unit 6 finance

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 $2.00 (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 )? (Do not round your intermediate calculation.)

$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 represents the valuation of stock using a zero growth model?

Dividend/Discount rate = D/R

Which of the following defines the primary market?

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

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

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

Which of the following 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

Which of the following are rights of common stock holders?

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

A benchmark PE ratio can be determined using:

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

The constant-growth model assumes that _________.

dividends change at a constant rate

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

false

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

growth; discount

"Inside Quotes" represent the _________ and the ________.

highest bid price; lowest ask price

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

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

order flow

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

secondary

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

specialists

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

target

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 growth discussed in the text include:

constant growth zero growth non-constant growth

Mary owns 100 shares of stock. Each share entitles her to one vote per open seat on the board of directors. Assume there are three open seats in the current election and Mary casts all 300 of her votes for a single candidate. What is the term used to describe this type of voting?

cumulative

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

dealer

Preferred stock has preference over common stock in the:

distribution of corporate assets payment of dividends

True or false: Common stock has a set maturity.

false

The ______ can be interpreted as the capital gains yield.

growth rate

The dividend yield on a stock will increase if the:

stock price decreases

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

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

Dividend Discount rate

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

Dividend Yield Growth rate

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

Dividends Capital gains

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

Dividends may grow at a constant rate.

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

ECNs

This type of growth describes a company that grows quickly at first, then slower in future years.

Non-constant

When valuing a stock using the constant-growth model, D1 represents the:

The Next expected Annual dividend

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

The Price/Earnings ratio The Price/Sales ratio