FIN 300 CH 8 STOCK VALUATION

The NYSE member who acts as a dealer in a small number of securities is called a(n) _________.

Specialist

Which of the following represents the valuation of stock using a zero-growth model?

Dividends/Discount rate

A(n) ____________ is a website that allows investors to trade directly with each other.

ECN

Which of the following entities declares a dividend?

The board of directors

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

The current price (P0)

When the stock being valued does not pay dividends,

The dividend growth model can still be used.

The assumption of constant growth infers that ____________.

Dividends change at a constant rate

Which of the following is true about dividend growth patterns?

Dividends may grow at a constant rate

Preferred shareholders receive a stated value if the firm liquidates, ____________ (like/unlike) bondholders.

Like

A share of common stock is __________ (less/more) difficult to value in practice than a bond.

More

When applying two-stage growth, in the second stage, g2,

Must be less than R

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

Expected

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

False

The NYSE differs from the Nasdaq primarily because the NYSE has __________.

Specialists An auction market A physical location

When assuming non-constant 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.

The goal of many successful organizations is a(n) ___________ rate of growth in dividends.

Steady

The main reason for considering nonconstant growth in dividends is to allow for _________ growth rates over ___________.

Supernormal Some finite length of time

Investment firms that are active participants in stocks assigned to them are called __________ liquidity providers.

Supplemental

Which of the following occurs in the primary market?

Newly-issued stocks are initially sold

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?

2/.10 = 20

A share of common stock can be valued by determining the _________ value of its future cash flows.

Present

Initial public offerings of stock occur in the _________ market.

Primary

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

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

Broker

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

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

A website that allows investors to trade directly with each other is called an electronic _________ network.

Communications

NASDAQ has which of these features?

Computer network of securities dealers Multiple market maker system

The _________ can be interpreted as the capital gains yield.

Constant growth rate

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

Dealer

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

Decrease

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

Future

Which of the following are features of common stock?

It has no special preference in bankruptcy It has no special preference in receiving dividends It generally has voting rights

The two most important stock markets in the United States are the New York Stock Exchange and _____________.

Nasdaq

The constant growth formula calculates the stock price:

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

The formula for valuing a constant growth stock is _________.

P0=D1sqrt(R-g)

What is the formula to determine the price of a stock at the end of one year (P1) if the dividend for Year 2 (Div2) is $10, the price for Year 2 (P2) is $15, and the discount rate is 8 percent?

P1=($10+15)/1.08

What is the formula to determine the price of a stock at the end of one year (P1) if the dividend for Year 2 (Div2) is $5, the price for Year 2 (P2) is $20, and the discount rate is 10 percent?

P1=($5+20)/1.10

Preferred stock has preference over common stock in the _________.

Payments of dividends Distribution of corporate assets

A stock with dividend priority over common stock is called a _________ stock.

Preferred

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

If the growth rate (g) is zero, the capital gains yield is __________.

Zero

Three special case patterns of dividend growth include __________.

Zero growth Non-constant growth Constant growth

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

A __________ is a payment by a corporation to shareholders, made in either cash or stock.

Dividend

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

Dividend yield Growth rate

Common stock as no special preference either in receiving _________ or in bankruptcy.

Dividends

The price of a share of common stock is equal to the present value of all expected future __________.

Dividends

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

Dividends Capital gains

In which way(s) is preferred stock like a bond?

Preferred shareholders receive a stated value if the firm liquidates, like bondholders Preferred shareholders receive a stated dividend, similar to interest on a bond Some preferred stock has credit ratings, like bonds Preferred stock sometimes has a sinking fund, giving in a set maturity like bonds