Finance Chapter 7

Websites that allow investors to trade directly with one another are termed ___.

ECNs

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

False

The fundamental business of the New York Stock Exchange is to attract ____.

order flow

The trading of existing shares occurs in the ____ market.

secondary

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

target

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

target

Preferred stock has preference over common stock in the:

- distribution of corporate assets - payment of dividends

Which of the following are rights of common stock holders?

- the right to share proportionally in any common dividends paid - the right to share proportionally in any residual value in the even of liquidation - The right to vote on matters of importance

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

Dividend/Discount rate = D/R

Which one of the following is true about dividend growth patterns?

Dividends may grow at a constant rate

T/F: Common stock has a set maturity

False

The ____ can be interpreted as the capital gains yield.

Growth rate

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

the current price (P0)

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

zero

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 in unobservable - Stock has no set maturity - Dividends are unknown and uncertain

The NYSE differs from the NASDAQ primarily because the NYSE has:

- a face-to-face auction market - a physical location

Suppose a firm's dividends are expected to grow at a rate of 15% (g1) for 3 years (t) then stabilize at 5% (g2) forever. If the firm just paid a $2 (D0) dividend and the discount rate is 10% (r), what is the value of a share of the firm's stock in year 3 (P3)?

$63.88 D3 = D0 x (1+g1)t = $2 x (1.15)3 = $3.04 D4 = D3 x (1+g2) = $3.04 x 1.05 = $3.19 P3 = D4/(r-g2 ) = $3.19/(.10 - .05) = $63.88

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

- Capital gains - Dividends

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

- Growth rate - Dividend yield

The two most important stock markets in the U.S. are the New York Stock Exchange and ____

NASDAQ

What is the formula for the percent value of a growth perpetuity when C1 is the net cash flow, R is the required return and g is the growth rate?

P = C1/(R - g)

Matching P1 D1 R P0 D0

P1 = price in one year D1 = Next expected dividend R = Discount rate P0 = Price today D0 = Dividend just paid

P0 = (D1 + P1)/(1 + ___)

R

T/F: total return is calculated by adding the dividend yield and the capital gains yield.

True

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

All else constant, the dividend yield will increase is the stock price ___.

decreases

The constant-growth model assumes that ____

dividends change at a constant rate

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

- constant growth - non-constant growth - zero growth

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

- discount rate - dividend

NASDAQ has which of these features?

-Multiple market maker system -Computer network of securities dealers

A benchmark PE ratio can be determined using:

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

R = ______

D1/P0 + g

P1 = (__ + P2)/(1 + R)

D2

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

Decrease

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

Initial public offerings of stock occur in the _____ market.

primary

Shares of stock are first brought to the market and sold to investors in the ____________ market.

primary

New York Stock Exchange Designated Market Makers (DMMs) were formerly called ____.

specialists

Earnings over the coming year are expected to be $3 and a benchmark PE of 15 applied to earnings over the previous year. The _____, or forecast, price over the coming year is $45

target

Which of the following defines the primary market?

The primary market is where stocks are issued for the first time

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

expected

T/F: Daily stock prices can only be found by looking up the stock in newspapers

false

T/F: a PE ratio that is based on estimated future earnings is called a regressive PR ratio

false

A PE ratio that is based on estimated future earnings is knowns as a ____ PE ratio.

forward

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

growth; discount

"Inside Quotes" represents the ____ and the _____

highest bid price; lowest ask price

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

internet