Chapter 8: Stock Valuation

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

Suppose Bob owns 20 shares and Vikki owns 30 shares in Good Company, and there are five members of the board of directors. Under which voting arrangement can Bob assure himself a board member that represents his interests?

Cumulative voting

Present value of the future cash flow for a share of stock

Current price of the stock = (Cash dividend paid at the end of one period + Price in one period)/(1 + required return in the market on this investment)

Stock price reporting has increasingly moved from traditional print media to the _______ in recent years.

internet

Initial public offerings of stock occur in the ____ market

primary

One requirement of the dividend growth model is:

g<R

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

expected

Scott Corporation does not pay dividends. The PE ratio for its industry is 13.3, and Scott's EPs were $1.47. At what price should Scott's stock trade?

$19.55

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 P0 = D/R = 2/.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%?

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

You expect the following dividends from ABC Stock: Year 1- $3.00 Year 2- $2.00 Year 3- $1.00 You expect that from year 4 onward, the dividend will grow at a constant 3% growth rate. If your required rate of return is 7%, what is your estimate for the current stock price?

$26.39

Dusty corporation has an issue of preferred stock that pays a dividend of 7% of it stated 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, this discount rate is 11 percent and the constant rate of growth is 3 percent?

$75 P0 = $6/(.11-.03) = $75

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

NASDAQ has which of these features?

-Multiple market maker system -Computer network of securities dealers

The NYSE differs from the NASDAQ primarily because the NYSE has

-a face-to-face auction market, -a physical location -specialists

Preferred stock has preference over common stock in the:

-distribution of corporate assets; -payment of dividends

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

-dividend yield -growth rate

expected cash flows to investors in stocks

-dividends, -capital gains

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

-growth -discount

Three special case patterns of dividend growth include:

-non-constant growth; -zero growth; -constant growth

in which ways is preferred stock like a bond

-preferred shareholders receive a stated dividend, similar to interest on a bond -preferred stock sometimes has a sinking fund, giving it a set maturity like bonds -preferred shareholders receive a stated value if the firm liquidates, like bondholders -some preferred stock has credit ratings, like bonds

A benchmark PE ratio can be determined using:

-the PEs of similar companies; -a company's own historical PEs

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.

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

Broker

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.

One reason corporations use staggered boards is that:

It makes takeover attempts less likely to be successful.

the two most important stock markets in the US are the New York Stock Exchange and the _____.

NASDAQ

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 differ dividends on preferred stock; however, they cannot pay dividends to come in shareholders until preferred dividends are paid.

The constant growth formula calculates the stock price:

One year prior (year t) to the first dividend payment (Dt+1)

Stock price at any point in time

Pt = (Dt)/(R - g)

A PE ratio that is based on estimated future earnings is known as a ___ PE ratio.

forward

Common stock

Term used to describe the total amount paid in by stockholders for the shares they purchase.

Which of the following entities declares a dividend?

The board of directors

When the stock being valued does not pay dividends,

The dividend growth model can still be used because analysts must assume that, at some point in the company's future, it is paying dividends

Will is deciding whether or not to buy Dang Corporation stock, whose current price is $54.95. Dang paid a dividend of $2.17 this year. Will estimates that dividends will grow very quickly, at a rate of 12%, for the next four years. After that, he expects the dividend growth rate to fall 5%. Should Will buy the stock if his required rate of return is 10%?

Yes; using the two stage growth model, the stock's value is $58.06

An asset's value is determined by the present value of its ___ cash flows.

future

Dividend Growth Model

a model that determines the current price of a stock as its dividend next period divided by the discount rate less the dividend growth rate

The ___ can be interpreted as the capital gains yield.

constant growth rate

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

decreases

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

specialist

Mota Motors has eight directors on its board, two of whom go up for election each year. This is an example of a:

staggered

The goal of many successful organizations is a ______ rate of growth in dividends.

stready

P0 = D/R D is cash flow every period R is required return

zero growth share of common stock?