Ch 7 Smartbook

Under a _________voting mechanism, the minimum number of votes required to acquire a seat on a board is __________PLUS __________.

straight 50% 1

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

Nasdaq

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

a physical location a face-to-face auction market

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

broker

A PE ratio that is based on estimated future earnings is known as a ______ PE ratio.

forward

The value of a firm is derived using the firm's ______ rate and its ______ rate.

growth; discount

The fundamental business of the New York Stock Exchange is to attract ______.

order flow

Institutional memory can be enhanced by ______.

staggering board elections

True or false: All classes of stock issued by a firm must have equal voting rights.

False Different classes of stock can have different voting rights.

P0 = (D1 + P1)/(1 + __)

R

Preferred stock has preference over common stock in the:

distribution of corporate assets. payment of dividends.

Payments to shareholders that represent a return on the capital contributed to the corporation are referred to as

dividends

"Inside quotes" represent the ______ and the ______.

highest bid price; lowest ask price

If a company's growth for Years 1 through 3 is 20 percent but stabilizes at 5 percent beginning in Year 4, its growth pattern would be described as _________

nonconstant

the business of the NYSE is to attract and process _____.

order flow

Which type of voting procedure provides "institutional memory"? institutional discounted accelerated staggered

staggered

A website that allows investors to trade directly with one another is called ______.

an ECN

Nasdaq has which of these features? physical trading floor computer network of securities dealers single DMM system multiple market maker system

computer network of securities dealers multiple market maker system

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

decreases

What information do we need to determine the value of a stock using the zero growth model?

dividend discount rate

D0

dividend just paid

The constant growth model assumes that ______.

dividends change at a constant rate

Electronic communication networks increase __________ and _________ in a market.

liquidity competition

D1

next expected dividend

When voting for the board of directors, the number of votes a shareholder is entitled to is generally determined as follows:

one vote per share held

Initial public offerings of stock occur in the ______ market.

primary

New York Stock Exchange Designated Market Makers (DMMs) were formerly called ______.

specialists

Which of the following ratios might be used to estimate the value of a stock? the book-to-value ratio the price-sales ratio the price-earnings ratio

the price-earnings ratio

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

the current price (P0).

Three special case patterns of dividend growth discussed in the text include:

-Constant growth -Non-constant growth -Zero growth

R

Discount rate

Earnings over the coming year are expected to be $3 and a benchmark PE of 15 applies to earnings over the previous year. The ______, or forecast, price over the coming year is $45.

target

Which of the following defines the primary market? Primary markets are markets that are regulated by the Fed. The primary market is where stocks are issued for the first time. Primary markets are markets for basic goods and services. The primary market is where stocks trade once they have been issued.

The primary market is where stocks are issued for the first time.

P1 = (__ + P2)/(1 + R)

D2

R = ______.

D1/P0 + g

If there are nine directors to be elected, what is the least number of shares you will need to guarantee a seat on the board under cumulative voting?

10 percent of the stock plus 1 share ( 1 / (9+1) ) + 1 share = 10 percent plus 1 share

What right does a proxy give to a shareholder?

The right to vote on behalf of another shareholder

Which of the following statements are true of cumulative preferred dividends? (Select all that apply.) They are like interest on a bond. They are carried forward as an arrearage. Directors elected by common shareholders cannot defer cumulative preferred dividends indefinitely. Preferred shareholders receive no interest on the cumulated dividends.

They are carried forward as an arrearage. Preferred shareholders receive no interest on the cumulated dividends.

Which of the following is true of classes of common stock? The classes of common stock often have unequal voting rights. A primary reason for creating more than one class of stock is to maintain control. Firms may have only one class of common stock. All classes of common stock are required to have equal voting rights.

The classes of common stock often have unequal voting rights. A primary reason for creating more than one class of stock is to maintain control.

Which of the following are true of dividends? They are required by law of every corporation that issues common stock. They are deductible for corporate tax purposes. They are paid at the discretion of the board of directors. They are taxable to individual shareholders.

