Chapter 7

If shareholders are granted a preemptive right they will:

have priority in the purchase of any newly issued shares.

Dividends are:

paid out of aftertax profits.

The trading of existing shares occurs in the ______ market.

secondary

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

order flow

Which of the following are rights of common stock holders?

1. The right to share proportionally in any residual value in the event of liquidation. 2. The right to vote on matters of importance. 3. The right to share proportionally in any common dividends paid.

Which one of the following must equal zero if a firm pays a constant annual dividend?

Capital gains yield

R = ______

D1/P0 + g

The capital gains yield equals which one of the following?

Dividend growth rate

The required return on a stock is equal to which one of the following if the dividend on the stock decreases by a constant percent per year?

Dividend yield + Capital gains yield

On which one of the following dates do dividends become a liability of the issuer for accounting purposes?

On the date the board declares the dividend

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

R

Which of the following defines the primary market?

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

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

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

Initial public offerings of stock occur in the ____ market.

primary

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)

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

1. The Price/Earnings ratio 2. The Price/Sales ratio

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

growth; discount

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

1. Capital gains 2. Dividends

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

1. Discount rate 2. Dividend

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

decreases

Jensen Shipping has four open seats on its board of directors. How many shares will a shareholder need to control to ensure that his or her candidate is elected to the board given the fact that the firm uses straight voting? Assume each share receives one vote.

Fifty percent of the shares plus one share

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)

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

primary market

There are two open seats on the board of directors. If two separate votes occur to elect the new directors, the firm is using a type of voting that is best described as _____ voting.

straight

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

Dividend/Discount rate = D/R

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)

Kate could not attend the last shareholders' meeting and thus she granted the authority to vote on her behalf to the managers of the firm. Which term applies to this granting of authority?

Proxy

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

zero

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

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

target

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

Dividends may grow at a constant rate.

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

1. Dividend Yield 2. Growth rate

The constant-growth model assumes that _________.

dividends change at a constant rate

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

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

1. Growth rate 2. Dividend Yield

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

1. Stock has no set maturity 2. The required rate of return is unobservable 3. Dividends are unknown and uncertain

A benchmark PE ratio can be determined using:

1. a company's own historical PEs 2. the PEs of similar companies

Preferred stock has preference over common stock in the:

1. payment of dividends 2. distribution of corporate assets

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

1.non-constant growth 2. constant growth 3. zero growth