finace chapter 7

An initial public offering is also referred to as the/a(n) Blank______.

first offering of stock

The plowback ratio is defined as the Blank______.

fraction of earnings retained by the firm

The dividend discount model implies that, investors who agree about a firm's Blank______ and Blank______ will also agree about its Blank______. Multiple choice question.

future dividends; risk; current share price

The present value of the cash payoffs anticipated by the investor in a stock is called the share's Blank______. Multiple choice question.

intrinsic value

Smithfield Hams is forecasted to pay a dividend of $1.50 for the following year and expects dividends to grow at a rate of 3% into the future. If investors require an 11% rate of return from Smithfield, what should its current share price be?

$18.75 Reason: $1.50/(0.11 − 0.03) = $18.75.

Using the dividend discount model for a no-growth stock, what is the value of a stock that pays a $3 dividend and has a discount rate of 10%?

$30 Reason: Value of a no-growth stock = DIV1/r = $3/0.1 = $30.

Helena Handbaskets expects to pay a dividend of $0.50 at year-end and expects that dividend to grow at a rate of 6% per year thereafter. If investors require a 15% return on Helena's stock, what should the current share price be? Multiple choice question.

$5.56 becasue: $0.50/(0.15 − 0.06) = $5.56.

Which of the following statements are correct regarding the method of valuation by comparables? (Choose 2.) Multiple select question. A firm's market value can be estimated by multiplying its earnings per share by the P/E ratio for a similar firm. A firm's market value can be estimated by multiplying its book value by the market/book ratio for a similar firm. A firm's market value can be estimated by using the share price of any similar-sized firm. A firm's market value can be estimated by finding the share price of a similar firm and using that value

A firm's market value can be estimated by multiplying its earnings per share by the P/E ratio for a similar firm. A firm's market value can be estimated by multiplying its book value by the market/book ratio for a similar firm.

When a firm sells its shares to the public for the first time, this is called a(n) Blank______. Multiple choice question.

IPO

If a firm's ROE is held constant, then Blank______ will grow in direct proportion to equity. Multiple choice question

earnings per share

Which of the following statements are correct about the book value of a firm's equity? Multiple select question. It can be calculated from the balance sheet as assets minus liabilities. It is what an investor would pay to buy the firm today. It is generally less than the market value of the firm's equity.

It can be calculated from the balance sheet as assets minus liabilities. It is generally less than the market value of the firm's equity.

Which of the following statements are true regarding the intrinsic value of a stock? Multiple select question. It is based on the recent historical returns of the stock. It is the present value of the cash payoffs anticipated by the investor who buys the stock. It is the price that should be observed in a well-functioning stock market. It is a theoretical value that is never actually observed in practice.

It is the present value of the cash payoffs anticipated by the investor who buys the stock. It is the price that should be observed in a well-functioning stock market.

The ratio of stock price to earnings per share is a firm's Blank______.

P/E ratio

An investor who purchases Blank______ receives ownership shares in a publicly held corporation.

common stock

In the constant growth dividend discount model, the expected return is equal to Blank______. Multiple choice question.

dividend yield + growth rate

Many companies that grow at rapid or irregular rates for several years before settling down use ---- growth model

nonconstant

A stock that pays out a perpetual stream of constant dividends can be valued as a(n) Blank______. Multiple choice question.

perpetuity

To determine a firm's sustainable growth rate, which three figures must remain constant? Multiple select question. plowback ratio return on assets long-term debt ratio return on equity receivables turnover

plowback ratio long-term debt ratio return on equity

The price-earnings multiple, also known as the P/E ratio, is calculated by Blank______.

price per share/earnings per share

The sale of new securities by corporations takes place in the Blank______.

primary market

A Blank______ refers to a corporation selling shares in the firm to investors.

primary offering

The expected rate of return for a stock whose next dividend is "DIV1," that has a required rate of return "r" and expects to grow its future dividends at a rate of "g" is Blank______. Multiple choice question.

r = (DIV1/P0) + g

when investors sell shares of a firm's stock to each other on an exchange or through an electronic network, this is called a Blank______ transaction.

secondary market

the book value of a firm's equity is equal to Blank______.

the firm's assets minus the firm's liabilities

the secondary market is where investors Blank______.

trade shares among other investors

A firm that examines a competitor's market-to-book and P/E ratios is in the beginning stages of Blank______.

valuation by comparables