Business Finance Chapter 7

What 3 ratios may be used to estimate the value of a stock?

1) market to book ratio 2) price to sales ratio 3) price to earnings ratio

In what 2 ways does preferred stock have preference over common stock?

1) payment of dividends 2) distribution of corporate assets

What are 3 rights of common stock holders?

1) the right to vote on matters of importance 2) the right to share proportionally in any dividends paid 3) the right to share proportionally in any RESIDUAL value in the event of liquidation

What is a forward PE ratio?

A PE ratio that is based on estimated future earnings

Delfino's expects to pay an annual dividend of $1.50 per share next year. What is the anticipated dividend for year 5 if the firm increases its dividend by 2 percent annually? Show the generic equation

D5 = D4 * (1-g)^4

True or false: Common stock has priority in a bankruptcy proceeding

False

True or false: Dividends are tax-deductible

False

True or false: For investors in the stock market, dividends from stocks are fixed and guaranteed, while capital gains are variable and not guaranteed

False

True or false: Stocks have maturity dates

False

What are the names of the 2 most important stock markets in the US?

NYSE + NASDAQ

What is the definition of a dealer?

Someone who maintains an inventory of stocks and and buys and sells those stocks

What is SuperDOT?

The electronic system that transmits buy and sell orders directly to a specialist on the floor of the NYSE

True or false: the primary market is where stocks are issued for the first time

True

What does a specialist do?

a player on the NYSE floor that is obligated to maintain a fair, orderly market for a limited number of securities

What is a proxy?

granted the authority to vote on her behalf to the managers of the firm

Which must equal zero if a firm pays a constant annual dividend?

growth rate/capital gains yield

To be a member of the NYSE, you must...

have a trading license

What does it mean to have a preemptive right as a shareholder?

have priority in the purchase of any newly issued stock

The simplification that allows us to replace the infinite stream of dividends with the dividend growth model is....

illegal

What will increase the current value of a stock?

increase in the capital gains yield

How do you calculate the number of cumulative votes?

number of owned shares x number of directors

The trading of existing shares come from the _________ market.

secondary

What are the 3 types of stock growth we study?

zero growth, constant growth, nonconstant growth

The NYSE differs from NASDAQ in what 3 ways?

1) an auction market 2) physical location 3) designated market makers

Describe 2 features of NASDAQ

1) computer network of securities dealers 2) multiple market maker system

What kind of dividend does a preferred stock receive?

fixed dividend

How are dividends paid out?

after after-tax profits

What is a growing perpetuity?

an asset with cash flows that grow at a constant rate forever

In the dividend discount model, the expected return for investors comes from what two sources?

dividend yield and growth rate/capital gains yield

What is an ECN?

a website that allows users to directly sell their shares of stocks to others

What's one reason why a corporation would not pay dividends?

to plow back the earnings into growth

Which is more difficult to value, a stock or a bond?

stock

What are 3 reasons valuing a share of stock is more difficult than valuing a bond?

1) dividends are unknown and uncertain 2) the required rate of return is unobservable 3) stock has no set maturity

What are 3 features of a cumulative preferred stockholder?

1) generally pays a fixed dividend 2) receives first priority in dividend payment 3) maintains the right to a dividend payment, even if that payment is deferred

The benchmark PE ratio can be determined using what 2 things?

1) the PEs of similar companies 2) a company's own historic PEs

True or false: Common stock shareholders have rights to dividends each year

False

True or false: Dividends are paid out at the discretion of the firm's president

False

True or false: Stock price reporting has increasingly moved from traditional print media to the television in recent years.

False; internet

Why would the dividend grow at a constant rate?

For many companies, steady growth of dividends is an explicit goal

What is a target price?

Using a benchmark PE ratio against current earnings yields this forecasted price

What is cumulative voting?

Using all your votes for a single candidate

What happens when the growth rate exceeds the discount rate, or they are equal?

the stock price is infinitely large

If the growth rate is zero, the capital gains yield is ________.

zero