FIN Chapter 6
Preferred stock has which of these features?
o Preference over common stock in a liquidation o Dividend payment preference
A zero-growth model for stock valuation is distinguished by a ____.
Constant dividend amount
Retention Ratio
Growth rate percent/return on equity
The main trading floor at the NYSE is known as ____.
The big room
Earning next year are a function of which factors?
o Earnings this year o Return on retained earnings o Retained earnings this year
A firm has 15,000 shares of stock outstanding. The expected net income is $50,000 of which 40% will be used to pay dividends and repurchase shares. Income is expected to grow by 10% and the required return is 14%. What is the price per share?
$33.33
What is the value of a stock if next year's dividend is $6, the discount rate is 11 % and the constant rate of growth is 3%?
$75
The price of a share of common stock is equal to the present value of the ____ future dividends.
Expected
Ture or false: All classes of stock issued by a firm must have equal voting rights.
False
___ refers to the stream of customers' orders to buy and sell stock.
Order flow
PE Ratio
PPS/EPS
Initial public offerings of stock occur in the ____ market.
Primary
Which term applies to the granting of authority by a shareholder to someone else to case their votes?
Proxy
Find constant growth rate
g = discount rate - (D1/P0)
Which of the following are cash flows to investors in stocks?
o Interest o Capital Gains o Dividends
A firm with growth opportunities should sell for ____ a firm without growth opportunities.
More than
NASDAQ differs from NYSE primarily because NASDAQ has ____.
No physical location
The PE ratio is negatively related to the ______.
o Stock's risk o Firms discount rate
The NYSE trades both electronically and face-two-face, which makes it ___.
A hybrid market
EBITDA measures earnings before _____.
Interest, depreciation, amortization
The two polar cases when estimating R for individual securities are:
A firm whose growth rate is equal to or above R A firm paying no dividends
What are the effects of staggering the elections for the board of directors?
Increased prevention of minority shareholder control of the board Improved continuity on the board of directors Decreased likelihood of a successful takeover attempt
Enterprise value is equal to the market value of a firm's equity plus the market value of a firm's debt ____.
Minus cash
Estimation of firm's value
Industry value * EBITDA
What is the total return for a stock that currently sells $100, pays a dividend in one year of $2, and has a constant growth rate of 8%?
10%
The enterprise value of a firm will be $ _____ million if the EV/EBITDA ratio for the industry is 8 and it has an EBITDA of $20million.
160
If the dividend received next year is $2, the discount rate is 10%, and the stock is currently priced at $25, the constant growth rate must be ____ percent.
2
A firm with an 8 percent dividend growth rate and return on equity of 20% must have a retention ratio of ______ percent.
40
What is the total return for a stock 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%
A website that allow investors to trade directly with one another is called ____
An ECN
On objection to the present value analysis of stocks is that investors ____.
Are shortsighted
What are cash flows to investors in stocks?
Capital Gains Dividends
_______ act as two-sided dealers in particular stocks.
DMMs
Someone who maintains an inventory of stocks and buys and sells those stocks is known as a ____.
Dealer
R
Discount rate
An asset's value is determined by the present value of its _____ cash flows.
Future
The NYSE's goal is to _____.
Generate as much liquidity as possible
When a floor broker "works" an order, they are trying to _____.
Get their client the best possible price
If the growth rate (g) is zero, the capital gains yield is _____.
Zero
P0
dividend/(discount rate - growth rate)
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 [10,000/(3 +1)]
The trading of existing shares occurs in the ____ market.
Secondary
The value of a firm is the function of its ____ rate and its _____ rate.
Growth; discount
NASDAQ has what features?
o Computer network of securities dealers o Multiple market maker system
What are the three basic patterns of dividend growth?
o Constant growth o Zero growth o Differential growth
What three are common methods used to compute stock values?
o Dividend Discount model o Free cash flow model o Comparable method
Div1
Dividend at end of Year 1
Which one of the following represents valuation of stock using a zero-growth model?
Dividend/Discount rate
The price earnings ratio is found by dividing the current price per share by last year's _____.
Earnings per share
A firm may choose to forgo dividends today if growth opportunities are ____.
High
The ratio of this year's retained earnings to net income is called the _____ ratio.
Retention
When estimating the growth rate, g, with the constant-growth stock valuation model, it is assumed that the ______ ratio stays the same.
Retention
Common stockholders generally have which rights?
o Right to vote on key issues such as merger o Right to share proportionally in dividends paid o Right to share proportionally in residual assets in a liquidation
Why do no-payout stocks sell at positive prices?
Investors speculate on capital returns if the firm is sold. Investors count on future dividends.
In an inflationary environment, reported earnings are ____ if a firm uses LIFO rather than FIFO accounting.
Lower
In a stock price quote, the number of shares outstanding multiplied by the current price per share is known as the _____.
Market cap
A no-dividend firm can still pay off for an investor by ___.
Paying high dividends in the future. Being acquired in the future
Common stock is generally identified by its lack of special preference in ____.
Receiving dividends Bankruptcy
We can estimate the anticipated return on current retained earnings by using the historical ____ _____ ___.
Return on Equity
What is the price of a stock if its dividend a year from now is expected to be $3.20, the discount rate is 9 percent, and the constant rate of growth is 5 percent.
$80
Assuming inflationary environment, a firm that uses LIFO accounting will have ____ PE ratio than an equivalent firm using FIFO accounting.
A higher
All else constant, the dividend yield will increase if the stock price ______.
Decreases
Net investment is equal to the total investment minus ____.
Depreciation
What type of growth describes a company that grows quickly at first but then grows slower in later years?
Differential growth
Return Rate
R = (D1/P0) + g
P1
Stock price in one year
When share repurchases are involved, you must compute the _____ before computing the stock price per share.
Total present value of all outstanding shares
What information do we need to determine the value of stock using the zero-growth model?
Discount rate Annual dividend amount
Which of these factors are used in predicting stock values using the dividend discount model?
Discount rate Growth
In the dividend discount model, the expected return for investors comes from which two sources?
Dividend Yield Growth Rate
The ____ can be interpreted as the capital gains yield.
Growth rate
In a stock price quote, the ask price is _____ the bid price
Higher than
The determinants of a firm's growth rate include which factors?
Return on retained earnings The retention ratio
The goal of many successful organizations is a(n) ____ rate of growth in dividends.
Steady
P0
Stock price today
Earnings next year are a function of which factors?
o Earnings this year o Return on retained earnings o Retained earnings this year
The price earnings (PE) ratio is a function of which three factors?
o Growth opportunities o Accounting practices o Risk level
When enterprise value is calculated, cash is subtracted from the market value of debt and equity because ____.
o Many firms hold more cash than necessary o An EV ratio should reflect the ability of productive assets to create cash flow