chapter 17

In multiperiod dividend discount models, the value of a share is assumed to be the discounted value of the dividends that the share will pay the shareholder.

true

RainWater Co. decides to issue stock to raise capital. RainWater Co. doesn't have to pay any of its profits to shareholders in the form of dividends if it doesn't want to.

true

Suppose Mr. Ivanov just bought a share of AirPower Co., a renewable energy startup. AirPower promises to pay Mr. Ivanov $14 in dividends for one year and then the firm will shut down. Suppose that the liquidation value of the share is $1, and the rate of time preference is 4%. Then, according to the single-period dividend discount model, the present value of the cash payment received by Mr. Ivanov in one year would be____ , which means that the market price of the share of stock is_____

$14.42

According to the Gordon growth model, a stock with an expected dividend payment of $10 next year and an expected growth rate of dividends of 4% should sell at what price if the investor's discount rate or required rate of return is 6%?

$500

Suppose that Mr. Caddell bought common stock from RainWater, a green energy startup. Which of the following statements regarding Mr. Caddell's rights with the respect to RainWater are accurate? Check all that apply.

-He can claim on RainWater's assets at liquidation. -He can vote for RainWater's board of directors.

Which of the following is a possible interpretations of the PE ratio? Check all that apply.

-If the PE ratio for a share is lower than the PE ratios of similar shares, then the share is likely to be underpriced. -If the PE ratio for a share is higher than the PE ratios of similar shares, then the share is likely to be overpriced.

Suppose that Ms. Gaffney bought preferred stock of PowerWind, a big green energy firm. Which of the following is accurate regarding Ms. Gaffney's rights with the respect to PowerWind? Check all that apply.

-She has a claim on the PowerWind's assets at liquidation senior to common stock holders. -She receives a fixed dividend payment that is paid before common stock dividends.

Which of the following best defines expected earnings per share (EEPS)?

A corporation's net income divided by the number of shares outstanding

Suppose Mr. Juarez bought shares of PowerWind Co. If the corporation is liquidated, what Mr. Juarez can count on getting back? ________is paid to stockholders at the liquidation of a corporation after taxes, debts, and other claims have been satisfied.

A residual claim

The S&P 500 Index is different from the Dow Jones Industrial Average in that:

All of these... -The S&P 500 is a market value-weighted index, whereas the DJIA is a price weighted index. -The S&P 500 is a broader index because it is composed of the prices of more stocks than the DJIA. -The S&P 500 has a wider variety of stocks than does the DJIA.

The dividend discount model is

An application of the present value calculation

Behavioral finance is a subpart of finance that is

At least 250 years old

A stock market index

Both looks at a selected sample of stock prices and allows you to compare a particular stock or individual fund manager to the overall movement of the stock market.

The dividend discount model assumes

Both that we can figure out future dividend payments and predict the future salvage of a corporation

Examples of stock market indexes are

Dow Jones Industrial Average

Which of the following is the formula used in the Gordon growth model?

PVt=DIVt+1r−gPVt=DIVt+1r−g, where gg is the rate at which the dividend is expected to grow and rr is the rate of time preference

Common stock differs from preferred stock in what way

Preferred stockholders always get paid first

Irrational, emotion behavior can be explained by

Research in behavioral finance

The assumption that the stock market reflects all information, both public and private, is referred to as:

Strong form of efficiency

Which of the following best defines the PE Ratio?

The current price of a share relative to the earnings per share the corporation is expected to generate

Stock is important because

all of these -In the past, a business owner had no way to limit his or her personal liability in the event of business failure -Common stockholders only stand to lose what they paid for the stock in the event of business failure -Preferred stockholders only stand to lose what they paid for the stock in the event of business failure

Suppose Mr. Zambetti, a big science fiction fan, is convinced that human habitation of Mars will become a reality in the near future. So, when Mr. Zambetti hears about Deep Water Solutions (DWS), a firm exploring building energy plants at the bottom of the Atlantic Ocean, he immediately invests $17,000 in it. Behavioral economists would say that Mr. Zambetti's investment decision is likely to suffer from

confermation bias

PowerWind Co. decides to issue stock to raise capital. Eventually, when PowerWind Co. earns some profits, it will have to buy back the shares from its stockholders.

false

IPOs take place in which of the following equity markets?

primary

When PowerWind Co. sells its shares to the public, it is called a_______ market transaction.

primary

Most stock market transactions occur in the _______ market.

secondary