finance ch 8

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common stock

-A security that provides voting privileges -A security that provides the potential for its owner to receive both dividends and capital gains -An equity security that offers ownership benefits in a corporation

True or false: A dealer will buy stock from an investor at the ask price.

false

True or false: The value of a firm as measured by its market capitalization is solely dependent upon the market value of the firm's stock.

false

basic assumptions of a variable growth rate valuation

g2 < i g1 can be negative, positive, or equal to zero g1 applies to a designated number of years

NASDAQ

has dealers

key service provided by stock exchanges that attracts investors

liquidity

A preferred stock has

-Zero dividend growth -Preferred dividend payments are assumed to be infinite. -Preferred dividends are assumed to be a constant dollar amount. -Higher dividend yields than common stock issued by the same issuer -Preferred stock can be valued using the constant-growth model. -Preferred stock can be valued as a perpetuity, PV = PMT/i

.

A limit sell order will only execute at the limit price or higher. A market order will execute immediately, regardless of the price. A limit sell order may never be executed.

dividend discount model is based

All future cash flows from a stock are dividend payments.

market capitalization

Current stock price times number of shares outstanding

P/E Ratio

Current stock price/Last four quarters of earnings

the current value of a stock

Discounted value of both the future dividends and the future stock price

primary purpose of the P/E valuation formula

Estimate the future price of a stock

In a stock valuation formula, what does the symbol D1 represent?

Estimated dividend in time period 1, or next year's dividend when solving for the current price

True or false: A dealer will buy stock from an investor at the ask price.

False

full-service brokerage firm

In-depth research on individual stocks Investment advice

discount brokerage firm

Investors place trades on the firm's Internet site

Why do you have to use the dividend at time n + 1 to compute the terminal price in the two-stage growth valuation model?

The terminal price is the time n price. The dividend used to compute a price must always be one time period ahead of the price.

terms best describes the trading process used by NASDAQ

Multiple market maker system

requirements which a firm must meet to be listed on the NYSE

Number of stockholders

characteristics apply to the New York Stock Exchange (NYSE)

Physical trading floor Specialists Brokers

these apply to publicly-issued common stock

Stock value depends on the issuer's business success Value determined on the stock exchanges Ownership position

How is the discount rate used to value a stock related to the expected return on the stock? Assume the stock price fairly reflects the stock's value.

The discount rate should equal the expected rate of return.

Just before the market closes, ABC stock is selling for $43 a share, so you place a market sell order for 300 shares. The order reaches the trading floor after the market closes for the day. The next morning, ABC stock opens at a price of $28 a share. What happens to your order?

The order is executed at a price of $28 a share.

a correct interpretation of a P/E ratio

The stock with the lowest P/E has the lowest current price per dollar of earnings.

stock valuation

The value of a stock today equals the discounted value of the future expected cash flows.

What is the purpose of the terminal price that is used in conjunction with a variable-growth rate stock valuation formula?

To replace all of the dividends paid in stage 2

______ symbol is the unique code for a company on a stock exchange. It consists of one to five letters

ticker

t/f:Dealers are willing to sell stocks at the ask price.

true


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