Business Finance Ch. 7

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 hold

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

order flow

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

primary

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

expected

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

false

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

internet

The constant-growth model assumes that ___

dividends change at a constant rate

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

dividends may grow at a constant rate

True or false: Common stock has a set maturity.

false

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

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

Initial public offerings of stock occur in the ____ market.

primary

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

specialists

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

zero

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

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

NASDAQ has which of these features?

Computer network of securities dealers; Multiple market maker systems

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

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

dividends; capital gains

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

NASDAQ

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

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

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

broker

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 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.

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

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

A benchmark PE ratio can be determined using:

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

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

the current price (P0)

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

dividend; discount rate

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

Dividend/Discount rate = D/R

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

Stock has no set maturity, the required rate of return is unobservable, dividends are unknown and uncertain

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

constant growth, non-constant growth, zero-growth

Preferred stock has preference over common stock in the:

distribution of corporate assets; payment of dividends

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

P1 - price in one year D1 - next expected dividend R - discount rate P0 - price today D0 - dividend just paid

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)

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

R

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

dividend yield, growth rate

R =

D1/P0 + g

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

D2

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

cumulative

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

true