FIN 3309 Anderson Chap 7
What information do we need to determine the value of a stock using the zero growth model?
-discount rate -dividend
Preferred stock has preference over common stock in the:
-distribution of corporate assets -payment of dividends
What are reasons that make valuing a share of stock more difficult than valuing a bond?
-dividends are unknown and uncertain -stock has no set maturity -the required rate of return is unobservable
NASDAQ has what features?
-multiple market maker system -computer network of securities dealers
P1 D1 R P0 D0
-price in one year -next expected dividend -discount rate -price today -dividend just paid
What are the rights of common stock holders?
-the right to share proportionally in any residual value in the event of liquidation -the right to vote on matters of importance -the right to share proportionally in any common dividends paid
Three special case patterns of dividend growth discussed in the text include:
-zero growth -non-constant growth -constant growth
What is the total return for a stock that currently sells for $100, is expected to pay a dividend in one year of $2, and has a constant growth rate of 8%?
10%
What is the total return for a stock that currently sells for $50, just paid a $1.75 dividend, and has a constant growth rate of 8%?
11.78%
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?
20.00
What is the price of a stock at the end of one year (P1) if the dividend for year 2 (D2) is $5, the price for year 2 (P2) is $20, and the discount rate is 10%?
$22.73
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
What are cash flows to investors in stocks?
-capital gains -dividends
What represents that valuation of stock using a zero growth model?
Dividend/Discount rate = D/R
The two most important markets in the US are the New York Stock Exchange and ____
NASDAQ
Stock price reporting has increasingly moved from traditional print media to the ______ in recents years.
internet
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
The fundamental business of the New York Stock Exchange is to attract _______.
order flow
Initial public offerings of stock occur in the ____ market.
primary
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
Using a benchmark PE ratio against current yields a forecasted price called a _______ price.
target
The dividend yield is determine by dividing the expected dividend (D1) by:
the current price (P0)
If the growth rate (g) is zero, the capital gains yield is ____.
zero
The value of a firm is a function of its ____ rate and its _____ rate.
growth; discount
The constant-growth model assumes that _________.
dividends change at a constant rate
A person who brings buyers and sellers together is called a(n) _______.
broker
What is true about dividend growth patterns?
dividends may grow at a constant rate
A PE ratio that is based on estimated future earnings is known as a _________ PE ratio.
forward
All else constant, the dividend yield will increase if the stock price ______.
decreases
