Chapter 7 Questions (test 3)

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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)

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

broker

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

cumulative

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

R

discount rate

D0

dividend just paid

Which of the following is true about dividend growth patterns?

dividend may grow at a constant rate

The constant-growth model assumes that _______________.

dividends change at a constant rate

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

forward

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

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

internet

D1

next expected dividend

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

The fundamental business of the New York Stock Exchange is to attract _______.

order flow

P1

price in one year

P0

price today

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

primary

The trading of existing shares occurs in the ______ market.

secondary

New York Stock Exchange Designated Market Makers (DMMs) were formerly called ________ .

specialists

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

zero

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

the current price (P0)

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

expected

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

expected

Common stock has a set maturity. T or F

false

A PE ratio that is based on estimated future earnings is called a regressive PE ratio. T or F

false (forward PE ratio)

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

false (neither dividend nor capital gains are fixed and guaranteed)

A benchmark PE ratio can be determined using:

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

The NYSE differs from the NASDAQ primarily because the NYSE has:

- a physical location - a face-to-face auction market

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

- dividends - capital gains

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

- growth rate - dividend yield

Preferred stock has preference over common stock in the:

- payment of dividends - distribution of corporate assets

Which of the following ratios might be used to estimate the value of a stock?

- the Price/Earnings ratio - the Price/Sales ratio

Which of the following are reasons that make valuing a share of stock more difficult than valuing a bond?

- the required rate of return is unobservable - dividends are unknown and uncertain - stock has no set maturity

Which of the following are rights of common stock holders?

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

Three special case patterns of dividend growth discussed in the text include:

- zero growth - constant growth - non-constant growth

The two most important stock markets in the U.S. are the New York Stock Exchange and ______.

NASDAQ

Daily stock prices can only be found by looking up the stock in newspapers. T or F

false


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