FIN 320F Unit 10

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

Dividend/Discount rate = D/R

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

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

P0 = $2/0.10 = $20

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

decreases

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

discount rate dividend

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

dividend yield growth 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

clientele effect

holds that some investors prefer companies with steady dividend payments, while other investors prefer growth in the stock price rather than the income from dividends

If a company's growth for years 1 through 3 is 20% but stabilizes at 5% beginning in year 4, its growth pattern would be described as ___.

non-constant

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

preferred stocks has preference over common stock in the:

payment of dividends distribution of corporate assets

Dividends

regular payments to the shareholders that generally represent a distribution of profit

capitial gain

represents an increase in the value of an asset over its purchase price

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

target

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

the current price (P0)

Earnings Per Share (EPS)

the net income of the company divided by the number of shares This states the income of the company on a per-share bases, which is useful when we're evaluating the price of a single share of stock.

Retention Ratio

the proportion of earnings (net income) that is retained and reinvested in the company

Return on Equity (ROE)

the rate of return that the shareholders get on their investment in the corporation

Price to Earnings Ratio (P/E)

the ratio of stock price divided by the company's earnings per share (EPS)

Investment horizon

the time period that the investor plans to hold the stock

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

zero

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%?

$22.73

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

$75

A benchmark PE ratio can be determined using:

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

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%?

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

What is the total return for a stock that currently sells for $50, just paid a $1.75 dividend, and has a constant growth rate of 8%?

11.78%

If a zero-dividend stock is purchased for $80 and sold one year later for $84, the 1-year return is _____ %.

5 (84/80) - 1 = 5

For investors in the stock market, dividends from stocks are fixed and guaranteed, while capital gains are variable and not guaranteed.

False

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

capital gains, dividends

stock buyback

company goes into the secondary market and buys back its own stock, thus giving cash to its shareholders

Three special case patterns of dividend growth include:

constant growth zero growth non-constant growth