Ch7
What information do we need to determine the value of a stock using the zero growth model? A. Dividend B. Future price of stock C. capital gain D. Discount rate
Dividend and discount rate
Stock price reporting has increasingly moved from traditional print media to the (blank) in recent years
internet
Using a benchmark PE ratio against current earnings yields a forecasted price called a price. A. expected B. future C. target D. benchmark
target
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? A. 1.81 B. 12.29 C. 20.00
$2/0.10=$20.00
What represents for valuation of stock using a zero growth model?
D/R
What is the formula for the present value of a growing perpetuity where C is the net cash flow, R is the required return, and g is the growth rate?
P=C/(R-g)
The constant-growth model assumes that a. dividends change at a constant rate b. stock prices remain constant c. debt remains constant
a. dividends change at a constant rate
The trading of existing shares occurs in the market A. tertiary B. secondary c. federal d. primary
secondary
Preferred stock has preference over common stock in the A. payment of dividends B. portfolios of individual investors C. # of votes given D. distribution of corporate assets
A. payment of dividends D. distribution of corporate assets
A benchmark PE ratio can be determined using: A. the constant growth model B. Bank of Canada estimates C. the PE's of similar companies D. a company's own historical PE's
C. the PE's of similar companies D. a company's own historical PE's
Websites that allow investors to trade directly with one another are termed a. BATS b. OMX c. Level 2 d. ECNs
Electronic Communication Networks (ECNs)
What is the total return for a stock that currently sells for $100, is expected to pay a dividend in one year of $2, and has a constant growth rate of 8%? a. 10% b. 11.8% c. 9.8% d. 10.8%
R=($2/$100)+0.08 = 10%
Which of the following defines the primary market?
The primary market is where stocks are issued for the first time
If a zero-dividend stock is purchased for $80 and sold one year later for $84, the 1-year return is % A. 3 B. 5 C. 4 D. 6
($84/$80) -1 = 5%
In the dividend discount model, the expected return for investors comes from which two sources? A. Dividend Yield B. Growth Rate C. Amount of last year's earnings D. Tax rate
A. Dividend Yield B. Growth Rate
What is the price of a stock at the end of one year (P1) is the dividend for year 2 (d2) is $5, the price for year 2 (p2) is $20, and the discount rate is 10%? a. $19.73 b. $22.73 c. $2.73 d. $25.00
P₁=($5+$20)/1.10 = $22.73
What is the total return for a stock that currently sells for $50, just paid $1.75 dividend, and has a constant growth rate of 8%? A. 10.78% B. 9.82% C. 11.78 % D. 6.55%
R=($1.75 * 1.08)/($50) + 0.08 = 11.78%
A person who brings buyers and sellers together is a
broker
(t/f) For investors in the stock market, dividends from stocks are fixed and guaranteed, while capital gains are variable and not guaranteed.
false
A PE ratio that is based on estimated future earnings is known as a PE ratio. A. relative B. target C. voodoo D. forward
forward
The NYSE differs from the NASDAQ primarily because the NYSE has a. a faster network b. a physical location c. brokers d. a face-to-face auction market
b. a physical locationd. d. a face-to-face auction market
"Inside Quotes" represent the (blank) and the (blank)
highest bid price, lowest ask price
All else constant, the dividend yield will increase if the stock price . A. increases B. decreases
Decreases
Three special case patterns of dividend growth discussed in the text include; negative growth non-constant growth zero growth constant growth discounted growth fast growth
non-constant growth zero growth constant growth
NYSE Designated Market Makers (DMMs) were formally called a. floor brokers b. $2 brokers c. floor traders d. specialists
specialists
The dividend yield is determined by dividing the expected dividend (d1) by a. the current price P0 b. retained earnings c. the discount rate (R) d. the growth (g)
the current price P₀
Which of the following ratios might be used to estimate the value of a stock? (2)
the price/sales ratio the price/earnings ratio
If Joan owns 100 shares of BC company and the company is electing 4 directors, under cumulative voting, Joan would have how many votes? A. 400 B. 25 C. 1600 D. 1
400
Which of the following are reasons that make valuing a share of stock more difficult than valuing a bond? A. Dividends are unknown B. Different stock issues have different maturity dates C. The required rate of return is unobservable D. Dividends are unknown but certain E. Stock has no set maturity
Dividends are unknown The required rate of return is unobservable Stock has no set maturity
If the growth rate (g) is zero, the capital gains yield is . A. Zero B. Higher than the dividend yield C. cyclical D. 100 percent
zero
Which of the following are cash flows to investors from stocks? A. Dividends B. fees C. interest D. capital gains
Dividends and capital gains
Suppose a firm's dividends are expecte to grow at a rate of 15% (g1) for 3 years (t) then stabilize at 5% (g2) forever. If the firm just paid a $2.00 dividend (D0) and the discount rate is 10% (r), what is the value of a share of the firm's stock in year 3 (P3)? A. $63.88 B. $81.33 C. $70.54 D. $75.66
D₃ = 2.00*1.15³=$3.04175 ($3.04175*1.05)/(0.10-0.05) =6.3876 = $63.88
