Chapter 8 Stock Evaluation

Dusty corporation has an issue of preferred stock that pays a dividend of 7% of its state value, which is $100. Which of the following would be a commonly used name for that preferred stock?

$7 preferred

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

- Capital gains - Dividends

Which of the following are features of common stock?

- It generally has voting rights - It has no special preference in bankruptcy - It has no special preference in receiving dividends

NASDAQ has which of these features?

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

Which of the following occurs in the primary market?

- Newly-issued stocks are initially sold

Which of the following are reasons why it is more difficult to value common stock than it is to value bonds?

- The life of a common stock is essentially forever - The rate of return required by the market is not easily observed - Common stock cash flows are not known in advance

Which of the following is usually a right of common shareholders?

- Voting rights - The right to a proportional share of dividends paid

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

- a physical location - specialists - an auction market

Is a company required to pay preferred dividends?

No; the company may defer dividends on preferred stock; however they can not pay dividends to common shareholders until preferred dividends are paid.

The NYSE member who acts as a dealer in a small number of securities is called a(n) _______.

specialist

The goal of many successful organizations is a(n) _____ rate of growth in dividends.

steady

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

the NASDAQ

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

zero

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

- Growth rate - Dividend Yield

A benchmark PE ratio can be determined using:

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

Preferred stock has preference over common stock in the:

- payment of dividends - distribution of corporate assets

WinWin Corporation has five board members, and each shareholder gets one vote per share. The company uses a straight board voting procedure. How does this arrangement affect minority shareholders?

No minority shareholder would have enough votes to win any seat on the board.

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 constant growth formula calculates the stock price:

One year prior (year t) to the first dividend payment (Dt+1)

True or false: It can be advantageous to have a staggered board because it provides "institutional memory."

True

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

broker

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

decreases

The constant-growth model infers that _____.

dividends change at a constant rate

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

expected

An asset's value is determined by the present value of its ___ cash flows.

future

The value of a firm is a function of its ___ rate and its ___ rate.

growth; discount

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

internet

Most voting in large corporations is done by proxy because:

most small shareholders do not attend the annual meeting

Mota Motors has eight directors on its board, two of whom go up for election each year. This is an example of a:

staggered board

Match the following terms relating to stock valuation.

P1- Price in one year D1- Dividend in one year R- Discount rate P0- Price today

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

- Discount rate - Annual dividend amount

Matthews Company has two classes of common stock, and each share represents the same proportion of onwership in the company. Class A has 2 votes for each share. Class b has one vote per share. Which class is more valuable?

Class A

One common reason for having two classes of common stock with different voting rights is:

It is easier for insiders such as founding families to maintain control of the company.

What is the price of stock at the end of one year (P1) if the dividend for Year 2 (Div2) is $5, the price for Year 2 (P2) is $20, and the discount rate is 10 percent?

P1 = ($5 + 20)/1.10 = $22.73

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

forward

One requirement of the dividends growth model is:

g<R

Fundamentally, the business of the NYSE is to attract and process _____.

order flow

Which of the following entities declares a dividend?

The board of directors

Will is deciding whether or not to buy Dang Corporation stock, whose current price is $54.95. Dang paid a dividend of $2.17 this year. Will estimates that dividends will grow very quickly, at a rate of 12%, for the next four years. After that, he expects the dividend growth rate to fall 5%. Should Will buy the stock if his required rate of return is 10%?

Yes; using the two stage growth model, the stock's value is $58.06

Scott Corporation does not pay dividends. The PE ratio for its industry is 13.3, and Scott's EPS were $1.47. At what price should Scott's stock trade?

$19.55

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

Dividends may grow at a constant rate.

When the stock being valued does not currently pay dividends,

The dividend growth model can still be used based on the future dividends

In which ways is preferred stock like a bond?

- preferred shareholders receive a stated dividend, similar to interest on a bond - preferred stock sometimes has a sinking fund, giving it a set maturity like bonds - preferred shareholders receive a stated value if the firm liquidates, like bondholders - some preferred stock has credit ratings, like bonds

You expect the following dividends from ABC Stock: Year 1- $3.00 Year 2- $2.00 Year 3 $1.00 You expect that from year 4 onward, the dividend will grow at a constant 3% growth rate. If your required rate of return is 7%, what is your estimate for the current stock price?

3/1.07+2/1.07^2+(1+1(1.03)/.07-.03))/1.07^3 = 26.39

True or false: Cumulative voting means bond members are elected one at a time, with each shareholder casting his or her allotted votes for each seat on the board.

False