ch 7 connect financial management

using a benchmark PE ratio against current earnings yields a forecasted price called a

target price

constant-growth model assumes that

dividends change at a constant rate

dividend/discount rate = D/R

represents the valuation of stock using a zero growth model

a benchmark PE ratio can be determined using:

- PEs of similar companies - a company's own historical PEs

what information do we need to determine the value of a stock using the zero growth model?

- discount rate - dividend

which one of the following is true about dividend growth patterns?

- dividends may grow at a constant rate

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

- forward

the ________ can be interpreted as the capital gains yield.

- growth rate

preferred stock has preference over common stock in the:

- payment of dividends - distribution of corporate assets

which of the following ratios might be used to estimate the value of a stock?

- price/sales ratio - price/ earnings ratio

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

- the current price

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

- the required rate of return is unobservable - dividends are unknown and uncertain - stock has no set maturity

which of the following are rights of common stock holders?

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

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

-capital gains - dividends

If unpaid preferred dividends must be "caught up" before any common dividends can be paid, they are called _______ dividends.

-cumulative

in the dividend growth model, the expected return for investors comes from which two sources?

-dividend yield - growth rate

Three special case patterns of dividend growth discussed in the text include:

-non-constant growth - zero growth - constant growth