Fin SB Ch 8

In a board, only a fraction of the directorships are up for election at any one time.

staggered

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 In a staggered board, only a fraction of the directorships are up for election at any one time.

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

False

Which is the formula used to estimate a stock price based on the benchmark PE?

Pt = Benchmark PE ratio × EPSt

What is the formula to determine the total return for a stock that currently sells for $100, pays a dividend in one year of $2, and has a constant growth rate of 8 percent?

R = ($2/$100) + .08

True or false: It can be advantageous to have a staggered board because it provides "institutional memory."

T

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

expected

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

future

One requirement of the dividend growth model is _____.

g < R For the dividend growth model to be useful, the long-term growth rate must be smaller than the discount rate.

The value of a firm is the function of its rate and its discount rate.

growth

The value of a firm is the function of its ______ rate and its _______ rate.

growth; discount

Preferred shareholders receive a stated value if the firm liquidates, (like/unlike) bondholders.

like

When applying two-stage growth, in the second stage, g2 _____.

must be less than R

When assuming nonconstant growth in dividends, to avoid the problem of having to forecast and discount an infinite number of dividends, we must require that the dividends _____.

start growing at a constant rate sometime in the future

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

steady

With voting, the directors are elected one at a time and the only way to guarantee a seat is to own 50 percent plus one share.

straight

The main reason for considering nonconstant growth in dividends is to allow for _____ growth rates over _____.

supernormal; some finite length of time

A benchmark PE ratio can be determined using:

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

One reason corporations use staggered boards is that _____.

it makes takeover attempts less likely to be successful

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

zero

Suppose Bob owns 20 shares and Vikki owns 30 shares in Good Company, and there are five members of the board of directors. Under which voting arrangement can Bob assure himself of a board member that represents his interests?

Under cumulative voting, Bob would have 20 X 5 = 100 votes to cast. He could cast all 100 shares for a candidate of his choice, assuring the candidate of a seat on the board. Vikki would have a total of 30 X 5 = 150 shares, and there is no way to distribute her shares over five candidates such that each had more than 100 votes.

Shareholders typically have the right to share proportionally in paid.

dividends

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

Voting rights The right to a proportional share of dividends paid

Dusty Corporation has an issue of preferred stock that pays a dividend of 7 percent of its state value, which is $100. Which of the following would be a commonly used name for that preferred stock?

$7 preferred

If a zero-dividend stock is purchased for $80 and sold one year later for $84, the 1-year return can be found using the formula ______.

($84/$80) − 1

In which way(s) is preferred stock like a bond?

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

Preferred shares have a stated liquidating value, typically $_____ per share.

100

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

All else constant, the dividend yield will increase if the stock price decreases. The dividend yield is D/P, so when the denominator decreases, the ratio increases.

The dividend growth model determines the current price of a stock as its dividend next period (multiplied/divided) by the discount rate (less/plus) the dividend growth rate.

Blank 1: divided Blank 2: less

Matthews Company has two classes of common stock, and each share represents the same proportion of ownership in the company. Class A has 2 votes for each share. Class B has one vote per share. Which class is more valuable?

Class A Larger voting rights add value to the Class A shares.

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

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

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

Dividend Yield Growth rate

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

Dividends Capital gains

Which one of the following is true about dividend growth patterns?

Dividends may grow at a constant rate.

A(n) _____ is a website that allows investors to trade directly with each other.

ECN

True or false: Cumulative voting means board members are elected one at a time, with each shareholder casting his or her allotted votes for each seat on the board.

F Cumulative voting means that each shareholder may distribute votes however he or she wishes. If there are four seats on the board and the shareholder owns 20 shares, he or she can cast 80 votes for one board member.

Which of the following are features of common stock?

It generally has voting rights. It has no special preference in bankruptcy. It has no special preference in receiving dividends.

Most voting in large corporations is done by proxy because _____.

Most shareholders do not attend the annual meeting because it is inconvenient and they have a fairly small stake in the decisions made.

NASDAQ has which of these features?

Multiple market maker system Computer network of securities dealers

Which of the following occurs in the primary market?

Newly-issued stocks are initially sold

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.

The formula for valuing a constant growth stock is _____.

P0 = D1/(R − g)

What is the formula to determine the price of a stock at the end of one year (P1) if the dividend for Year 2 (Div2) is $10, the price for Year 2 (P2) is $15, and the discount rate is 8 percent?

P1 = ($10 + 15)/1.08

What is the formula to determine 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 percent?

P1 = ($5 + 20)/1.10

P1 D1 R P0 D0

P1=Price in one year D1 = Dividend in one year R= Discount rate P0=Price today

When the stock being valued does not pay dividends,

The dividend growth model can still be used. The analyst must assume that, at some point in the company's future, it begins paying dividends. (Though this assumption can be considered far-fetched, the process is still valid if the assumption is made. Therefore, the model can be used and the answer is "true.")

True or false: With more than one class of common stock, it is easier for insiders such as founding families to maintain control of the company.

True

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

broker

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

constant dividend amount

The ______ can be interpreted as the capital gains yield.

constant growth rate

If preferred dividends are and are not paid in a given year, they will be carried forward as an arrearage.

cumulative

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

dealer

The value of a share of common stock in a corporation is _____ to the general rights of shareholders.

directly related

What information do we need to determine the value of stock using the zero-growth model?

discount rate annual dividend amount

Preferred stock has preference over common stock in the _____.

distribution of corporate assets payment of dividends

A is a payment by a corporation to shareholders, made in either cash or stock.

dividend

Common stock as no special preference either in receiving or in bankruptcy.

dividends

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 constant growth formula calculates the stock price:

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

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

order flow

A stock with dividend priority over common stock is called a stock.

preferred

A share of common stock can be valued by determining the value of its future cash flows.

present

A is the grant of authority by a shareholder to someone else to vote his or her shares.

proxy

When a company is new and does not pay dividends and is not yet profitable, then you may use a benchmark price- ratio to estimate the stock price.

sales

A share of common stock is (less/more) difficult to value in practice than a bond.

more

The trading of existing shares occurs in the ______ market.

secondary

Using the dividend growth model requires that the growth rate be _____ the discount rate.

smaller than

Which of the following entities declares a dividend?

Board of Directors

The price of a share of common stock is equal to the present value of all expected future

dividends

Investment firms that are active participants in stocks assigned to them are called liquidity providers.

supplemental

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

the current price (P0)

Three special case patterns of dividend growth include _____.

zero growth constant growth nonconstant growth

An NYSE member who executes customer buy and sell orders is called a broker.

floor

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

internet

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 idea for -stage growth is that the dividend will grow at a rate of g1 for t years and then grow at a rate of g2 thereafter, forever.

two

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 have enough votes to win any seat on the board, so minority shareholder interests would not necessarily be protected.

The NYSE differs from the Nasdaq primarily because the NYSE has _____.

a physical location specialists an auction market