Finance Chapter 7 Smart Book
Initial public offerings of stock occur in the ____ market
primary
The trading of existing shares occurs in the ______ market.
secondary
New York Stock Exchange Designated Market Makers (DMMs) were formerly called ________
specialists
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
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 -g0
A benchmark PE ratio can be determined using:
the PEs of similar companies a company's own historical PEs
D0
Dividend just paid
Valuation of stock using a zero growth model
Dividend/Discount rate = D/R
P1
Price in one year
P0
Price today
dividend growth model
RE = Div/P0 + g
ratios used to estimate the value of a stock
The Price/Sales ratio The Price/Earnings ratio
D1
next expected dividend
3 special case patterns of dividend growth discussed in the text include
non-constant growth constant growth zero growth
shareholders get _____ vote per share held
one
The fundamental business of the New York Stock Exchange is to attract _______
order flow
rights of common stock holders
The right to vote on matters of importance. The right to share proportionally in any common dividends paid. The right to share proportionally in any residual value in the event of liquidation.
Preferred stock has preference over common stock in the (2)
payment of dividends distribution of corporate assets
A person who brings buyers and sellers together is called a(n) ______
broker
If unpaid preferred dividends must be "caught up" before any common dividends can be paid, they are called _________ dividends.
cumulative
Someone who maintains an inventory of stocks and buys and sells those stocks is known as a ____.
dealer
R
discount rate
Total return is calculated by adding the _________ and the ________
dividend yield; capital gains yield
the constant-growth model assumes that __________________
dividends change at a constant rate
T/F: common stock has a set maturity
false
A PE ratio that is based on estimated future earnings is known as a ____________ PE ratio
forward
"Inside Quotes" represent the _________ and the ________
highest bid price; lowest ask price
reasons that make valuing a share of stock more difficult than valuing a bond
Dividends are unknown and uncertain Stock has no set maturity The required rate of return is unobservable
The price of a share of common stock is equal to the present value of all ______ future dividends.
Expected
The value of a firm is derived using the firm's ______ rate and its _______ rate
Growth; discount
