FNCE 3400 SmartBook/LearnSmart Chapter 4
A zero-growth stock pays a dividend of $2 per share and has a discount rate of 10%. What will the stock's price be?
$20.00 [Reason: P0 = $2/0.10 = $20]
What is the price of a stock at the end of one year (P1) if the dividend for Year 2 (D2) is $5, the price for Year 2 (P2) is $20, and the discount rate is 10 percent?
$22.73 [Reason: P1= ($5 + 20)/1.10 = $22.73]
What is the price of a stock at the end of one year (P1) if the dividend for Year 2 (D2) is $6, the price for Year 2 (P2) is $40, and the discount rate is 5 percent?
$43.81 [Reason: P1= ($6 + 40)/1.05 = $43.81]
What is the value of a stock if next year's dividend is $6, the discount rate is 11 percent and the constant rate of growth is 3 percent?
$75 [Reason: P0 = $6/(.11 - .03) = $75 Do not multiply the dividend by 1 + the growth rate, because you're given next year's dividend.]
Which of the following increases the number of shares owned by the shareholders of a firm?
A stock dividend A stock split
______ stock has preference in the payment of dividends and during liquidation.
Preferred
Which term applies to the granting of authority by a shareholder to someone else to cast their votes?
Proxy
The determinants of a firm's growth rate include which factors?
Return on retained earnings The retention ratio
The term ________ stock is usually applied to stock that has no special preference in receiving dividends or in bankruptcy.
common
A zero-growth model for stock valuation is distinguished by a ____.
constant dividend amount
In order to prevent voting that freezes out minority shareholders, many states have mandatory ______ voting.
cumulative
The dividend yield is determined by dividing next year's expected cash dividend by the ____.
current stock price
The date on which the company's board of directors passes a resolution to pay a dividend is called the ______ date.
declaration
The ______ can be interpreted as the capital gains yield.
growth rate
The value of a firm is the function of its ______ rate and its _______ rate.
growth; discount
Stock sale price and dividends are
included in the valuation of stock. kinds of cash flows investing in a stock can provide.
With cumulative voting
minority participation is permitted. directors are elected all at once.
Enterprise value is equal to the market value of a firm's equity plus the market value of a firm's debt _____.
minus cash
A firm with growth opportunities should sell for ____ a firm without growth opportunities.
more than
An asset's value is determined by the ____________ value of its ___________ cash flows.
present future
A ________ gives someone else the authority to vote a shareholder's shares.
proxy
Public companies usually pay cash dividends on a ____ basis.
quarterly
Common stock is generally identified by its lack of special preference in _____.
receiving dividends bankruptcy
The ex-dividend date is the date
that stock must be purchased before in order to receive a dividend.
The value of a firm is a function of which of the following?
Its discount rate Its growth rate
An asset's value is determined by the present value of its ______ cash flows.
future
A firm may choose to forgo dividends today if growth opportunities are _____.
high
Which of these actions do many managers take when they consider the firm's stock to be undervalued?
A stock repurchase
Why do no-payout stocks sell at positive prices?
Investors count on future dividends. Investors speculate on capital returns if the firm is sold.
Which of the following are true of the return on equity?
It is the return on the cumulation of all of the firm's past projects. It can be used to estimate the anticipated return on current retained earnings. It is the return on the firm's entire equity.
In order to receive a dividend, a stockholder must purchase stock before a certain date. That date is called the ___.
ex-dividend date
What is the total return for a stock that currently sells for $100, pays a dividend in one year of $2, and has a constant growth rate of 8 percent?
10%
A firm with an 8 percent dividend growth rate and a return on equity of 20 percent must have a retention ratio of ______ percent.
40 [Reason: Retention ratio = .08/.2 = .4, or 40%]
If a zero-dividend stock is purchased for $80 and sold one year later for $84, the 1-year return is ______ percent.
5 [Reason: ($84/$80) - 1 = 5%]
What information do we need to determine the value of stock using the zero-growth model?
Annual dividend amount Discount rate
Which of the following is true about stock dividends ands stock splits?
Both will increase the total number of shares. Both will reduce the share price.
Which one of the following is true about dividend growth patterns?
Dividends may grow at a constant rate.
Dividends received by shareholders are expressed in which of the following ways?
Dividends per share Dividend payout Dividend yield
Which of the following are true?
Firms are indifferent between a stock repurchase and a cash dividend in a perfect market. Given the irrelevance propositions, the increase in EPS that results from repurchase is not beneficial.
