Int. Finance lesson 10

In the one-period valuation model, a stock's value falls if the ______ rises.

Required return on equity

A stock's market value will be higher the higher its expected dividend stream is, all else being equal

Ture

in OTC markets, dealer increase the liquidity of thinly traded securities

Ture

A share of common stock in a firm represents an ownership interest in that firm and allows stockholders to

Vote and receive dividends

According to the Gordon model, what is an investor's valuation of a stock whose current dividend is $1.00 per year if dividends are expected to grow at a constant rate of 10% over a long period of time and the investors required return is 11%?

$110

According to the Gordon model, what is an investor's valuation of a stock whose current dividend is $1.00 per year if dividends are expected to grow at a constant rate of 10% over a long period of time and the investors required return is 15%?

$22

A stock currently sells for $25 per share and pays $0.24 per year in dividends. What is an investor's valuation of this stock if she expects it to be selling for $30 in one year and requires a 15% return on equity investments?

$26.30

A stock currently sells for $30 per share and pays $1.00 per year in dividends. What is an investor's valuation of this stock if he expects it to be selling for $37 in one year and requires a 12% return on equity investments?

$33.93

Holding other things constant, a stock's value will be highest if its most recent dividend is

$5 (highest)

(I) The market price of a security at a given time is the highest value any investor puts on the security. (II) Superior information about a security increases its value by reducing its risk.

(I) is false, (II) is true

(I) Preferred stockholders hold a claim on assets that has priority over the claims of common stockholders, but after that of bondholders. (II) Firms issue preferred stock in far greater amounts than common stock.

(I) is true, (II) is false

Holding other things constant, a stock's value will be highest if its dividend growth rate is

15% (highest)

Holding other things constant, a stock's value will be highest if the investor's required return on investments in equity is

5% (lowest)

Which of the following is not an objective of the SEC?

Advise investors about which particular stocks are good buys

(I) A share of common stock in a firm represents an ownership interest in that firm. (II) A share of preferred stock is as much like a bond as it is like common stock.

Both are true

(I) Firms issue common stock in far greater amounts than preferred stock. (II) In a given year, the total volume of stock issued is much less than the volume of bonds issued.

Both are true

(I) Preferred stockholders hold a claim on assets that has priority over the claims of common stockholders. (II) Bondholders hold a calamine assets that has priority over the claims of preferred stockholders.

Both are true

The riskiest capital market security is

Common Stock

A stock's market value will be higher the higher the investor's required rate of return is, all else equal

False

About half of new equity issues are preferred stock

False

All stocks pay dividends, as that is the only way an investor can profit from holding stock.

False

More stock trading in the US occurs in over-the-counter markets rather than on organized exchanges

False

The Dow is the broadest and best indicator of the stocks market's day to day performance

Fasle

The main cause of fluctuations in stock prices is changes in

Information available to investors

The Enron financial scandal increased uncertainty about the quality of accounting info and as a result, increased required return on investment in stocks.

True

The Gordon model assumes that a stock's dividend grows at a constant rate forever.

True

The SEC requires firms to submit various documents to increase the flow of information to investors but doesn't not verify the accuracy of that information.

True

Securities not listed on one of the exchanges trade in the over-the-counter market. In this exchange, dealers "make a market" by

buying/selling stocks for/from inventory when investors want to sell/buy

Preferred stockholders hold a claim on assets that has priority over the claims of

common stockholders, but after that of bondholders.

9/11 and Enron caused anticipated dividend growth to _____, investors' required return on equity to ______, and stock prices to _____.

decrease; increase; decrease

Stock values computed by valuation models may differ from actual market prices because it is difficult to

estimate future dividend growth rates, estimate the risk of a stock, forecast a stock's future dividends.

In the generalized dividend valuation model, a stock's value depends only on

its future dividend payments and the required return on equity

In the one-period valuation model, a stock's value will be higher

the higher its expected future price is

A basic principle of finance is that the value of any investment is

the present value of all future net cash flows generated by the investment

Which of the following is not an element of the Gordon growth model of stock valuation?

the stock's expected future price

Common stock is the riskiest corporate security, followed by preferred stock and then bonds

true