FIN: Ch 8 Stock Valuation
Matthews Company has two classes of common stock, and each share represents the same proportion 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
The ___ can be interpreted as the capital gains yield.
Constant growth rate
All else constant, the dividend yield will increase if the stock price ____________________.
Decreases
Which one of the following is true about dividend growth patterns?
Dividends may grow at a constant rate
One requirement of the dividend growth model is:
g<R
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
NASDAQ has which of these features?
- Multiple market maker system - Computer network of securities dealers
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
The NYSE differs from the NASDAQ primarily because the NYSE has:
- A physical location - An auction market - Specialists
Which of the following are expected 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
Preferred stock has preference over common stock in the:
- Distribution of corporate assets - Payment of dividends
In the dividend discount model, the expected return for investors comes from which two sources?
- Dividend yield - Growth rate/capital gains yield
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.
A benchmark PE ratio can be determined using:
- The PEs of similar companies - A company's own historical PEs
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
What is the price of a 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%?
22.73 (5+20)/(1+0.10)
A PE ratio that is based on estimated future earnings is known as a ___ PE ratio.
Forward
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
One reason corporations use staggered boards is that:
It makes takeover attempts less likely to be successful
Most voting in large corporations is done by proxy because:
Most the small shareholders do not attend the annual meeting
Which of the following occurs in the primary market?
Newly-issued stocks are initially sold
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 (d t+1)
Fundamentally, the business of the NYSE is to attract and process _______________.
Order flow
Match the following terms relating to stock valuation.
P1 ................................................ Price in one year D1 ................................................ Dividend in one year R ................................................ Discount rate P0 ................................................ Price today
The formula for valuing a constant growth stock is:
Po = D1/ (R - g)
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
the goal of many successful organizations is a ______ rate of growth in dividends.
Steady
Which of the following entities declares a dividend?
The board of directors
When valuing a stock, the advantage to considering the stock price in the distant future (rather 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
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
An asset's value is determined by the present value of its ___ cash flows.
future
A person who brings buyers and sellers together is called a(n) __________.
broker
When the stock being valued does not pay dividends,
the dividend growth model can still be used