They are paid at the discretion of the board of directors. They are taxable to individual shareholders.

True or false: Total return is calculated by adding the dividend yield and the capital gains yield.

True

Identify the two types of preferred dividends:

cumulative and noncumulative

A benchmark PE ratio can be determined using:

-a company's own historical PEs -the PEs of similar companies

Using a benchmark PE ratio against current earnings yields a forecasted price called a ______ price.

target

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

zero

When directors elected by common shareholders defer preferred dividends indefinitely, ______.

common shareholders must also forego dividends

If unpaid preferred dividends must be "caught up" before any common dividends can be paid, they are called ______ dividends.

cumulative

A written authorization for one shareholder to vote the stock of another shareholder is called a(n) ______.

proxy

The trading of existing shares occurs in the ______ market.

secondary

This type of growth describes a company that grows quickly at first, then slower in future years.

nonconstant

The ______ can be interpreted as the capital gains yield.

growth rate

Which of the following are cash flows to investors in stocks? dividends fees capital gains interest

dividends capital gains

Shares of stock are first brought to the market and sold to investors in the __________ market.

primary

Which of the following are reasons that make valuing a share of stock more difficult than valuing a bond? Different stock issues have different maturity dates. Dividends are unknown and uncertain. Stock has no set maturity. Dividends are unknown but certain. The required rate of return is unobservable

Dividends are unknown and uncertain. Stock has no set maturity. The required rate of return is unobservable

Which one of the following is true about dividend growth patterns? Dividends may grow at a constant rate. Dividends never have a zero growth rate. Dividends always reduce at a differential rate. Dividends never grow.

Dividends may grow at a constant rate.

If a company's growth for Years 1 through 3 is 20 percent but stabilizes at 5 percent beginning in Year 4, its growth pattern would be described as _______

Expected

Which of the following are rights of common stockholders? the right to dividends each year the right to share proportionally in any common dividends paid. the right to share proportionally in any residual value in the event of liquidation. the right to vote on matters of importance. First claim on any assets in the event of liquidation.

the right to share proportionally in any common dividends paid. the right to share proportionally in any residual value in the event of liquidation. the right to vote on matters of importance.

Which of the following represents the valuation of stock using a zero growth model? Dividend × Discount rate = D × R Dividend/Discount rate = D/R Discount rate/Dividend = R/D (Dividend)discount rate = DR

Dividend/Discount rate = D/R

P1

Price in one year

True or false: Daily stock prices can only be found by looking up the stock in newspapers.

False Up-to-the-minute stock prices are available on many websites.

______ refers to the stream of customer orders to buy and sell stocks.

Order flow

What is the formula for the present value of a growing perpetuity, where C1 is the net cash flow, R is the required return, and g is the growth rate?

P = C1/(R − g)

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

growth rate dividend yield

Which of the following are reasons that make valuing a share of stock more difficult than valuing a bond? Dividends are unknown but certain. Dividends are unknown and uncertain. The required rate of return is unobservable Stock has no set maturity. Different stock issues have different maturity dates.

-Dividends are unknown and uncertain -The required rate of return is unobservable -Stock has no set maturity

P0

Price today

True or false: Common stock has a set maturity.

False Common stock has no maturity.

Stock price reporting has increasingly moved from traditional print media to the ______ in recent years.

internet

If you hold 50 shares of a particular corporation's common stock and there are 5 directors to be elected, how many votes will you be allowed to cast under cumulative voting?

250 50 shares × 5 positions = 250 votes

If there are nine directors that need to be elected, how many shares do you need to own in order to guarantee a seat on the board under straight voting?

50 percent of the stock + 1 share

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

False Neither dividends nor capital gains are fixed or guaranteed.

True or false: A PE ratio that is based on estimated future earnings is called a regressive PE ratio.

False A PE ratio that is based on estimated future earnings is called a forward PE ratio.