MGF CH7

True or false: Common stock has a set maturity.

False

P0 = (D1 + P1)/(1 + __)

R

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 stock price is in the denominator of the dividend yield equation, so a decrease in the stock price will increase the dividend yield.

Preferred stock has preference over common stock in the:

distribution of corporate assets payment of dividends

The constant-growth model assumes that _________.

dividends change at a constant rate

The value of a firm is derived using the firm's ______ rate and its _______ rate.

growth; discount

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

primary

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

False

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

zero

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

Dividend/Discount rate = D/R

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 = C(lowered 1)/(R-g)

Match the following.

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

Which of the following defines the primary market?

The primary market is where stocks are issued for the first time.

The ______ can be interpreted as the capital gains yield.

growth rate

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

the current price (P0)

P1 = (__ + P2)/(1 + R)

D2

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

broker

Initial public offerings of stock occur in the ____ market.

commodities

If unpaid preferred dividends must be "caught up" before any common dividends can be paid, they are called _________ dividends. Multiple choice question.

cumulative

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

expected

The trading of existing shares occurs in the ______ market.

secondary

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

Dividend Discount rate

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

Dividend Yield Growth rate

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 reasons that make valuing a share of stock more difficult than valuing a bond?

Dividends are unknown and uncertain The required rate of return is unobservable Stock has no set maturity

Which of the following are cash flows to investors in stocks? Fees Reason: Stockholders are entitled to capital gains and dividends. Capital gains Interest Reason: Stockholders are entitled to capital gains and dividends. Debt holders receive interest. Dividends

Capital gains Dividends

Match the following terms relating to stock valuation.

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

Which of the following are rights of common stock holders? The right to dividends each year First claim on any assets in the event of liquidation. The right to share proportionally in any common dividends paid. 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. The right to share proportionally in any residual value in the event of liquidation. The right to vote on matters of importance.