Ch 8
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?
Cumulative Voting
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
Preferred stock has preference over common stock in the _____.
distribution of corporate assets payment of dividends
The price of a share of common stock is equal to the present value of all expected future _________
dividends
When the stock being valued does not pay dividends,
the dividend growth model can still be used.
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
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.
False
When applying two-stage growth, in the second stage, g2 _____.
must be less than R
The constant growth formula calculates the stock price:
one year prior (year t) to the first dividend payment (D little t +1)
A _______ is the grant of authority by a shareholder to someone else to vote his or her shares.
proxy
In a ________ board, only a fraction of the directorships are up for election at any one time.
staggered
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
Which is the formula used to estimate a stock price based on the benchmark PE?
Pt = Benchmark PE ratio × EPSt
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.
T or F For investors in the stock market, dividends from stocks are fixed and guaranteed, while capital gains are variable and not guaranteed.
False
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.
divided less
Shareholders typically have the right to share proportionally in ______ paid.
dividends
The price of a share of common stock is equal to the present value of all ______ future dividends.
expected
An NYSE member who executes customer buy and sell orders is called a ________ broker.
floor
The value of a firm is the function of its ______ rate and its _______ rate.
growth discount
One common reason for having two classes of common stock with different voting rights is _____. Multiple choice question.
it is easier for insiders such as founding families to maintain control of the company
One reason corporations use staggered boards is that _____.
it makes takeover attempts less likely to be successful
A share of common stock can be valued by determining the___________ value of its future cash flows.
present
Which of the following is usually a right of common shareholders?
The right to a proportional share of dividends paid Voting rights
A website that allows investors to trade directly with each other is called an electronic _____ network.
communication
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
A share of common stock is (less/more) difficult to value in practice than a bond.
more
When voting for the board of directors, the number of votes a shareholder is entitled to is usually ______ vote per share held.
one
The trading of existing shares occurs in the ______ market.
secondary
Which of the following are features of common stock?
It has no special preference in receiving dividends. It generally has voting rights. It has no special preference in bankruptcy.
A zero-growth stock pays a dividend of $2 per share and has a discount rate of 10%. What will the stock's price be?
P0 = 2/.1 = 20.00
The formula for valuing a constant growth stock is _____.
P0 = D1/(R − g)
All else constant, the dividend yield will increase if the stock price ____.
decreases
An asset's value is determined by the present value of its ______ cash flows.
future
Three special case patterns of dividend growth include _____.
nonconstant growth zero growth constant growth
The dividend yield is determined by dividing the expected dividend (D1) by _____.
the current price (P0)
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
Preferred shareholders receive a stated value if the firm liquidates, (like/unlike) bondholders.
like
The NYSE differs from the Nasdaq primarily because the NYSE has _____.
specialists an auction market a physical location
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
The goal of many successful organizations is a(n) ______ rate of growth in dividends.
steady
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.
NASDAQ has which of these features?
Multiple market maker system Computer network of securities dealers
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
Preferred shares have a stated liquidating value, typically $_____ per share.
100
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
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
The NYSE member who acts as a dealer in a small number of securities is called a(n) _____.
specialist
Match the following terms relating to stock valuation. P1 D1 R P0
Price in one year; Dividend in one year; Discount rate; Price today
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
Most voting in large corporations is done by proxy because _____.
most small shareholders do not attend the annual meeting
The main reason for considering nonconstant growth in dividends is to allow for _____ growth rates over _____.
supernormal; some finite length of time
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 benchmark PE ratio can be determined using:
a company's own historical PEs the PEs of similar companies
Which one of the following is true about dividend growth patterns?
Dividends may grow at a constant rate.
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?
cumulative voting
If the growth rate (g) is zero, the capital gains yield is ____.
zero
Which of the following are reasons why it is more difficult to value common stock than it is to value bonds?
The life of a common stock is essentially forever. Common stock cash flows are not known in advance The rate of return required by the market is not easily observed.
In which way(s) is preferred stock like a bond?
Preferred shareholders receive a stated value if the firm liquidates, like bondholders. Some preferred stock has credit ratings, like bonds. Preferred stock sometimes has a sinking fund, giving it a set maturity like bonds. Preferred shareholders receive a stated dividend, similar to interest on a bond.
True or false: It can be advantageous to have a staggered board because it provides "institutional memory."
True
Which of the following entities declares a dividend?
The board of directors
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
Which of the following are expected cash flows to investors in stocks?
Capital gains Dividends
Fill in the blank question. Fundamentally, the business of the NYSE is to attract and process _____ flow.
order
A person who brings buyers and sellers together is called a(n) ______.
broker
Common stock has no special preference either in receiving _______ or in bankruptcy.
dividends