finance ch 7 stocks

Using a benchmark PE ratio against current earnings yields a forecasted price called a _______ price.

target

A benchmark PE ratio can be determined using:

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

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

zero, constant, and non-constant growth rate

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

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

zero

A PE ratio that is based on estimated future earnings is known as a ____________ PE ratio.

forward

The value of a firm is derived using the firm's ______ rate and its _______ rate.

growth; discount

The trading of existing shares occurs in the ______ market.

secondary market

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

Dividend/Discount rate = D/R

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

cumulative

Total return is calculated by adding

dividend yield and the capital gains yield.

The constant-growth model assumes that _________.

dividends change at a constant rate

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

-P/E -Price/Sales

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

-Stock has no set maturity -The required rate of return is unobservable -Dividends are unknown and uncertain

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 share proportionally in any common dividends paid-The right to vote on matters of importance

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

What are cash flows to investors in stocks?

Dividends Capital gains

Someone who maintains an inventory of stocks and buys and sells those stocks is known as a ____.

dealer

True or false: Common stock has a set maturity.

F

True or false: A PE ratio that is based on estimated future earnings is called a regressive PE ratio.

False - A PE ratio that is based on estimated future earnings is called a forward PE ratio

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

False, neither are guarenteed

The ______ can be interpreted as the capital gains yield

Growth rate EX: In the formula R = dividend yield plus capital gains yield, dividend yield = D/P and capital gains yield = g.

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

R = Div/P0+g (dividend yield and growth rate)

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

The current price (P0)

which defines the primary market?

Where stocks are issued for the first time

A person who brings buyers and sellers together is called a(n) _____

broker

The price of a share of common stock is equal to the present value of all ______ future dividends.

expected

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)

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

decreases -The stock price is in the denominator of the dividend yield equation, so a decrease in the stock price will increase the dividend yield.