Financial Management Unit 3 Smartbook

A projected IRR on a risky investment in the ______ percent range is not unusual

10 to 20

Bonds used in Ibbotson-Sinquefield's long-term U.S. government bond portfolio had maturities of _______ years

20

In the Ibbotson-Sinquefield studies, long-term corporate bonds have which of the following characteristics?

20-year maturities High quality

A zero-growth stock pays a dividend of $2 per share and has a discount rate of 10%. What will the stocks price be?

20.00 (Stock price = dividend per share / discount rate)

During the financial crisis of 2008, the S&P Index fell by _______ percent

37

The dividend yield for a 1-year period is equal to the annual dividend amount divided by the _____

Beginning stock price

________ formula is the equation that combines the arithmetic average return and the geometric average return

Blume's

If you are forecasting a few decades in the future (as you might do for retirement planning) you should calculate the expected return using:

Blume's formula

The AAR is calculated by taking the average net income and dividing it by the average _______ value

Book

A person who brings buyers and sellers together is called a

Broker

The ________ gains yield can be found by taking the difference between the ending stock price and the initial stock price and dividing it by the initial stock price

Capital

If you buy a stock for $10 and later sell it for $16, you will have a

Capital gain of $6

Which of the following are ways to make money by investing in stocks?

Capital gains Dividends

When a company declares a dividend, shareholders generally receive _________

Cash

Which of the following are true?

Common stocks may experience negative returns. T-bills sometimes outperform common stocks.

NASDAQ has which of these features?

Computer network of securities dealers Multiple market maker system

Three special case patterns of dividend growth include

Constant growth Zero growth Nonconstant growth

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 of a board member that represents his interests?

Cumulative voting

Someone who maintains an inventory of stocks and buys and sells those stocks is known as a

Dealer

An NYSE member who acts as a dealer in particular stocks is called a _________ market maker

Designated

Preferred stock has a preference over common stock in the

Distribution of corporate assets Payment of dividends

A _________ payment is a payment by a corporation to shareholders, made in either cash or stock

Dividend

Common stock as no special preference either in receiving __________ or in bankruptcy

Dividends

The two potential ways to make money as a stockholder are through _________ and capital appreciation

Dividends

Which of the following are expected cash flows to investors in stocks?

Dividends Capital gains

Which of the following is true about dividend growth patterns?

Dividends may grow at a constant rate

Which of the following represents the valuation of stock using a zero-growth model?

Dividends/Discount rate

T/F: Cumulative voting means board members are elected one at a time, with each shareholder casting his or her allotted votes for each seat on the board

False

T/F: For investors in the stock market, dividends from stocks are fixed and guaranteed, while capital gains are variable and not guaranteed.

False

An NYSE member who executes customer buy and sell orders is called a ____ broker.

Floor

Average returns can be calculated using _________ or arithmetic average

Geometric

The ________ (greater/lower) the risk, the greater the required return

Greater

The second lesson from studying capital market history is that risk is ___________

Handsomely rewarded

Dividends are the _________ component of the total return from investing in stock

Income

The capital gains yield can be found by finding the difference between the ending stock price and the initial stock price and dividing it by ________

Initial stock price

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

Internet

Which of the following are features of common stock?

It generally has voting rights It has no special preference in bankruptcy It has no special preference in receiving dividends

One reason corporations use staggered boards is that

It makes takeover attempts less likely to be successful

WinWin Corporation has 5 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

When voting for the board of directors, the number of votes a shareholder is entitled to is usually ______ vote per share held.

One

The year 2008 was

One of the worst years for stock market investors in US history

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 formula for valuing a constant growth stock is

P0 = D1/(R − g)

Normally, the excess rate of return on risky assets is ________

Positive

A stock with a dividend priority over common stock is called a ________ stock

Preferred

Initial public offerings of stock occur in the ________ market

Primary

The arithmetic average rate of return measures the ________

Return in an average year over one period

The Sharpe ratio measures _________

Reward to risk

The excess return on a risky asset is the difference between the risky return and the _________ rate

Risk-free

Mona Corporation has a variance of returns of 343, while Scott Corporation has a variance of returns of 898. Which company's actual returns vary more from their mean return?

Scott Corporation

The trading of existing shares occurs in the _________ market

Secondary

The ________ ratio is calculated as the risk premium of the asset divided by the standard deviation

Sharpe

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

Specialist

The standard deviation is the _______ of the variance

Square root

In a ______ board, only a fraction of the directorships are up for election at any one time

Staggered

Mota Motors has 8 directors on its board, 2 of whom go up for election each year. This is an example of a ______

Staggered board

The goal of many successful organizations is a(n) _________ rate of growth in dividends

Steady

A capital gain on a stock results from an increase in _________

Stock price

With _______ voting, the directors are elected one at a time and the only way to guarantee a seat is to own 50% plus one share

Straight

Investment firms that are active participants in stocks assigned to them are called _________ liquidity providers

Supplemental

A normal distribution has a ______ shape

Symmetrical

Some important characteristics of the normal distribution are that it is:

Symmetrical Bell-shaped

The Ibbotson-Sinquefield data show that over the long-term ______

T-bills, which had the lowest risk, generated the lowest return Small-company stocks generated the highest average return Small-company stocks had the highest risk level

Which of the following is commonly used to measure inflation?

The Consumer Price Index (CPI)

A benchmark PE ratio can be determined using:

The PEs of similar companies A company's own historical PEs

The geometric average rate of return is approximately equal to _________

The arithmetic mean minus half of the variance

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

Studying market history can reward us by demonstrating that

The greater the potential reward is, the greater the risk There is a greater reward for bearing risk

T/F: It can be advantageous to have a staggered board because it provides "institutional memory".

True

The dividend _______ is defined as the annual dividend amount divided by the beginning stock price

Yield

Capital Corp is considering a project whose internal rate of return is 14%. If Capital's required rate of return is 14%, the projects NPV is

Zero

More volatility in returns produces __________ difference between the arithmetic and geometric averages

a larger

Quizlet to review

https://quizlet.com/166542731/finance-midterm-7-9-flash-cards/

Average returns can be calculated ___________

two different ways