Finance - Chapter 7: Valuing Stocks

primary offering

A _________ refers to a corporation selling shares in the firm to investors.

valuation by comparables

A firm that examines a competitor's market-to-book and P/E ratios is in the beginning stages of __________________.

a.

A high P/E ratio generally means that a firm has: a. good growth opportunities b. low payback ratios c. high liquidity d. high dividend payouts

b.

A limit order is an order to ____________. a. buy the stock if the market price is within a range of prices b. buy stock at or below a stated price, or sell it at or above a stated price c. buy or sell a limited number of shares of a stock d. buy or sell the stock of a limited liability corporation

10%

A stock has an expected dividend yield of 2% and an expected capital gain of 8%. What is the stock's expected rate of return?

common stock

An investor who purchases ______ receives ownership shares in a publicly held corporation.

ROE x plowback ratio

If a company earns a constant return on equity and plows back a constant proportion of earnings, then its growth rate, g, is:

earnings per share

If a firm's ROE is held constant, then ________ will grow in direct proportion to equity.

price

In a limit order, __________ triggers the execution of the order.

c.

In a market order the _________. a. order is executed when the prices increases to a predetermined limit. b. order is placed at the close of the next business day. c. order is executed immediately at the best available price. d. order is executed when the prices decreases to a predetermined limit.

c.

In a market where stocks are fairly valued, stock prices follow: a. historical patterns b. an upward trajectory c. a random walk

the new-issue puzzle

Investors who buy stock in an IPO and receive an immediate gain followed by a longer term loss are experiencing an anomaly to the efficient market hypothesis called:

relationship is unchanged

Successive week returns on the NY Composite Index show no significant relationship between returns; however, when you move to successive months,

c.

The ask price quoted by an exchange for a stock is: a. the price investors are asking to be paid for the stock b. the price that the exchange will pay you for the stock c. the price you must pay the exchange to buy the stock d. the price at which the stock opened on the exchange that morning

c.

The bid price quoted by an exchange for a stock is: a. the price at which the stock opened on the exchange that morning b. the last price that an investor paid to buy the stock c. the price at which investors are willing to buy

firm's assets minus liabilities

The book value of a firm's equity is equal to:

dividend yield

The current yield on a bond is similar to the __________ on a stock in that both ignore prospective capital gains and losses.

d.

The difference between a firm's actual value and its book value is the firm's: a. opportunity cost of capital b. economic value added c. return on equity d. going-concern value

growth stock

The difference between a firm's market value and book value is likely to be greatest in a:

present value of all forecasted future dividends paid by the stock

The dividend discount model asserts that the value of a share of stock today is determined by _____________.

rate of return (with growth)

The expected rate of return for a stock whose next dividend is "DIV1", that has a required rate of return "r" and expects to grow its future dividends at a rate of "g" is ________. r = (DIV1/P0) + g

dividend yield; capital gain

The expected return on a stock can be calculated as the sum of the _______ and the ________.

sustainable growth rate

The firm's growth rate if it plows back a constant fraction of earnings, maintains a constant return on equity, and keeps its debt ratio constant is the firm's __________________.

liquidation value

The net proceeds that could be realized by selling the firm's assets and paying off its creditors is known as the firm's _________.

intrinsic value

The present value of the cash payoffs anticipated by the investor in a stock is called the share's _____________.

price per share / earnings per share

The price-earnings multiple, also known as the P/E ratio, is calculated by:

NYSE; NASDAQ

The principal stock markets in the United States are _____________ and ____________.

P/E ratio

The ratio of stock price to earnings per share is a firm's:

a.

The secondary market is where investors: a. trade shares among other investors b. buy first shares from a newly public firm c. buy new shares in an existing firm

True

True of false: If the growth rate is non-constant, then it can exceed the required return for a finite time.

True

True or false: A constant growth can never exceed the required return.

False

True or false: A stock is either a growth stock or income stock, these are mutually exclusive.

True

True or false: the dividend yield is an indicator of how much dividend income you will receive for every $100 you invest in the stock.

initial public offering (IPO)

When a firm sells its shares to the public for the first time, this is called a(n) _________.

secondary market

When investors sell shares of a firm's stock to each other on an exchange or through an electronic network, this is called a __________ transaction.

DivH+1

Which dividend is used to calculate the horizon price, at time H?

Market Value of a going concern

Which of the factors listed below contribute to the market value of a going concern? value of future investments intangible assets extra earning power

c.

Which of the following values accounts for both present earnings and future earning power? a. book value b. liquidation value c. market value

b.

Which of the following values accounts for both present earnings and future earning power? a. liquidation value b. market value c. book value d. economic value added

market value

factors that contribute to the _____ _____ of a going concern: -intangible assets -extra earning power -value of future investments

valuation by comparables

true for the method of _____________: -A firm's market value can be estimated by multiplying its earnings per share by the P/E ratio for a similar firm -A firm's market value can be estimated by multiplying its book value by the market/book ratio for a similar firm