FINN 3160- Ch. 7 Equity Markets and Stock Valuation

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

Discount rate and Dividend

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

True or false: A PE ratio that is based on estimated future earnings is called a regressive PE ratio.

False

True or false: Daily stock prices can only be found by looking up the stock in newspapers.

False: Up-to-the-minute stock prices are available on many websites

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)

Match the following terms relating to stock valuation. P1 D1 R P0 D0

P1- Price in one year D1- Next expected Dividend R- Discount rate P0- Price today D0- Dividend just paid

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

Primary

The ______ can be interpreted as the capital gains yield.

growth rate

The trading of existing shares occurs in the ______ market.

secondary

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

the current price (P0)

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

zero

True or false: Common stock has a set maturity.

False

The constant-growth model assumes that _________.

dividends change at a constant rate

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

expected

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

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

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

Which of the following are rights of common stock holders?

(1) The right to vote on matters of importance. (2) The right to share proportionally in any common dividends paid. (3) The right to share proportionally in any residual value in the event of liquidation.

Preferred stock has preference over common stock in the:

(1) distribution of corporate assets (2) payment of dividends

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

(1) Dividends (2) Capital gains

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

(1) Growth rate (2) Dividend Yield

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

(1) Stock has no set maturity (2) Dividends are unknown and uncertain (3) The required rate of return is unobservable

Which of the following represents the valuation of stock using a zero growth model?

Dividend/Discount rate = D/R

Which one of the following 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

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

(1) The Price/Earnings ratio (2) The Price/Sales ratio

A benchmark PE ratio can be determined using:

(1) a company's own historical PEs (2) the PEs of similar companies

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

(1) non-constant growth (2) constant growth (3) zero growth