Chapter 9 LS
If a zero-dividend stock is purchased for $80 and sold 1 year later for $84, the 1-year return is Blank______ percent.
.05%
What is the total return for a stock that currently sells for $100, pays a dividend in 1 year of $2, and has a constant growth rate of 8 percent?
10% R = ($2/$100) + 0.08 = 0.10, or 10%.
The price-earnings ratio is found by dividing the current price per share by last year's Blank______.
earnings per share
Companies with differential growth have dividends that grow Blank______ in the near term than in the long term.
faster
When computing the PE ratio, using _______ earnings is merely using forecasts.
forward
What denominators are often used in value ratios?
free cash flow EBITDA EBIT
The NYSE's goal is to Blank______.
generate as much liquidity as possible
The Blank______ can be interpreted as the capital gains yield.
growth rate The growth rate can be interpreted as the capital gains yield. In the formula R = dividend yield plus capital gains yield, dividend yield = D/P and capital gains yield = g.
In a stock price quote, the ask price is Blank______ the bid price.
higher than The ask price is higher because it is what people are willing to accept for the purchase of the stock.
EBITDA measures earnings before Blank______.
interest depreciation amortization
If the growth rate exceeds the discount rate, then the present value of dividends Blank______.
keeps getting bigger
The business of the NYSE is to attract Blank______.
order flow
______ refers to the stream of customer orders to buy and sell stocks.
order flow
When estimating the growth rate, g, with the constant-growth stock valuation model, it is assumed that the Blank______ ratio stays the same.
retention
Earnings next year are a function of which factors?
return on retained earnings retained earnings this year earnings this year
The goal of many successful organizations is a(n) Blank______ rate of growth in dividends.
steady
The PE ratio is negatively related to the Blank______.
stock's risk firm's discount rate
In theory, which of the following models are mutually consistent and can be used to determine the value of a share of stock?
the comparables method the dividend discount model the free cash flow model
In theory, which of the following models are best used to determine the value of a non-dividend-paying share of stock?
the firm cash flow model
The determinants of a firm's growth rate include which factors?
the retention ratio return on retained earnings
If the growth rate (g) is zero, the capital gains yield is Blank______.
zero
All else constant, the dividend yield will _______ if the stock price
decrease Suppose a company pays a $2.50 dividend and the stock price is $50—the dividend yield is $2.50/$50 = 5%. Suppose the stock price increases to $60—then the dividend yield decreases to $2.50/$60 = 4.17%. Alternatively, if the stock price drops to $40, the dividend yield increases to $2.50/$40 = 6.25%.
All else constant, the dividend yield will increase if the stock price Blank______.
decreases
Net investment is equal to the total investment minus Blank______.
depreciation
Which type of growth describes a company that grows quickly at first but then grows slower in later years?
differential growth
A no-dividend firm can pay off an investor by paying ___________ in the future.
dividends
For many companies, steady growth in __________ is an explicit goal.
dividends
The cash flows of common stock are Blank______.
dividends
Investors select a stock based on the cash they expect to receive from that stock. That cash comes in the form of Blank______.
dividends the future sales price
The constant growth model assumes that Blank______.
dividends change at a constant rate
Most trades on the NYSE occur Blank______.
electronically without human intervention
The price of a share of common stock is equal to the present value of all Blank______ future dividends.
expected
An asset's value is determined by the present value of its Blank______ cash flows.
future
Electronic communication networks increase _______ and ______ in a market.
liquidity ; competition
In a stock price quote, the number of shares outstanding multiplied by the current price per share is known as the Blank______.
market cap
Firms in the same industry Blank______ have the same multiples
may not
Enterprise value is equal to the market value of a firm's equity plus the market value of a firm's debt Blank______.
minus cash
A firm with growth opportunities should sell for Blank______ a firm without growth opportunities.
more than
Nasdaq has which of these features?
multiple market maker system computer network of securities dealers
Nasdaq differs from the NYSE primarily because Nasdaq has Blank______.
no physical location multiple market makers rather than DMMS
A network of dealers who buy and sell the stocks of corporations that are not listed on a security exchange is called Blank______.
over-the-counter market
The ask price is the price the investor will Blank______ if they transact with the dealer.
pay
Firms may retain all their earnings if they have identified Blank______.
positive NPV projects growth opportunities
The current price per share divided by last year's earnings per share gives you Blank______.
price-earnings ratio
Valuing companies using the comparables approach is similar to valuation in ________________ ______________. (Enter one word in each blank.)
real estate
Which of the following are cash flows to investors in stocks?
- dividends - capital gains
Net investment is equal to the Blank______ minus Blank______.
total investment; depreciation
In an inflationary environment, reported earnings are lower if a firm uses Blank______ rather than Blank______ accounting.
LIFO; FIFO
Comparable firms are assumed to have similar Blank______.
Multiples
Which of the following has a physical trading floor?
NYSE
True or false: A market order allows the investor to choose the price they will transact at.
False The stock will be sold at or near the current market price.
Why do stocks that pay no dividends sell at positive prices?
Investors count on future dividends. Investors speculate on capital returns if the firm is sold.
The two most important stock markets in the United States are the New York Stock Exchange and Blank______.
Nasdaq
Which of the following occurs in the primary market?
Newly issued stocks are initially sold.
Which one of these represents the present value of a growing perpetuity?
