Chapter 7 Questions
A person who brings buyers and sellers together is called a(n) ______.
broker
Shares of stock are first brought to the market and sold to investors in the ________ market.
primary
New York Stock Exchange Designated Market Makers (DMMs) were formerly called ________ .
specialists
P0 = (D1 + P1)/(1 + __)
R
T/F: For investors in the stock market, dividends from stocks are fixed and guaranteed, while capital gains are variable and not guaranteed.
false
T/F: a PE ratio that is based on estimated future earnings is called a regressive PE ratio.
false
A PE ratio that is based on estimated future earnings is known as a ____________ PE ratio.
forward
Stock price reporting has increasingly moved from traditional print media to the ______ in recent years.
internet
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 payed
Someone who maintains an inventory of stocks and buys and sells those stocks is known as a ____.
dealer
What information do we need to determine the value of a stock using the zero growth model?
dividend & discount rate
The constant-growth model assumes that _________.
dividends change at a constant rate
The ______ can be interpreted as the capital gains yield.
growth rate
Initial public offerings of stock occur in the ____ market.
primary
P1 = (__ + P2)/(1 + R)
D2
The trading of existing shares occurs in the ______ market.
secondary
All else constant, the dividend yield will increase if the stock price ____.
decreases
The price of a share of common stock is equal to the present value of all ______ future dividends.
expected
T/F: Common stock has a set maturity.
false
T/F: Daily stock prices can only be found by looking up the stock in newspapers.
false
A benchmark PE ratio can be determined using:
- the PEs of similar companies - a company's own historical PEs
If unpaid preferred dividends must be "caught up" before any common dividends can be paid, they are called _________ dividends.
cumulative
R = ______
D1/P0 + g
The NYSE differs from the NASDAQ primarily because the NYSE has:
- a face-to-face auction market - a physical location
Which of the following are cash flows to investors in stocks?
- capital gains - dividends
NASDAQ has which of these features?
- computer network of securities dealers - multiple market maker system
In the dividend growth model, the expected return for investors comes from which two sources?
- growth rate - dividend yield
Three special case patterns of dividend growth discussed in the text include:
- non-constant growth - constant growth - zero growth
Preferred stock has preference over common stock in the:
- payment of dividends - distribution of corporate assets
Which of the following ratios might be used to estimate the value of a stock?
- price/sales ratio - price/earnings ratio
The value of a firm is derived using the firm's ______ rate and its _______ rate.
growth; discount
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
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 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?
- stock has no set maturity - the required rate of return is unobservable - dividends are unknown and uncertain
Which of the following are rights of common stock holders?
- the right to share proportionally in any common dividends paid - the right to share proportionally in any residual value in the event of liquidation - the right to vote on matters of importance
T/F: Total return is calculated by adding the dividend yield and the capital gains yield.
true
The two most important stock markets in the U.S. are the New York Stock Exchange and ______.
NASDAQ
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
Using a benchmark PE ratio against current earnings yields a forecasted price called a _______ price.
target
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)
The dividend yield is determined by dividing the expected dividend (D1) by:
the current price (P0)
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.)
1) D3 = D x (1+g1)t = 2X(1.15)^3 = 3.04 2) D4 = D3 x (1+g2) = 3.04 X 1.05 = 3.19 3) P3 = D4/(r-g2) = 3.19/(0.10-0.05) = 63.88
Websites that allow investors to trade directly with one another are termed _______.
ECNs
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
If the growth rate (g) is zero, the capital gains yield is ____.
zero
