Chapter 7
o Using a benchmark PE ratio against current earnings yields a forecasted price called a ________ price. Expected Benchmark Target Future
• Target
o A benchmark PE ratio can be determined using: (2) Bank of Canada estimates The PE's of similar companies The constant growth model A company's own historical PE's
• The PE's of similar companies • A company's own historical PE's
o The dividend yield is determined by dividing the expected dividend D(1) by: Retained earnings The discount rate (R ) The growth (g ) The current price P(0)
• The current price P(0)
o A PE ratio that is based on estimated future earnings is known as a __________ PE ratio Relative Target Forward Voodoo
• Forward
o The price of a share of common stock is equal to the present value of all _______ future dividends Stable Expected Paid Growing
• Expected
o For investors in the stock market, dividends from stocks are fixed and guaranteed, while capital gains are variable and not guaranteed. False True
• False
o Newly issued securities are sold to investors in which one of the following markets? Proxy Stated value Inside Secondary Primary
• Primary
o Shares of stock are first brought to the market and sold to investors in the _______ market
Primary
o New York Stock Exchange Designated Market Makers (DMM's) were formerly called_______. Specialists Floor brokers Floor traders $2 brokers
• Specialists
o If the growth rate (g) is zero, the capital gains yield is ________. Higher than the dividend yield Zero 100 percent Cyclical
• Zero
o Sweet treats pays a constant annual dividend of $2.38 a share and currently sells for $52.60 a share. What is the rate of return? 4.56% 5.39% 4.52% 4.83% 5.91%
• 4.52%
o What is the total return for a stock that currently sells for $50, just paid a $1.75 dividend, and has a constant growth rate of 8%? 8.55% 11.78% 10.78% 9.82%
• R= Dividend yield + Capital gains yield • Dividend yield= (dividend per share)/(Stock price per share) • Capital gains yield= dividend growth per year o Dividend yield=1.75/50 .035 o Capital Gains yield= .08 o R=.035+.08 .115 11.5%
o Which of the following are reasons that make valuing a share of stock more difficult than valuing a bond? (3) Different stock issues have different maturity dates Stock has no set maturity Dividends are unknown and uncertain Dividends are unknown but certain The required rate of return is unobservable
• Stock has no set maturity • Dividends are unknown and uncertain • The required rate of return is unobservable
o Delfino's expects to pay an annual dividend of %1.50 per share next year. What is the anticipated dividend for Year 5 if the firm increases its dividends by 2 percent annually? $1.50*(1.02)^(1) $1.50*(1.02)^(4) $1.50*(1.02)^(5)
• $1.50*(1.02)^(4)
o If Joan owns 100 shares of ABC Company and the company is electing 4 directors, under cumulative voting, Joan would usually have _______ votes. 1600 1 25 400
• 400
o The value of a firm is a function of its _______ rate and its ________ rate. Growth; discount Growth; inflation Discount; burn
• Growth; discount
o Which of the following represents the valuation of stock using a zero growth model? Discount rate/Dividend=R/D Dividend/Discount rate=D/R (Dividend)^(Discount rate)=D^(r ) Dividend * Discount rate= D*R
• Dividend/Discount rate=D/R
o The _______ can be interpreted as the capital gains yield. Growth rate Yield to maturity Inflation rate Dividend yield
• Growth rate
o In the dividend model, the expected return for investors comes from which two sources? (2) Growth rate Dividend Yield Tax rate Amount of last year's earnings
• Growth rate • Dividend Yield
o Three special case patterns of dividend growth discusses in the text include: (3) Zero growth Non-constant growth Negative growth Discounted growth Constant growth Fast growth
• Zero growth • Non-constant growth • Constant growth
o Which of the following are rights of common stock holders? (3) 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 First claim on any assets in the event of liquidation The right to dividends each year
• 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
o Which of the following are cash flows to investors in stocks? (2) Capital gains Interest Dividends Fees
• Capital gains • Dividends
o Dividends are best defined as: Cash payments to shareholders Cash or stock payments to shareholders Distribution of stock to current shareholders
• Cash or stock payments to shareholders
o An agent who buys and sells securities from inventory is called a: Floor trader Dealer Commission broker Broker Floor broker
• Dealer
o The required return on a stock is equal to which one of the following it the dividend on the stock decreases by a constant percent per year? (P(0)/D(1))/g Dividend yield + Capital gains yield Dividend yield - Capital gains yield
• Dividend yield + Capital gains yield
o All else constant, the dividend yield will increase if the stock price _____. Decreases Increases
• Dividend yield= (dividend paid)/(stock price) o Decreases
o What is the value of a stock if next year's dividend is $6, the discount rate is 11 percent and the constant rate of growth is 3 percent? $75 $79 $65 $70
• Future Value= ($ per share)/((Required percent of return)-(percent of dividend increase)) o Future Value=6/(.11-.03) $75
o Which one of the following will increase the current value of a stock? Decrease in the dividend growth rate Increase in the required return Increase in the market rate of return Decrease in the expected dividend for next year Increase in the capital gains yield