Estimates of R should be viewed with a healthy sense of skepticism because the determination of R is highly dependent on g and the estimate of g is based on a number of assumptions. Which of the following are assumptions used in arriving at the estimate for g?
The future retention ratio is equal to the past retention ratio. The return on reinvestment of future retained earnings is equal to the firm's past ROE.
Which of the following is a reason that an investor should pay a higher price for stock in a firm with growth opportunities than a firm without growth opportunities?
The investor is buying both current income and growth opportunities.
Which of the following are true of dividends?
They are taxable to individual shareholders. They are paid at the discretion of the board of directors.
Which of the following are reasons a firm would prefer a stock repurchase over dividends?
Undervaluation Flexibility Taxes
What are the three basic patterns of dividend growth?
Zero growth Constant growth Differential growth
Net investment is equal to the total investment minus ____.
depreciation
EBITDA measures earnings before ______.
depreciation interest amortization
With straight voting
directors are elected one at a time. you must have 50% plus one vote to guarantee a seat on the board.
When a payment is made from a firm's earnings to its owners in the form of cash, it is called a _____.
dividend
Payments to shareholders that represent a return on the capital contributed to the corporation are referred to as _______________.
dividends
The constant-growth model assumes that _________.
dividends change at a constant rate
The price earnings ratio is found by dividing the current price per share by its ______.
earnings per share
A net investment of zero occurs when total investment
equals depreciation.
A dividend _______ is the amount of the dividend expressed as a percentage of the stock's market price.
yield
If the growth rate (g) is zero, the capital gains yield is ____.
zero
A firm has three open seats on its board of directors and has 10,000 shares outstanding. How many shares must you control to ensure your election to the board if each share receives one vote and voting is cumulative?
2,501 shares [Reason: [10,000/(3 + 1)] + 1 = 2,501 shares. In order to keep you off the board, each of the three seats would have to receive 2,502 votes - 2502 X 3 = 7506. Because there would only be (10000 - 2501)= 7499 votes remaining, you are sure to win one of the seats.]
What is the total return for a stock that currently sells for $108, pays a dividend in one year of $3.20, and has a constant growth rate of 3.5 percent?
6.46% [Reason: R = ($3.20/$108) + .035 = .0646, or 6.46%]
The stock of Boyle Industries is selling for $21 per share and its earnings per share is $3.00. What is Boyle's PE ratio?
7 [Reason: PE ratio = $21/$3.00 = 7]
Preferred stock has which of the following features?
Dividend payment preference Preference over common stock in a liquidation
Which one of the following represents valuation of stock using a zero-growth model?
Dividend/Discount rate
A firm can pay out its cash earnings to its shareholders in which of the following ways?
Dividends Share repurchase
Which of the following are true of cumulative preferred dividends?
If cumulative preferred dividends go unpaid in a particular year, they will be carried forward as an arrearage. Common shareholders must forgo dividends while preferred dividends are unpaid.
What are the effects of staggering the elections for the board of directors?
Improved continuity on the board of directors Decreased likelihood of a successful takeover attempt Increased prevention of minority shareholder control of the board
Which of the following are cash flows to investors in stocks?
Sale price Dividends
Match the following terms relating to stock valuation. P1 Div1 R P0
Stock price in one year Dividend at end of Year 1 Discount rate Stock price today
In a perfect market, which of the following is true?
The firm is indifferent between a stock repurchase and a cash dividend.
Which of the following usually occur with a stock dividend?
The number of shares increase. The price per share falls. No cash leaves the firm.
What is likely to happen to the share price if a company issues a stock dividend?
The price will fall.
Preferred stock dividends
can be deferred indefinitely. may be noncumulative. may be cumulative.
The date the firm mails out its declared dividends is called the ___.
date of payment
All else constant, the dividend yield will increase if the stock price ____.
decreases
As the discount rate increases, the PE ratio ______.
decreases
When estimating the growth rate, g, with the constant-growth stock valuation model, it is assumed that the ______ ratio stays the same.
retention
We can estimate the anticipated return on current retained earnings by using the historical _________ _________ _________.
return on equity
A dividend can be paid in the form of cash or ______.
stock
An alternative way to pay out a firm's earnings to shareholders instead of cash dividends is a ___.
stock repurchase
The PE ratio is negatively related to the ______.
stock's risk firm's discount rate
