finance ch 8
common stock
-A security that provides voting privileges -A security that provides the potential for its owner to receive both dividends and capital gains -An equity security that offers ownership benefits in a corporation
True or false: A dealer will buy stock from an investor at the ask price.
false
True or false: The value of a firm as measured by its market capitalization is solely dependent upon the market value of the firm's stock.
false
basic assumptions of a variable growth rate valuation
g2 < i g1 can be negative, positive, or equal to zero g1 applies to a designated number of years
NASDAQ
has dealers
key service provided by stock exchanges that attracts investors
liquidity
A preferred stock has
-Zero dividend growth -Preferred dividend payments are assumed to be infinite. -Preferred dividends are assumed to be a constant dollar amount. -Higher dividend yields than common stock issued by the same issuer -Preferred stock can be valued using the constant-growth model. -Preferred stock can be valued as a perpetuity, PV = PMT/i
.
A limit sell order will only execute at the limit price or higher. A market order will execute immediately, regardless of the price. A limit sell order may never be executed.
dividend discount model is based
All future cash flows from a stock are dividend payments.
market capitalization
Current stock price times number of shares outstanding
P/E Ratio
Current stock price/Last four quarters of earnings
the current value of a stock
Discounted value of both the future dividends and the future stock price
primary purpose of the P/E valuation formula
Estimate the future price of a stock
In a stock valuation formula, what does the symbol D1 represent?
Estimated dividend in time period 1, or next year's dividend when solving for the current price
True or false: A dealer will buy stock from an investor at the ask price.
False
full-service brokerage firm
In-depth research on individual stocks Investment advice
discount brokerage firm
Investors place trades on the firm's Internet site
Why do you have to use the dividend at time n + 1 to compute the terminal price in the two-stage growth valuation model?
The terminal price is the time n price. The dividend used to compute a price must always be one time period ahead of the price.
terms best describes the trading process used by NASDAQ
Multiple market maker system
requirements which a firm must meet to be listed on the NYSE
Number of stockholders
characteristics apply to the New York Stock Exchange (NYSE)
Physical trading floor Specialists Brokers
these apply to publicly-issued common stock
Stock value depends on the issuer's business success Value determined on the stock exchanges Ownership position
How is the discount rate used to value a stock related to the expected return on the stock? Assume the stock price fairly reflects the stock's value.
The discount rate should equal the expected rate of return.
Just before the market closes, ABC stock is selling for $43 a share, so you place a market sell order for 300 shares. The order reaches the trading floor after the market closes for the day. The next morning, ABC stock opens at a price of $28 a share. What happens to your order?
The order is executed at a price of $28 a share.
a correct interpretation of a P/E ratio
The stock with the lowest P/E has the lowest current price per dollar of earnings.
stock valuation
The value of a stock today equals the discounted value of the future expected cash flows.
What is the purpose of the terminal price that is used in conjunction with a variable-growth rate stock valuation formula?
To replace all of the dividends paid in stage 2
______ symbol is the unique code for a company on a stock exchange. It consists of one to five letters
ticker
t/f:Dealers are willing to sell stocks at the ask price.
true
