BUAD 306 Chapter 8: Stock Valuation

An asset's value is determined by the present value of its ________ cash flows.

future

One requirement of the dividend growth model is:

g < R

The value of a firm is the function of its _____ rate and its _____ rate.

growth; discount

Scott Corporation does not pay dividends. The PE ratio for its industry is 13.3, and Scott's EPS were $1.47. At what price should Scott's stock trade?

$19.55 (P = Benchmark PE ratio * EPS)

Dusty Corporation has an issue of preferred stock that pays a dividend of 7% of its state value, which is $100. What is a commonly used name for that preferred stock?

$7 preferred

The price of a share of common stock is equal to the present value of all _________ future dividends.

expected

What is the total return for a stock that currently sells for $100, pays a dividend in one year of $2, and has a constant growth rate of 8%?

10% (R = Div.Yield + Cap.Gains Yield)

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 _________.

2% (Using Dividend Growth Model)

Is a company required to pay preferred dividends?

No; the company may defer dividends on preferred stock; however they can not pay dividends to common shareholders until preferred dividends are paid.

Which entity in a corporation declares a dividend?

The board of directors

A benchmark PE ratio can be determined using:

a company's own historical PEs, the PEs of similar companies (industry average)

The ___________ can be interpreted as the capital gains yield.

constant growth rate, g

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

dealer

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

When the stock being valued does not currently pay dividends:

the dividend growth model can still be used based on the future dividends

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%, and the constant rate of growth is 5%?

$80 (Using Dividend Growth Model)

In the dividend discount model, the expected return for investors comes from which two sources?

(1) Dividend yield and (2) growth rate

What are some important features of common stock?

(1) It generally has voting rights, (2) It has no special preference in bankruptcy, and (3) It has no special preference in receiving dividends

In which way(s) is preferred stock like a bond?

(1) Preferred stock sometimes has a sinking fund, giving it a set maturity like bonds, (2) Some preferred stock has credit ratings like bonds, (3) Pref. shareholders receive a stated dividend, like bond interest, and (4) Pref. shareholders receive a stated value if firm liquidates

What are some reasons why it is more difficult to value common stock than it is to value bonds?

(1) The life of a common stock is essentially forever (has no maturity), (2) Common stock cash flows are not known in advance, and (3) The rate of return required by the market is not easily observed

Preferred stock has preference over common stock in the:

(1) distribution of corporate assets in the event of liquidation, and (2) payment of dividends

Three special case patterns of dividend growth include:

(1) zero growth, (2) constant growth, and (3) non-constant growth

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

Capital gains and dividends

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

False, neither are fixed or guaranteed

The constant growth formula calculates the stock price:

One year prior (year t) to the first dividend payment (Dt+1)

A PE ratio that is based on estimated future earnings is known as a ___________ PE ratio.

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