Fin 338 Chapter 8

The average stock's standard deviation is about:

30%.

Which of the following statements regarding stock classes is accurate?

A classified stock bearing voting rights is more valuable to investors than a classified stock without voting rights, other privileges being equal.

A key point to remember is that if the ROIC is too low, managers must implement growth strategies before pursuing better capital utilization.

False

A preemptive right gives stockholders the right to call for a meeting to vote to replace the management. Without the preemptive right, dissident stockholders would have to seek a change in management through a proxy fight.

False

An increase in the growth rate always has a positive effect on the horizon value.

False

Classified stock refers to different types of preferred stock, which may be issued to meet special needs, such as preserving control of founding investors.

False

Large changes in the expected value drivers are required to affect incremental changes in stock prices.

False

Stockholders must choose a proxy to represent them at annual meetings.

False

To find the expected rate of return on a share of stock, find the dividend yield and subtract any commissions paid when the stock is purchased and sold.

False

A type of classified stock called founders' shares is owned exclusively by the firm's founders and typically provides more votes per share than other classes of common stock.

True

If a stock's price is stable, this probably means that little new information is arriving.

True

If quarterly earnings are less than expected for nonoperational reasons, the stock price may actually increase.

True

In order to prevent dilution of control or dilution of value, shareholders use preemptive rights to purchase, on a pro rata basis, any new shares issued by the firm.

True

The FCF valuation model and the dividend growth model provide the same result.

True

To find the firm's value of operations, discount projected free cash flows at the firm's weighted average cost of capital.

True

When stockholders assign their right to vote to another party, this is called:

a proxy.

Using the market multiple method to estimate a target company's value, the second step is to calculate for each comparable firm the ratio of its observed market value to:

any metric that applies to the target firm and the comparable firms.

If you cannot explain a firm's behavior in terms of economic logic, the reason is likely related to:

compensation plans or peculiar features of the Tax Code.

If checked during trading hours, the stock price quoted on a subscription-paid stock trading Web site is usually the:

current "real time" price.

For a company that is a going concern, _____ have the first claim on value.

debtholders

The last year in a forecast, at which the FCF growth rate is expected to become constant, is called the:

forecast horizon, horizon date, or terminal date.

The estimate of the value of operations at the horizon year is called the:

horizon value, continuing value, or terminal value.

In the market multiple method, the ratio of a comparable firm's market value to a particular metric is called a:

market multiple.

Stock trading Web sites usually report the Market Capitalization, which is the total:

market value of outstanding common shares.

The preemptive right is important to shareholders because it:

protects the current shareholders against a dilution of their ownership interests.

Which of the following inputs to the FCF valuation model is NOT a value driver?

recent level of sales

A graphic provided with a stock quote on a stock trading Web site usually depicts the:

stock's price over time.

If you were trying to precisely estimate the value of a company that has never paid a dividend, you would have to use:

the free cash flow valuation model

When considering the sale or purchase of a division, which model/method can be used to estimate a fair price?

the free cash flow valuation model

The free cash flow (FCF) valuation model defines the value of a company's operations as:

the present value of its expected free cash flows discounted at the weighted average cost of capital.

Companies have two primary sources of value, which are:

the value of operations and the value of nonoperating assets.