Finance Exam 2

New York Stock Exchange Designated Market Makers (DMMs) were formally called __________

specialists

A benchmark PE ratio can be determined using:

*A company's own historical PEs *The PEs of similar companies

Proxy

A grant of authority by a shareholder allowing another individual to vote his or her shares.

Straight Voting

A procedure in which a shareholder may cast all votes for each member of the board of directors.

Cumulative Voting

A procedure in which a shareholder may cast all votes for one member of the board of directors.

The internal rate of return is a function of _______

A project's cash flows

According to the average accounting return rule, a project is acceptable if its average accounting return exceeds:

A target average accounting return

The following represents the valuation of stock using the zero growth model:

Dividend/Discount rate = D/R

The following is true about dividend growth patterns:

Dividends may grow at a constant rate.

Websites that allow investors to trade directly with one another are termed ________

ECNs

The _______ can be interpreted as the capital gains yield.

Growth rate

"Inside Quotes" represent the _______ and the ________

Highest bid price; lowest ask price.

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

The current price (P0)

Primary Market

The market in which new securities are sold to investors.

Secondary Market

The market in which previously owned securities are traded among investors.

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

zero

Dealer

An agent who buys and sells securities from inventory.

The following are reasons the IRR continues to be used in practice:

*Businesspeople prefer to talk about rates of return *The IRR of a proposal can be calculated without knowing the appropriate discount rate *It is easier to communicate information about a proposal with an IRR.

NASDAQ has these features:

*Computer network of securities dealers *Multiple market maker system

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

*Dividend *Discount rate

In general, NPV is:

*Equal to zero when the discount rate equals the IRR *Positive for discount rates below the IRR *Negative for discount rates about the IRR

What are the advantages of the payback period method for management?

*Ideal for minor projects *Easy to use *Allows lower level managers to make small decisions effectively

The basic NPV investment rule is:

*accept a project if the NPV is greater than zero *If the NPV is equal to zero, acceptance or rejection of the project is a matter of indifference *reject a project if its NPV is less than zero.

The following present problems when using the IRR method

*non-conventional cash flows *mutually exclusive projects

The following are reasons that make valuing a share of stock more difficult than valuing a bond

1. The required rate of return is unobservable. 2. Stock has no set maturity. 3.Dividends are unknown and Uncertain.

Broker

An agent who arranges security transactions among investors.

If unpaid preferred dividends must be "caught up" before any common dividends can be paid, they are called _______ dividends.

Cumulative

If unpaid preferred dividends must be "caught up" before any common dividends can be paid, they are called __________ dividends.

Cumulative

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

Decreases

The payback period can lead to foolish decisions if it is used too literally because:

It ignores cash flows after the cutoff date.

The average accounting return is defined as

average net income/average book value

Preferred Stock

differs from common stock because it has preference over common stock in the payment of dividends and in the distribution of corporation assets in the event of liquidation

Common stock

equity without priority for dividends or bankruptcy.

Preemptive Right

means a company that wishes to sell stock must first offer it to the existing stockholders before offering it to the general public.

The fundamental business of the New York Stock Exchange is to attract _______

order flow