• Increase in the capital gains yield
o Stock price reporting has increasingly moved from traditional print media to the _____ in recent years. Internet Network newscasts Ticker tape machine Radio
• Internet
o NASDAQ has which of these features? (2) Single DMM system Physical trading floor Multiple market maker system Computer network of securities dealers
• Multiple market maker system • Computer network of securities dealers
o The two most important stock markets in the U.S. are the New York Stock Exchange and _______. NASDAQ The TSX Venture Exchange The London Stock Exchange The Tokyo Stock Exchange
• NASDAQ
o The dividend yield is defined as: The last annual dividend divided by the current market price per share Next year's expected dividend divided by the current market price per share Next year's expected dividend divided by the par value per share
• Next year's expected dividend divided by the current market price per share
o 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 _________. Unexpected Non-constant Unconventional Fixed
• Non-constant
o When voting for the board of directors, the number of votes a shareholder is entitled to is generally determined as follows: One vote per shareholder One vote per share held One vote per proxy One vote for every 100 shares held
• One vote per share held
o Match the following terms relating to stock valuation P(1) --------Next Expected Dividend D(1)---------Price in one year R---------Discount rate P(0)---------Price today D(0)---------Dividend just paid
• P(1)---------Price on one year • D(1)---------Next expected Dividend • R---------Discount Rate • P(0)---------Price Today • D(0)---------Dividend just paid
o Dividends are: Payable at the discretion of a firm's president Paid out of net income Only partially taxable to high-income individual shareholders
• Paid out of net income
o Preferred stock has preference over common stock in the: (2) Payment of dividends Portfolios of individual investors Distribution of corporate assets Number of votes given
• Payment of dividends • Distribution of corporate assets
o Initial public offerings of stock occur in the ______ market. Futures Commodities Primary Secondary
• Primary
o The dividend yield on a stock will increase if the: Dividend growth rate decreases Stock price decreases Capital gains rate decreases Stock price increases Tax rate on dividends increases
• Stock price decreases
o 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? 1.81 20.00 12.29
• Stock price= (dividend per share)/(discount rate) o 20.00
o Breakfast Hut pays a constant annual dividend of $1.39 per share. How much are you willing to pay for one share if you require a rate of return of 14.6 percent? $14.72 $9.52 $2.52 $1.59
• $9.52
o What is the price of a stock at the end of one year (P(1)) if the dividend for year 2 (D(2)) is $5, the price for year 2(P(2)) is $20, and the discount rate is 10%? $25.00 $2.73 $19.73 $22.73
• (P(1))=((D(2))+(P(2)))/(1+R )) • P(1)= the price to be in one period • D(2)= predicted event in two periods • P(2)= the price to be in two periods • R= required return in the market on this investment o P(1)=(5+20)/(1+.1) o P(1)=25/1.1 $22.73
o Dry Dock Marina is expected to pay an annual dividend of $1.58 next year. The stock is selling for $18.53 a share and has a total return of 9.48 percent. What is the dividend growth rate? .82% 1.03% 1.28% .95% .66%
• .95%
o The common stock of Sweet Treats has a total return of 11.62%, a stock price of $48.20 and recently paid an annual dividend of $2.38. What is the capital gains rate if the company maintains a constant dividend? 8.34% 16.56% 11.17% 6.68% 4.59%
• 2.38/48.20= .0493775934 • .1162-.0493775934=.0668224066 o (6.68%)
o The NYSE differs from the NASDAQ primarily because the NYSE has: (2) A face-to-face auction market A faster network Brokers A physical location
• A face-to-face auction market • A physical location
o A broker is an agent who: Trades on the floor of an exchange for himself or herself Buys and sells from inventory Offers new securities for sale to dealers only Is ready to buy or sell at any time Brings buyers and seller together
• Brings buyers and sellers together
o A person who brings buyers and sellers together is called a (n) ________. Dealer Lawyer Broker Investor
• Broker
o The fundamental business of the New York Stock Exchange is to attract ___________. Institutions Dealers Customers Order flow
• Order flow
o The _________ can be interpreted as the capital gains yield. Yield to maturity Inflation rate Growth rate Dividend yield
• Growth rate
o On which of the following dates do dividends become a liability of the issuer for accounting purposes? First day of the fiscal year in which the dividend is expected to be paid On the date the board declares the dividend On the date of payment
• On the date the board declared the dividend
o Which of the following ratios might be used to estimate the value of a stock? (2) The Book to Value ratio The Price/Earnings ratio The Price/Sales ratio
• The Price/Earnings ratio • The Price/Sales ratio
o Which of the following are reasons that make valuing a share of stock more difficult than valuing a bond? (3) The required rate of return is unobservable Dividends are unknown and uncertain Dividends are unknown but certain Different stock issues have different maturity dates Stock has no set maturity
• The required rate of return is unobservable • Dividends are unknown and uncertain • Stock has no set maturity