Fin Ch.7
NASDAQ has which of these features?
Computer network of securities dealers Multiple market maker system
P1 = (__ + P2)/(1 + R)
D2
The NYSE differs from the NASDAQ primarily because the NYSE has:
a physical location a face-to-face auction market
A person who brings buyers and sellers together is called a(n) ______.
broker
True or false: A PE ratio that is based on estimated future earnings is called a regressive PE ratio.
False
Initial public offerings of stock occur in the ____ market.
primary
Preferred stock has preference over common stock in the:
payment of dividends distribution of corporate assets
Earnings over the coming year are expected to be $3 and a benchmark PE of 15 applies to earnings over the previous year. The _____, or forecast, price over the coming year is $45.
target
Which of the following are reasons that make valuing a share of stock more difficult than valuing a bond?
Stock has no set maturity Dividends are unknown and uncertain The required rate of return is unobservable
Someone who maintains an inventory of stocks and buys and sells those stocks is known as a ____.
dealer
The constant-growth model assumes that _________.
dividends change at a constant rate
A PE ratio that is based on estimated future earnings is known as a ____________ PE ratio.
forward
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
What information do we need to determine the value of a stock using the zero growth model?
Discount rate Dividend
Which of the following represents the valuation of stock using a zero growth model?
Dividend/Discount rate = D/R
The value of a firm is derived using the firm's ______ rate and its _______ rate.
growth; discount
New York Stock Exchange Designated Market Makers (DMMs) were formerly called ________ .
specialists
Using a benchmark PE ratio against current earnings yields a forecasted price called a _______ price.
target
What is the formula for the present value of a growing perpetuity where C1 is the net cash flow, R is the required return and g is the growth rate?
P = C1/(R-g)
All else constant, the dividend yield will increase if the stock price ____.
decreases
Shares of stock are first brought to the market and sold to investors in the _____ market.
primary
If unpaid preferred dividends must be "caught up" before any common dividends can be paid, they are called _________ dividends.
cumulative
P0 = (D1 + P1)/(1 + __)
R
Which of the following defines the primary market?
The primary market is where stocks are issued for the first time
True or false: Total return is calculated by adding the dividend yield and the capital gains yield.
True
The ______ can be interpreted as the capital gains yield.
growth rate
"Inside Quotes" represent the _________ and the ________.
highest bid price; lowest ask price
Stock price reporting has increasingly moved from traditional print media to the ______ in recent years.
internet
The trading of existing shares occurs in the ______ market.
secondary
The dividend yield is determined by dividing the expected dividend (D1) by:
the current price (P0)
For investors in the stock market, dividends from stocks are fixed and guaranteed, while capital gains are variable and not guaranteed.
False
The two most important stock markets in the U.S. are the New York Stock Exchange and ______.
NASDAQ
Match the following terms relating to stock valuation. Instructions
P1 Price in one year D1 Next expected Dividend R Discount rate P0 Price today D0 Dividend just paid
A benchmark PE ratio can be determined using:
-a company's own historical PEs -the PEs of similar companies
If the growth rate (g) is zero, the capital gains yield is ____.
zero
R = ______
D1/P0 + g
Which of the following are rights of common stock holders?
The right to vote on matters of importance. The right to share proportionally in any residual value in the event of liquidation. The right to share proportionally in any common dividends paid.
True or false: Common stock has a set maturity.
False
True or false: Daily stock prices can only be found by looking up the stock in newspapers.
False
In the dividend growth model, the expected return for investors comes from which two sources?
Growth rate Dividend Yield
This type of growth describes a company that grows quickly at first, then slower in future years.
Non-constant
Which of the following ratios might be used to estimate the value of a stock?
The Price/Sales ratio The Price/Earnings ratio
Suppose a firm's dividends are expected to grow at a rate of 15% (g1) for 3 years (t) then stabilize at 5% (g2) forever. If the firm just paid a $2.00 (D0) dividend and the discount rate is 10% (r), what is the value of a share of the firm's stock in year 3 (P3 )? (Do not round your intermediate calculation.)
$63.88 D3 = D0 x (1+g1)t = $2 x (1.15)3 = $3.04 D4 = D3 x (1+g2) = $3.04 x 1.05 = $3.19 P3 = D4/(r-g2 ) = $3.19/(.10 - .05) = $63.88
Which of the following are cash flows to investors in stocks?
Dividends Capital gains
Which one of 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 price of a share of common stock is equal to the present value of all ______ future dividends.
expected
Three special case patterns of dividend growth discussed in the text include:
zero growth non-constant growth constant growth
