Smartbook 8

Which of the following occurs in the primary market?

newly-issued stocks are initially sold

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

A physical location An auction market Specialists

The ___ can be interpreted as the capital gains yield

Constant growth rate

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

Dividend Yield Growth Rate

The constant growth formula calculates the stock price:

One year prior (year t) to the first dividend payment (Dt+1)

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

decreases

Mota Motors has eight directors on its board, two of whom go up for election each year. This is an example of a:

staggered board

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?

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

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?

Cumulative voting

Which of the following is usually a right of common shareholders?

the right to a proportional share of dividends paid voting rights

You expect the following dividends from ABC Stock: Year 1- $3.00 Year 2- $2.00 Year 3 $1.00 You expect that from year 4 onward, the dividend will grow at a constant 3% growth rate. If your required rate of return is 7%, what is your estimate for the current stock price?

$26.39

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

Dividend/Discount rate = D/R

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

Expected

Scott Corporation does not pay dividends. The PE ratio for its industry is 13.3, and Scott's EPs were $1.47. At what price should Scott's stock trade?

$19.55

Dusty Corporation has an issue of preferred stock that pays a dividend of 7% of its state value, which is $100. Which of the following would be a commonly used name for that preferred stock?

$7 preferred

What is the value of a stock if next year's dividend is $6, the discount rate is 11% and the constant rate of growth is 3%?

$75

In which way(s) is preferred stock like a bond?

Preferred shareholders receive a stated value if the firm liquidates, like bondholders Preferred shareholders receive a stated dividend, similar to interest on a bond Some preferred stock has credit ratings, like bonds Preferred stock sometimes has a sinking fund, giving in a set maturity like bonds

The formula for valuing a constant growth stock is:

Po = D1/ (R - g)

Which of the following are features of common stock?

It generally has voting rights It has no special preference in bankruptcy It has no special preference in receiving dividends

Which of the following entities declares a dividend?

The board of directors

Will is deciding whether or not to buy Dang Corporation stock, whose current price is $54.95. Dang paid a dividend of $2.17 this year. Will estimates that dividends will grow very quickly, at a rate of 12%, for the next four years. After that, he expects the dividend growth rate to fall 5%. Should Will buy the stock if his required rate of return is 10%?

Yes; using the two stage growth model, the stock's value is $58.06

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

internet

Three special case patterns of dividend growth include:

non-constant growth zero growth constant growth

Fundamentally, the business of the NYSE is to attract and process ___

order flow

Preferred stock has preference over common stock in the:

payment of dividends distribution of corporate assets

When the stock being valued does not pay dividends,

the dividend growth model can still be used

Is a company required to pay preferred dividends?

No; the company may differ dividends on preferred stock however, they cannot pay dividends to come in shareholders until preferred dividends are paid

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

Match the following terms relating to stock valuation

P1 - price in 1 year D1 - Dividend in 1 year R - Discount Rate P0 - Price Today

Matthews Company has two classes of common stock, and each share represents the same proportion of ownership in the company. Class A has 2 votes for each share. Class B has one vote per share. Which class is more valuable?

Class A

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

Dealer

The value of a firm is the function of its ___ rate and its ___ rate

Growth Rate Discount Rate

One common reason for having two classes of common stock with different voting rights is:

It is easier for insiders such as founding families to maintain control of the company

One reason corporations use staggered boards is that:

It makes takeover attempts less likely to be successful

Most voting in large corporations is done by proxy because:

Most small shareholders cannot attend the annual meeting

NASDAQ has which of these features?

Multiple market maker system Computer network of securities dealers

Which of the following are reasons why it is more difficult to value common stock than it is to value bonds?

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

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

forward

One requirement of the dividend growth model is:

g < R

A benchmark PE ratio can be determined using:

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