Ch7 Finance

the __ can be interpreted as the capital gains yield

constant growth rate

Three special case patterns of dividend growth include:

constant growth, non-constant growth, zero growth

Most voting in large corporations is done by proxy because:

most small shareholders do not attend the annual meeting

What is the value of a stock if next year's dividend is $6, the discount rate is 11 percent and the constant rate of growth is 3 percent?

P0 = D1/(r-g) when g < r 6/(.11-.03) = 75

Initial public offerings of stock occur in the ____ market

Primary

A PE ratio that is baed on estimated future earnings is known as a ____ PE ratios

forward

one requirement of the dividend growth model is

g<R

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

Mota Motors has eight directors on its board, two of whom go up for election each year. This is an example of a:

staggered board

The goal of many successful organizations is a ______ rate of growth in dividends.

steady

NASDAQ has which of these features?

Multiple market maker system. Computer network of securities dealers.

A benchmark PE ratio can be determined using:

A company's own historical PEs, the PEs of similar companies

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

decrease. The dividend yield is D/P, so when the denominator decreases, the ratio increases

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

internet

Fundamentally, the business of the NYSE is to attract and process ____________.

order flow

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

the current price(P0)

When the stock being valued does not pay dividends,

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

if the growth rate (g) is zero, the capital gains yield is,

zero

Which of the following entities declares a dividend?

The board of directors

You expect the following dividends from ABC Stock: Year 1- $3.00 Year 2- $2.00 Year 3 $1.00 You expect that from year 4 onward, the dividend will grow at a constant 3% growth rate. If your required rate of return is 7%, what is your estimate for the current stock price?

3/1.07 + 2/(1.07^2) + (1+1(1.03)/(.07-.03))/(1.07^3)

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

dividend yield + growth rate (capital gains)

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

expected

cummulative voting

to permit minority representation

One reason corporations use staggered boards is that:

it makes takeover attempts less likely to be successful, more difficult for a minority to elect a director because fewer are elected at a time

The value of a firm is a function of its ___ rate and its ___ rate.

growth, discount

Preferred called

7% dividend pays -> $7 preferred

Which of the following are reasons why it more difficult to value common stock than it it to value bonds?

1. The life of a common stock is essentially forever 2. Common stock cash flows are not known in advance 3. The rate of return required by the market is not easily observed.

If a zero-dividend stock is purchased for $80 and sold one year later for $84, the 1-year return is _____ %.

5% ($84/$80)-1=5

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

Dividends / Discount Rate

Which of the following are features of common stock?

It has no special preference in receiving dividends, it has no special preference in bankruptcy, it generally has voting right

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

P0=D/R=$2/.10

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?

PE*EPS= 13.3*1.47

Preferred stock has a preference over common stock in the;

Payment of dividends, distribution of corporate assets

Which of the following is usually a right of common shareholders?

The right to a proportional share of dividends paid, voting rights

The nyse differs from the nasdaq primarily because the nyse has:

an auction market, a physical location, specialists

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

dealer

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

future

One common reason for having two classes of common stock with different voting rights is:

it is easier for insiders such as founding families to maintain control of the company

The constant growth formula calculates the stock price:

one year prior (year t) to the first dividend payment (D t+1)

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

capital gains, dividends

A zero-growth model for stock valuation is distinguished by a

constant dividend amount

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.

In which ways is preferred stock like a bond?

Preferred shareholders receive a stated value if the firm liquidates, like bondholders, Preferred shareholders receive a stated dividend, similar to interest on a bond, preferred stock sometimes has a stinking, giving it a set maturity like bonds, some preferred stock has credit ratings, like bonds

WinWin Corporation has five 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 hav enough votes to win any seat on the board

What is the price of a stock at the end of one year (p1) if the dividend for Year 2(Div2) is $5, the price for Year 2 (P2) is $20, and the discount rate is 10%?

P1 = (D2+P2)/(1+R) P1 = (5 + 20) / (1 +.10)

Will is deciding whether or not to buy Dang Corporation stock, whose current price is $54.95. Dang paid a dividend of $2.17 this year. Will estimates that dividends will grow very quickly, at a rate of 12%, for the next four years. After that, he expects the dividend growth rate to fall 5%. Should Will buy the stock if his required rate of return is 10%?

yes: P0 = 2.17(1.12)/0.10-0.12)x{1-(1.12/1.10)^4}+{2.17(1.12)^4(1.05)/(.10-.05)}/1.1064 = 58.06