Ch 7 SmarkBook

The ______ can be interpreted as the capital gains yield.

growth rate

The value of a firm is derived using the firm's ______ rate and its ______ rate.

growth; discount

If a company's growth for Years 1 through 3 is 20% but stabilizes at 5% beginning in Year 4, its growth pattern would be described as _______.

non-constant

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

Initial public offerings of stock occur in the ______ market.

primary

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

A benchmark PE ratio can be determined using: Multiple select question. the PEs of similar companies. a company's own historical PEs. Bank of Canada estimates. the constant growth model.

the PEs of similar companies. a company's own historical PEs.

The dividend yield is determined by dividing the expected dividend (D1) by:

the current price (P0).

Which of the following ratios might be used to estimate the value of a stock? Multiple select question. the price-sales ratio the book-to-value ratio the price-earnings ratio

the price-sales ratio the price-earnings ratio

A person who brings buyers and sellers together is called a(n) ______.

broker

What information do we need to determine the value of a stock using the zero growth model? Multiple select question. future price of stock capital gain discount rate dividend

discount rate dividend

The constant growth model assumes that ______.

dividends change at a constant rate

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

expected

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

forward

In the dividend growth model, the expected return for investors comes from which two sources? Multiple select question. amount of last year's earnings growth rate tax rate dividend yield

growth rate dividend yield

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 − g)

Which one of the following is true about dividend growth patterns?

Dividends may grow at a constant rate.

True or false: A PE ratio that is based on estimated future earnings is called a regressive PE ratio.

F

True or false: Common stock has a set maturity.

F

True or false: For investors in the stock market, dividends from stocks are fixed and guaranteed, while capital gains are variable and not guaranteed.

F

R = ______.

D1/P0 + g

Suppose a firm's dividends are expected to grow at a rate of 15% (g1) for 3 years (t) then stabilize at 5% (g2) forever. If the firm just paid a $2.00 (D0) dividend and the discount rate is 10% (r), what is the value of a share of the firm's stock in year 3 (P3 )? (Do not round your intermediate calculation.)

D3 = D0 x (1+g1)t = $2 x (1.15)3 = $3.04 D4 = D3 x (1+g2) = $3.04 x 1.05 = $3.19 P3 = D4/(r-g2 ) = $3.19/(.10 - .05) = $63.88

Which of the following represents the valuation of stock using a zero growth model? Multiple choice question. Dividend × Discount rate = D × R Discount rate/Dividend = R/D Dividend/Discount rate = D/R (Dividend)discount rate = DR

Dividend/Discount rate = D/R

Match the following terms relating to stock valuation:P1D1RP0D0

-Price in one year-Next expected dividend-Discount Rate-Price today-Dividend just paid

If unpaid preferred dividends must be "caught up" before any common dividends can be paid, they are called ______ dividends.

cumulative

If the growth rate (g) is zero, the capital gains yield is ______.

zero

Which of the following are reasons that make valuing a share of stock more difficult than valuing a bond? Multiple select question. Different stock issues have different maturity dates. Dividends are unknown and uncertain. Dividends are unknown but certain. Stock has no set maturity. The required rate of return is unobservable

Dividends are unknown and uncertain. Stock has no set maturity. The required rate of return is unobservable

Shares of stock are first brought to the market and sold to investors in the ____market.

Primary

Which of the following are cash flows to investors in stocks? Multiple select question. capital gains interest dividends fees

capital gains dividends

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

dealer

All else constant, the dividend yield will increase if the stock price ______.

decreases

Three special case patterns of dividend growth discussed in the text include: Multiple select question. nonconstant growth. discounted growth. zero growth. fast growth. constant growth. negative growth.

nonconstant growth. zero growth. constant growth.

Preferred stock has preference over common stock in the: Multiple select question. portfolios of individual investors. payment of dividends. number of votes given. distribution of corporate assets.

payment of dividends. distribution of corporate assets.

The trading of existing shares occurs in the ______ market.

secondary

Which of the following are rights of common stock holders? Multiple select question. the right to share proportionally in any residual value in the event of liquidation. First claim on any assets in the event of liquidation. the right to share proportionally in any common dividends paid. the right to vote on matters of importance. the right to dividends each year

the right to share proportionally in any residual value in the event of liquidation. the right to share proportionally in any common dividends paid. the right to vote on matters of importance.

True or false: Total return is calculated by adding the dividend yield and the capital gains yield.

T

Which of the following defines the primary market? Primary markets are markets that are regulated by the Fed. Primary markets are markets for basic goods and services. The primary market is where stocks are issued for the first time. The primary market is where stocks trade once they have been issued.

The primary market is where stocks are issued for the first time.