FIN 331 Ch. 8

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

Capital gains; Dividends

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

Discount rate; annual dividend amount

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

Growth rate; Dividend Yield

Which of the following is a feature of common stock?

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

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

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

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

the NASDAQ

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

the current price

The trading of existing shares occurs in the ___ market.

secondary

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

When valuing a stock, the advantage to considering the stock price in the distant future (rathen than a more near-term price) as a cash flow is that:

when discounted to present value, a stock price in the distant future is nearly zero

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

zero

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

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?

$26.39

Dusty Corporation has an issue do 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

What is the value of a stocks if next year's dividend is $6, the discount rate is 11 percent and the constant rate of growth is 3 percent?

$75 because $6/(0.11-0.03)

A zero-growth stock pays a dividend of $2 per share and has a discount rate of 10%. The stock's price will be 0.

20.00

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

A physical location; an auction market; specialists

In which way(s) is preferred stock like a bond?

Preferred shareholders receive a stated value if the firm liquidates, like bondholders; Preferred shareholders receive a stated dividend, similar to interest on a bond; Some preferred stock has credit ratings, like bonds; Preferred stock sometimes has a sinking fund, giving in a set maturity like bonds.

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

Price in one year; Dividend in one year; Discount rate; Price today

Which of the following entities declares a dividend?

The board of directors

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?

The right to a proportional share of dividends paid; Voting rights; The right to purchase a proportional share of new stock issued

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

The largest number of NYSE members are registered as ___.

commission brokers

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

decreases

Preferred stock has preference over common stock in the:

distribution of corporate assets; payment of dividends

The constant-growth model infers that ___.

dividends change at a constant rate

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

forward

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

future

The ___ can be interpreted as the capital gains yield.

growth rate

The value of a firm is the 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

When the stock being valued does not pay dividends,

the dividend growth model can still be used

Three special case patterns of dividend growth include:

non-constant growth; zero growth; constant growth

A benchmark PE ratio can be determined using:

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