Chapter 7 Questions (test 3)
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)
A person who brings buyers and sellers together is called a(n) ______.
broker
If unpaid preferred dividends must be "caught up" before any common dividends can be paid, they are called _________ dividends.
cumulative
Someone who maintains an inventory of stocks and buys and sells those stocks is known as a ____.
dealer
All else constant, the dividend yield will increase if the stock price ____.
decreases
R
discount rate
D0
dividend just paid
Which of the following is true about dividend growth patterns?
dividend may grow at a constant rate
The constant-growth model assumes that _______________.
dividends change 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
The value of a firm is derived using the firm's ______ rate and its _______ rate.
growth; discount
Stock price reporting has increasingly moved from traditional print media to the ______ in recent years.
internet
D1
next expected dividend
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
The fundamental business of the New York Stock Exchange is to attract _______.
order flow
P1
price in one year
P0
price today
Shares of stock are first brought to the market and sold to investors in the __________ market.
primary
The trading of existing shares occurs in the ______ market.
secondary
New York Stock Exchange Designated Market Makers (DMMs) were formerly called ________ .
specialists
If the growth rate (g) is zero, the capital gains yield is ____.
zero
The dividend yield is determined by dividing the expected dividend (D1) by:
the current price (P0)
The price of a share of common stock is equal to the present value of all ______ future dividends.
expected
The price of a share of common stock is equal to the present value of all ____________ future dividends.
expected
Common stock has a set maturity. T or F
false
A PE ratio that is based on estimated future earnings is called a regressive PE ratio. T or F
false (forward PE ratio)
For investors in the stock market, dividends from stocks are fixed and guaranteed, while capital gains are variable and not guaranteed. T or F
false (neither dividend nor capital gains are fixed and guaranteed)
A benchmark PE ratio can be determined using:
- a company's own historical PEs - the PEs of similar companies
The NYSE differs from the NASDAQ primarily because the NYSE has:
- a physical location - a face-to-face auction market
Which of the following are cash flows to investors in stocks?
- dividends - capital gains
In the dividend growth model, the expected return for investors comes from which two sources?
- growth rate - dividend yield
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?
- the Price/Earnings ratio - the Price/Sales ratio
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 vote on matters of importance - the right to share proportionally in any residual value in the event of liquidation - the right to share proportionally in any common dividends paid
Three special case patterns of dividend growth discussed in the text include:
- zero growth - constant growth - non-constant growth
The two most important stock markets in the U.S. are the New York Stock Exchange and ______.
NASDAQ
Daily stock prices can only be found by looking up the stock in newspapers. T or F
false