Chapter 8

Cumulative voting means board members are elected one at a time, with each shareholder casting their allotted votes for each seat on the board.

False

The ____ can be interpreted as the capital gains yield

constant growth rate

The next dividend payment by Halestorm, Inc., will be $1.48 per share. The dividends are anticipated to maintain a growth rate of 5 percent forever. If the stock currently sells for $27 per share, what is the required return?

=1.48/27+.05= 10.48%

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

current price (Po)

An asset's value is determined by the present value of its ______ cash flows.

future

NYSE differs from the NASDAQ primarily because the NYSE has:

-An auction market -A physical locations -Specialists

Which are expected cash flows to investors in stocks?

-Dividends -Capital gains

The special case patterns of dividend growth are:

-Non constant growth -Constant growth -Zero growth

The Jackson-Timberlake Wardrobe Co. just paid a dividend of $1.30 per share on its stock. The dividends are expected to grow at a constant rate of 8 percent per year indefinitely. A) If investors require a 14 percent return on The Jackson-Timberlake Wardrobe Co. stock, what is the current price? B) What will the price be in 7 years?

A) =(1.3&1.08)/(.14-.08) =23.40 B) =23.4*(1.08)^7

Someone who maintains an inventory of stocks and buys and sells those stocks is known as a _____.

Dealer

When valuing a stock, the advantage to considering the stock price in the distant future (rather than a more near-term price) as a cash flow is that:

when discounted to PV, a stock price in the distant future is nearly 0

The goal of many successful organizations is a ______ rate of growth in dividends.

Steady

You expect the following dividends from ABC stock: year 1- $3 year 2- $2 year 3- $1 you expect that from year 4 onward, the dividend will grow at a constant 3% growth rate. If your required rate of return is 7%, what is you estimate for the current stock price?

3/1.07+2/1.07^2+(1+1(1.03)/.07-.03))/1.07^3= 26.39

The next dividend payment by Halestorm, Inc., will be $1.68 per share. The dividends are anticipated to maintain a growth rate of 6 percent forever. The stock currently sells for $32 per share. What is the dividend yield?

=1.68/32= 5.25%

One requirement of the dividend growth model is:

g<R

The value of a firm is the function of its _____ rate and its _______ rate.

Growth; discount

A benchmark PE ratio can be determined using:

-The PE's of similar companies -A company's own historical PEs

Which are reasons why it is more difficult to value common stock than it is to value bonds?

-The life of common stock is essentially forever -The rate of return required by the market is not easily observed -Common stock cash flows are not known in advance

Scott corp does not pay dividends. The PE ratio for its industry is 13.3, and Scott's EPS were $1.47. At what price should Scott's stock trade?

13.3*1.47=19.55

What is 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%?

2/100+.08= 10%

You have found the following stock quote for RJW Enterprises, Inc., in the financial pages of today's newspaper. A) What was the closing price for this stock that appeared in yesterday's paper? B) If the company currently has 17 million shares of stock outstanding, what was net income for the most recent four quarters?

A) div/yld= 1.4/.025= 56 B) step 1. use the PE formula to solve for EPS 15=56/eps solve and get eps=3.73333 step 2. solve for net income using EPS formula 3.73333= net income/17,000,000 net income=63,466,666.67

The constant growth formula calculates the stock price:

One year prior (year t) to the first dividend payment (Dt+1)

Which occurs in the primary market?

Newly issued stocks are initially sold

When the stock being valued does not pay dividends,

The dividend growth model can still be used because analysts must assume that, at some point in the company's future, it beings paying dividends

Will is deciding whether or not to buy Dang corporation stock, whose current price is $54.95. Dang paid a dividend of $2.17 this year. Will estimates that dividends will grow very quickly at a rate of 12%, for the next four years. After that, he expects the dividend growth rate to fall to 5%. Should Will buy the stock if his require rate of return is 10%?

-solve using the 2 stage growth method =58.06

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

75

TwitterMe, Inc., is a new company and currently has negative earnings. The company's sales are $1.9 million and there are 128,000 shares outstanding. If the benchmark price-sales ratio is 4.8, what is your estimate of an appropriate stock price?

=(1,900,000/128,000)*4.8 =71.25

If a zero dividend stock is purchased for $80 and sold one year later for $84, the 1 year return is ______%.

=(84/80)-1 =5%

Tell Me Why Co. is expected to maintain a constant 4 percent growth rate in its dividends indefinitely. If the company has a dividend yield of 5.8 percent, what is the required return on the company's stock?

=.04+.058= 9.8%

Metroplex Corporation will pay a $4.40 per share dividend next year. The company pledges to increase its dividend by 3.10 percent per year indefinitely. Required: If you require an 9.60 percent return on your investment, how much will you pay for the company's stock today?

=67.69 (????)

A zero growth model for stock valuation is distinguished by a ______.

A constant dividend amount

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

Decreases