Business Finance Ch. 7

True or false: Common stock has a set maturity.

False

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

False (Forward PE Ratio)

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

R

The trading of existing shares occurs in the ______ market.

Secondary

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

Non-constant

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

P = C1/(R-g)

Which of the following defines the primary market?

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

If unpaid preferred dividends must be "caught up" before any common dividends can be paid, they are called _________ dividends.

cumulative

The ______ can be interpreted as the capital gains yield.

growth rate

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

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

order flow

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

the current price (P0)

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

False

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

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

Dealer

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

forward

R = ______

D1/P0 + g

NASDAQ has which of these features?

-Multiple market maker system. -Computer network of securities dealers.

Match the following terms relating to stock valuation: P1 D1 R P0 D0

-Price in one year -Next expected dividend -Discount Rate -Price today -Dividend just paid

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

The constant-growth model assumes that _________.

dividends change at a constant rate

A person who brings buyers and sellers together is called a(n) ______.

Broker

Initial public offerings of stock occur in the ____ market.

Primary

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

Target

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

-The Price/Earnings ratio -The Price/Sales ratio

Preferred stock has preference over common stock in the:

-distribution of corporate assets -payment of dividends

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

NASDAQ

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

Primary

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

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

Which of the following are rights of common stock holders?

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

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

Target

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.

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

Expected

True or false: Daily stock prices can only be found by looking up the stock in newspapers.

False

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

internet

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

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

-Dividends -Capital Gains

A benchmark PE ratio can be determined using:

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

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

D2 (little 2)

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:

-non-constant growth -constant growth -zero growth

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

0 (Zero)

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

Decrease

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

specialists

True or false: Total return is calculated by adding the dividend yield and the capital gains yield.

True