and not guaranteed.
False
Identify the two types of preferred dividends:
cumulative and noncumulative
All else constant, the dividend yield will increase if the stock price Blank______.
decreases
Preferred stock has preference over common stock in the:
distribution of corporate assets. payment of dividends.
What information do we need to determine the value of a stock using the zero growth model?
dividend discount rate
D0
dividend just paid
Payments to shareholders that represent a return on the capital contributed to the corporation are referred to as
dividends
Payments to shareholders that represent a return on the capital contributed to the corporation are referred to as ___
dividends
Which of the following are cash flows to investors in stocks?
dividends capital gains
The constant growth model assumes that Blank______.
dividends change at a constant rate
The price of a share of common stock is equal to the present value of all Blank______ future dividends.
expected
A PE ratio that is based on estimated future earnings is known as a Blank______ PE ratio.
forward
The Blank______ can be interpreted as the capital gains yield.
growth rate
In the dividend growth model, the expected return for investors comes from which two sources?
growth rate dividend yield
The value of a firm is derived using the firm's Blank______ rate and its Blank______ rate.
growth; discount
P1
matches Choice Price in one year
If a company's growth for Years 1 through 3 is 20 percent but stabilizes at 5 percent beginning in Year 4, its growth pattern would be described as Blank______.
nonconstant
This type of growth describes a company that grows quickly at first, then slower in future years.
nonconstant
When voting for the board of directors, the number of votes a shareholder is entitled to is generally determined as follows:
one vote per share held
A written authorization for one shareholder to vote the stock of another shareholder is called a(n) Blank______.
proxy
Which type of voting procedure provides "institutional memory"?
staggered
Institutional memory can be enhanced by Blank______.
staggering board elections
Under a ___ voting mechanism, the minimum number of votes required to acquire a seat on a board is ___ PLUS ___ .
straight, 50%, 1
Earnings over the coming year are expected to be $3 and a benchmark PE of 15 applies to
target
Earnings over the coming year are expected to be $3 and a benchmark PE of 15 applies to earnings over the previous year. The Blank______, or forecast, price over the coming year is $45.
target
Using a benchmark PE ratio against current earnings yields a forecasted price called a Blank______ price.
target
A benchmark PE ratio can be determined using:
the PEs of similar companies. a company's own historical PEs.
The dividend yield is determined by dividing the expected dividend (D1) by:
the current price (P0).
Which of the following ratios might be used to estimate the value of a stock?
the price-earnings ratio
Which of the following are rights of common stock holders?
the right to share proportionally in any common dividends paid. the right to share proportionally in any residual value in the event of liquidation. the right to vote on matters of importance.
What right does a proxy give to a shareholder?
the right to vote on behalf of another shareholder
If the growth rate (g) is zero, the capital gains yield is Blank______.
0
If there are nine directors to be elected, what is the least number of shares you will need to guarantee a seat on the board under cumulative voting?
10 percent of the stock plus 1 share
If you hold 50 shares of a particular corporation's common stock and there are 5 directors to be elected, how many votes will you be allowed to cast under cumulative voting?
250
R=
D1/P0 + g
R
Discount rate
Which of the following represents the valuation of stock using a zero growth model?
Dividend/Discount rate = D/R
Which one of the following is true about dividend growth patterns?
Dividends may grow at a constant rate.
True or false: A PE ratio that is based on estimated future earnings is called a regressive PE ratio.
False
True or false: All classes of stock issued by a firm must have equal voting rights.
False
True or false: Common stock has a set maturity.
False
What beneficial purpose does staggering serve?
It provides institutional memory.
D1
Next expected dividend
What is the formula for the present value of a growing perpetuity, where C1 is the net cash flow, R is the required return, and g is the growth rate?
P = C1/(R − g)
P0
Price today
Which of the following are reasons that make valuing a share of stock more difficult than valuing a bond?
Stock has no set maturity. Dividends are unknown and uncertain. The required rate of return is unobservable
Which of the following is true of classes of common stock?
The classes of common stock often have unequal voting rights. A primary reason for creating more than one class of stock is to maintain control.
Which of the following statements are true of cumulative preferred dividends?
They are carried forward as an arrearage. Preferred shareholders receive no interest on the cumulated dividends.
Which of the following are true of dividends?
They are paid at the discretion of the board of directors. They are taxable to individual shareholders.
True or false: Total return is calculated by adding the dividend yield and the capital gains yield.
True
When directors elected by common shareholders defer preferred dividends indefinitely, Blank______.
common shareholders must also forego dividends
Three special case patterns of dividend growth discussed in the text include:
constant growth. zero growth. nonconstant growth.
If unpaid preferred dividends must be "caught up" before any common dividends can be paid, they are called Blank______ dividends.
cumulative
