Finance- Exam #2- Ch 8

The NYSE member who acts as a dealer in a small number of securities is a

specialist

Which of the following are expected cash flows to investors in stock?

Capital gains Dividends

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

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(n) _____________________ rate of growth in dividends.

Steady

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

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

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

zero

Which of one the following is true about dividend growth patterns?

Dividends may grow at a constant rate

Which of the following occurs in the primary market?

newly-issues stocks are initially sold

What is the price in 1 year for a stock that pays a dividend in 1 year of $2 with a growth rate of 8% and a required return of 10%?

$108 P1= D2/(r-g) = D1 * (1+g)/(r-g)= ($2 * 1.08)/(0.10-0.08)

The two most important stock markets in the US are the New York Stock Exchange and _______

the NASDAQ

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

T/F: It can be advantageous to have a staggered board because it provides "institutional memory".

true

A person who brings buyers and sellers together is called a ___.

broker

WHat's the price of a stock at the end of 1 year (P1) if the dividend for yr 2 (Div2) is $5, the price for yr 2 (P2) is $20, and the discount rate is 10%?

$22.73 P1= ($5 + 20)/1.10

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 stock if next year's dividend is $6, the discount rate if 11% and the constant rate of growth is 3%?

$75 P0= $6/(.11 - .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

Which of the following entities declares a dividend?

Board of directors

One requirement of the dividend growth model is

g < R

NASDAQ has which of these features?

-Multiple market maker system -Computer network of securities dealers

The value of a firm is a function of its ___ rate and its ___ rate.

Growth rate Discount rate

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

Most voting in large corporations is done by proxy because:

Most small shareholders do not attend the annual meeting

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.

Is a company required to pay preferred dividends?

No; the company may defer dividends on preferred stock; however they can not pay dividends to common shareholders until preferred dividends are paid.

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 fundamental business of the New York Stock Exchange is to attract ___.

Order flow

The formula for valuing a constant growth stock is

P0 = D1/(R-g)

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.

P1 D1 R P0

Price in 1 year Dividend in 1 year Discount rate Price today

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

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

an auction market physical location specialists

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 formula calculates the stock price

one year prior (year t) to the 1st dividend payment (Dt+1)

The price of a share of common stock is equal to the present value of all ___ future dividends.

expected