FIN 370 Chapter 8

Investment firms that are active participants in stocks assigned to them are called ______________ liquidity providers.

supplemental

Stock price reporting has increasingly moved from traditional print media to the ______ in recent years. -internet -network newscasts -ticker tape machine -radio

internet

Non-constant growth means ____________ growth rates over some finite length of time. -unexpected -required -weighted -supernormal -declining

supernormal

Which of the following entities declares a dividend? -existing shareholders -the management of the company -the board of directors -the CFO

the board of directors

When the stock being valued does not pay dividends _________. -the dividend growth model can still be used. -the dividend growth model can not be used.

the dividend growth can still be used

Stock price reporting has increasingly moved from traditional print media to the _______________ in recent years.

internet

A share of common stock is _____________ (less/more) difficult to value in practice than a bond.

more

Two-stage growth is a special case of __________ growth. -weighted -supernormal -unexpected -non-constant -required

non-constant

Which of the following are expected cash flows to investors in stocks? Select all that apply: -dividends -fees -interest -capital gains

-dividends -capital gains

Which of the following are features of common stock? -it receives interest semi-annually -it generally has voting rights -it has no special preference in receiving dividends -it receives dividends every quarter -it has no special preference in bankruptcy

-it generally has voting rights -it has no special preference in receiving dividends -it has no special preference in bankruptcy

NASDAQ has which of these features? -single DMM system -physical trading floor -multiple market maker system -computer network of securities dealers

-multiple market maker system -computer network of securities dealers

The formula for valuing a constant growth stock is _____.

P0 = D1/(R-g)

The price the dealer is willing to pay is called the ________ price. -spread -ask -bid -dealer -required

bid

A person who brings buyers and sellers together is called a(n) ______. -dealer -broker -lawyer -investor

broker

Suppose Bob owns 20 shares and Vikki owns 30 shares in Good Company, and there are five members of the board of directors. Under which voting arrangement can Bob assure himself of a board member that represents his interests? -straight voting -cumulative voting -minority voting

cumulative voting Reason: Under cumulative voting, Bob would have 20 X 5 = 100 votes to cast. He could cast all 100 shares for a candidate of his choice, assuring the candidate of a seat on the board. Vikki would have a total of 30 X 5 = 150 shares, and there is no way to distribute her shares over five candidates such that each had more than 100 votes.

Someone who maintains an inventory of stocks and buys and sells those stocks is known as a ____. -dealer -broker -speculator -retailer

dealer

A _______________ is a payment by a corporation to shareholders, made in either cash or stock.

dividends

Common stock has no special preference either in receiving ___________ or in bankruptcy.

dividends

The assumption of constant growth infers that _________. -stock prices remain constant -dividends change at a constant rate -the real interest rate remains constant

dividends change at a constant rate

T or F: Cumulative voting means board members are elected one at a time, with each shareholder casting his or her allotted votes for each seat on the board.

false

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

false

WinWin Corporation has five board members, and each shareholder gets one vote per share. The company uses a straight board voting procedure. How does this arrangement affect minority shareholders? -minority shareholders don't vote in such an arrangement. -no minority shareholder would have enough votes to win any seat on the board. -each minority shareholder would have one preferred board member. -corporations always have one board member designated to protect the interests of minority shareholders.

no minority shareholder would have enough votes to win any seat on the board

When voting for the board of directors, the number of votes a shareholder is entitled to is usually ___________ vote per share held.

one

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 -one vote per proxy -one vote per shareholder -one vote for every 100 shares held

one vote per share held

A stock with dividend priority over common stock is called a Blank______ stock. -cumulative -common -preferred -stated

preferred

If the current dividend (D0) is $3.00 and the growth rate is 6%. How much will the dividend be at Time 5?

$4.015 Dt=D0 × (1 + g)^t D5=D0 × (1 + g)^5 D5=$3.00 × (1 + .06)^5 D5=$3.00 × 1.3382 D5=$4.015

Let's look at a company that is currently not paying dividends. You predict that in five years the company will pay a dividend for the first time. The dividend will be $0.50 per share. You expect the dividend to grow at an 8% rate per year indefinitely at that time. The required return on companies like this one is 15%. What is the price of the stock today?

$4.08 P4 = D5/(R-g) = $.50/(.15-.08) = $7.1429 P0 = $7.1429/1.15^4 = $7.1429/1.749 = $4.08

Preferred stock has preference over common stock in the _________. -number of votes given -portfolios of individual investors -payment of dividends -distribution of corporate assets

-payment of dividends -distribution of corporate assets

A benchmark PE ratio can be determined using: -the constant-growth model -the PEs of similar companies -Bank of Canada estimates -a company's own historical PEs

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

An NYSE member who executes customer buy and sell orders is called a ____________ broker.

floor

A company's dividend is expected to grow at 20% for the next six years. After that, the growth is expected to be 3% forever. If the required return is 10%, what is the value of the stock at time 6? The dividend just paid was $1.

$43.94 P6=D7/R − g2 =[D0 × (1 + g1)^6 × (1 + g2)]/(R - g2) =[$1 × (1 + .20)^6 × (1 + .03)]/(.10 − .03) =[$2.9860 × (1 + .03)]/(.10 − .03) =[$3.0756]/(.07) =$43.94

The NYSE member who acts as a dealer in a small number of securities is called a(n) _____. -floor trader -floor broker -member -specialist

specialist

The difference between the bid and ask prices is called the _________, and is the basic source of dealer profits. -dealer -required -spread -ask -bid

spread

Which of the following occurs in the primary market? -shareholders gift shares to charities -issuers repurchase shares -outstanding shares are resold -newly-issued stocks are initially sold

newly issued stocks are initially sold

Which of the following are reasons why it is more difficult to value common stock than it is to value bonds? Select each of the following: -the rate of return required by the market is not easily observed. -common stock cash flows are not known in advance. -all bond and stock cash flows are guaranteed to be paid. -the life of a common stock is essentially forever.

-the rate of return required by the market is not easily observed. -common stock cash flows are not known in advance. -the life of a common stock is essentially forever.

Initial public offerings of stock occur in the ____ market. -commodities -futures -secondary -primary

primary

With ____________ voting, the directors are elected one at a time and the only way to guarantee a seat is to own 50 percent plus one share.

straight