Business Finance on Chapter 7

What is the formula for the present value of a growing merpetuity 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 ------ Price in one year D1 ------ Next expected dividend R -------- Discount rate Po ------- Price today Do ------- Dividend just paid

If unpaid preferred dividends must be "caught up" before any common dividends can be paid, they are called _____ dividends.

cumulative

The trading of existing shares occurs in the _____ market.

Secondary

Using a benchmark PE ratio against current earnings yields a forecasted price called a _______ price

Target

Examples of secondary markets in the U.S. include which of the following?

The Chicago stock exchange; The New York Stock Exchange; NASDAQ

Which of the following are 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.

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

A PE ratio that is based on estimated future earnings is known as a __________ PE ratio

forward

The _____ can be interpreted as the capital gains yield.

growth rate

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

The fundamental business of the New York Stock Exchange is to attract

order flow

If Joan owns 100 shares of ABC company and the company is electing 4 directors under cumulative voting, Joan would usually have _____ votes

400

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

zero growth; constant growth; non-constant growth

What is the value of a stock if next year's dividend is $6, this discount rate is 11 percent and the constant rate of growth is 3 percent?

Po = $6/(.11-.03) = $75

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

Discount rate; dividend

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

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

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

Growth rate; dividend yield

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

R = $2/$100 + 0.08 = 10%

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

The Price/Sales ratio The Price/Earnings ratio

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

The current price (Po)

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

False

The two most important stock markets in the U.S. are the New York Stock Exchange and _______

NASDAQ

The constant-growth model infers that ________.

dividends change at a constant rate

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

broker

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

decreases

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

expected

"Inside Quotes" represent the _________ and the ________.

highest bid price; lowest ask price

The NYSE differs from the NASDAQ primarily because the NYSE has:

a face-to-face auction market; a physical location

NASDAQ has which of these features

Multiple market maker system; Computer network of securities dealers

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 one of the following is true about dividend growth patterns?

Dividends may grow at a constant rate.

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

Dividends; capital gains

Preferred stock has preference over common stock in the:

payment of dividends; distribution of corporate assets

Initial public offerings of stock occur in the ____ market

primary

New York Stock Exchange Designated Market Makers (DMMs) were formerly called __________.

specialists