P0 = Div / (r-g)
Match the following terms relating to stock valuation. Instructions
P1: stock price in one year Div1: Dividend at end of Year 1 R: Discount rate P0: Stock price today
What information do we need to determine the value of stock using the zero-growth model?
annual dividend amount discount rate
A no-dividend firm can still pay off for an investor by Blank______.
being acquired in the future paying high dividends in the future
Which of the following help facilitate trades without necessarily maintaining an inventory?
broker
A zero-growth model for stock valuation is distinguished by a Blank______.
constant dividend amount
Typically, growth stocks pay a Blank______ amount of earnings to shareholders, while cash cows pay a Blank______ amount of earnings to shareholders.
small; large
Since estimation error may be high, what do some financial economists recommend when using the constant-growth dividend discount model?
use the industry average rate of return for R
______ act as two-sided dealers in particular stocks. Multiple choice question.
DMMs
Which one of the following is true about dividend growth patterns?
Dividends may grow at a constant rate.
A website that allows investors to trade directly with one another is called Blank______.
ECN
The impact of leverage on Blank______ is less because enterprise value includes debt and equity.
EV/EBITDA ratio
What conditions must be met for a firm to increase value?
Earnings must be retained to fund projects. Projects must have positive net present values.
Which of the following characterizes newer companies?
They are fast-growing companies.
Which of the following characterizes newer companies? Multiple select question.
They have negative earnings. They don't pay dividends.
True or false: A benefit of trailing earnings is that they reflect what actually happened.
True
True or false: If the growth rate is larger than the discount rate, the dividend growth model with constant growth does not work.
True The simplification to replace the infinite stream of dividends with the DGM is not allowed.
The NYSE trades both electronically and face-to-face, which makes it Blank______.
a hybrid market
The price-earnings (PE) ratio is a function of which three factors?
accounting practices growth opportunities risk level
What differences might cause firms in the same industry to have different multiples?
accounting treatments risk levels investment opportunities
The bid price is the price the dealer is willing to Blank______.
buy at
True or false: An asset's value is determined by the most recent cash flows.
FALSE Future cash flows
True or False: Nasdaq officials have recently created an advertisement campaign to promote the Nasdaq market as a purely OTC exchange.
False Nasdaq officials are trying to decouple the term "OTC" from the Nasdaq exchange.
True or False: For investors in the stock market, dividends from stocks are fixed and guaranteed, while capital gains are variable and not guaranteed.
False Neither dividends nor capital gains are fixed or guaranteed.
What is the price of a stock at the end of 1 year (P1) if the dividend for Year 2 (Div2) is $2, the price for Year 2 (P2) is $15, and the discount rate is 9 percent?
$15.60 D+E/(1+R)^Y P1= ($2 + $15)/1.09 = $15.60
If the current market price is $21, a limit order to buy shares at $17 will be filled at what price?
$17 or less
What is the price of a stock at the end of 1 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 percent?
$22.73 P1= ($5 + $20)/1.10 = $22.73.
What is the value of stock if next year's dividend is $6, the discount rate is 11 percent, and the constant rate of growth is 3 percent?
$75 P0 = $6/(0.11 − 0.03) = $75
A firm with an 8 percent dividend growth rate and a return on equity of 20 percent must have a retention ratio of Blank______ percent.
40 Retention ratio = 0.08/0.2 = 0.4, or 40%.
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 percent, and the constant rate of growth is 5 percent?
$80 Price of stock = dividend / (discount rate - constant growth rate) P0 = $3.20/(0.09 − 0.05) = $80.
When enterprise value is calculated, cash is subtracted from the market value of debt and equity because Blank______.
-Many firms hold more cash than necessary -An EV ratio should reflect the ability of productive assets to create cash flow
The dividend yield is determined by dividing next year's expected cash dividend by the Blank______.
current stock price Dividend yield = Div1/P0.
Someone who maintains an inventory of stocks and buys and sells those stocks is known as a Blank______.
dealer
If the discount rate increases, the PE ratio will Blank______.
decrease
In the dividend discount model, the expected return for investors comes from which two sources?
dividend yield growth rate R = Div/P0+g.
Which of these factors are used in predicting stock values using the dividend discount model?
growth discount rate P0 = Div1/(r−g).
Which of the following refers to a company that pays a small amount of its earnings to its stockholders?
growth stock
The value of a firm is the function of its Blank______ rate and its Blank______ rate.
growth; discount
A firm may choose to forgo dividends today if growth opportunities are Blank______.
high If growth opportunities are high, firms may retain earnings to fund those opportunities.
Firms with many investment opportunities typically have Blank______ PE ratios.
higher
Higher growth opportunities create Blank______ value today.
higher
When the growth rate is _______ than or equal to the discount rate, one
higher
When the growth rate is ___________ than or equal to the discount rate, one should be particularly skeptical.
higher
The impact of ___________ will be lower on the EV/EBITDA ratio than on the PE ratio.
leverage or gearing
In an inflationary environment, reported earnings are Blank______ if a firm uses LIFO rather than FIFO accounting.
lower
he stock will be sold at (or near) the current market price in a __________ order.
market
A calculated stock price that discounts earnings instead of dividends will usually be Blank______.
too high A calculated stock price that discounts earnings instead of dividends will usually be too high because some earnings must be retained to generate growth.
Growth opportunities may be lost if a firm pays out Blank______ in dividends
too much
A designated market maker, or DMM, continually posts and updates bid and ask prices as he or she maintains a Blank______ market.
two-sided meaning he or she is willing to buy or sell to keep the market liquid.
EBIT, EBITDA, and free cash flow are typically used in the denominators of __________ ratios.
value
Which cases should make one particularly skeptical when estimating the required rate of return?
zero dividend case when the growth rate is greater than or equal to the discount rate
What are the three basic patterns of dividend growth?
zero growth constant growth differential growth