Finance Smartbook Ch 7
If there are nine directors that need to be elected, how many shares do you need to own in order to guarantee a seat on the board under straight voting?
50% of the stock + 1 share
Identify the two types of preferred dividends:
cumulative and noncumulative
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
What information do we need to determine the value of a stock using the zero growth model?
dividend and discount rate
Payments to shareholders that represent a return on the capital contributed to the corporation are referred to as ______________.
dividends
What are cash flows to investors in stocks?
dividends and capital gains
The constant growth model assumes that ___________________________.
dividends change at a constant rate
The price of a share of common stock is equal to the present value of all _______________ future dividends.
expected
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
In the dividend growth model, the expected return for investors comes from which two sources?
growth rate and dividend yield
The value of a firm is derived using the firm's ______________ rate and its _______________ rate.
growth; discount
"Inside quotes" represent that ____________ and the ______________.
highest bid price; lowest ask price
What beneficial purpose does staggering serve?
it provides institutional memory
Electronic communication networks increase _________________ and ________________ in a market.
liquidity; competition
The business of the NYSE is to attract _______________.
order flow
Initial public offerings of stock occur in the _______________ market.
primary
A written authorization for one shareholder to vote the stock of another shareholder is called a(n) ______________.
proxy
Under a __________________ voting mechanism, the minimum number of votes required to acquire a seat on a board is _______% PLUS _________.
straight; 50; 1 share
The dividend yield is determined by dividing the expected dividend (D1) by:
the current price (P0)
What ratio might be used to estimate the value of a stock?
the price-earnings ratio
What defines the primary market?
the primary market is where stocks are issued for the first time
What right does a proxy give to a shareholder?
the right to vote on behalf of another shareholder
If the growth rate (g) is zero, the capital gains yield is _________________.
zero
A benchmark PE ratio can be determined using:
- a company's own historical PEs - the PEs of similar companies
The NYSE differs from the Nasdaq primarily because the NYSE has...
- a face-to-face auction market - a physical location
Three special case patterns of dividend groth:
- constant growth - nonconstant growth - zero growth
Nasdaq has which features?
- multiple market maker system - computer network of securities dealers
What is true of classes of common stock?
- the classes of common stock often have unequal voting rights - a primary reason for creating one class of stock is to maintain control
What are reasons that make valuing a share of stock more difficult than valuing a bond?
- the required rate of return is unobservable - stock has no set maturity - dividends are unknown and uncertain
What is true of cumulative preferred dividends?
- they are carried forward as an arrearage - preferred shareholders receive no interest on the cumulated dividends
What is true of dividends?
- they are paid at the discretion of the board of directors - they are taxable to individual shareholders
If there are nine directors to be elected, what is the least number of shares you will need to guarantee a seat on the board under cumulative voting?
10% of the stock + 1 share
If you hold 50 shares of a particular corporation's common stock and there are 5 directors to be elected, how many votes will you be allowed to case under cumulative voting?
250
R
Discount rate
D0
Dividend just paid
What represents the valuation of stock using a zero growth model?
Dividend/Discount Rate = D/R
A PE ratio that is based on estimated future earnings is called a regressive PE ratio. T/F
False
All classes of stock issued by a firm must have equal voting rights. T/F
False
Common stock has a set maturity. T/F
False
For investors in the stock market, dividends from stocks are fixed and guaranteed, while capital gains are variable and not guaranteed. T/F
False
The 2 most important stock markets in the United States are the New York Stock Exchange and ________________.
Nasdaq
D1
Next expected dividend
__________________ refers to the stream of customer orders to buy and sell stocks.
Order flow
What is the formula for the present value of a growing perpetuity, where C1 is the net cash flow, R is the required rate of return, and g is the growth rate?
P = C1/(R - g)
P1
Price in one year
P0
Price today
A website that allows investors to trade directly with one another is called _________.
an ECN
A person who brings buyers and sellers together is called a(n) _____________________.
broker
When directors elected by common shareholders defer preferred dividends indefinitely, ____________________.
common shareholders must also forego dividends
