Chp 7 BA 323

Match the following terms relating to stock valuation.

P1- Price in one year D1- Next expected Dividend R- Discount rate P0- Price today D0- Dividend just paid

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

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

Which of the following is true of classes of common stock?

The classes of common stock often have unequal voting rights. A primary reason for creating more than one class of stock is to maintain control.

The ______ can be interpreted as the capital gains yield.

growth rate

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

growth rate dividend yield

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

growth; discount

A written authorization for one shareholder to vote the stock of another shareholder is called a(n)

proxy

Institutional memory can be enhanced by

staggering board elections

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).

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

the price-earnings ratio

A benchmark PE ratio can be determined using:

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

Which of the following are true of dividends?

-they are taxable to individual shareholders. -they are paid at the discretion of the board of directors.

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

False

True or false: All classes of stock issued by a firm must have equal voting rights.

False

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

False

What beneficial purpose does staggering serve?

It provides institutional memory.

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)

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

forward

If there are nine directors to be elected, what is the least number of shares you will need to guarantee a seat on the board under cumulative voting?

10 percent of the stock plus 1 share

If you hold 50 shares of a particular corporation's common stock and there are 5 directors to be elected, how many votes will you be allowed to cast under cumulative voting?

250

If there are nine directors that need to be elected, how many shares do you need to own in order to guarantee a seat on the board under straight voting?

50 percent of the stock + 1 share

Under _____ a voting mechanism, the minimum number of votes required to acquire a seat on a board is _____ % PLUS _____ .

Blank 1: straight Blank 2: 50 or fifty Blank 3: 1, one, 1 share, or one share

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: common stock has no maturity

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

capital gains dividends

When directors elected by common shareholders defer preferred dividends indefinitely,_____

common shareholders must also forego dividends

Identify the two types of preferred dividends:

cumulative and noncumulative

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

decreases

Payments to shareholders that represent a return on the capital contributed to the corporation are referred to as _____.

dividends

The constant growth model assumes 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

What right does a proxy give to a shareholder?

the right to vote on behalf of another shareholder

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

zero

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

zero growth. constant growth. nonconstant growth.