Chapter 8 Stock Valuation
R
Discount rate
For investors in the stock market, dividends from stocks are fixed and guaranteed, while capital gains are variable and not guaranteed.
False
The two most important stock markets in the United States are the New York Stock Exchange and _____.
Nasdaq
Which of the following occurs in the primary market?
Newly-issued stock are initially sold
The formula for valuing a constant growth stock is ____.
P0=D1/(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 $5, the price for Year 2 (P2) is $20, and the discount rate is 10 percent?
P1=($5+20)/1.10
Which is the formula used to estimate a stock price based on the benchmark PE?
Pt= Benchmark PE ratio*EPS(t)
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
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
An NYSE member who acts as a dealer in particular stocks is called a _____ market maker.
designated
The dividend growth model determines the current price of a stock as its dividend next period ______ by the discount rate ____ the dividend growth rate.
divided; less
D1
dividend in one year
The price of a share f common stock is equal to the resent value of all expected future _____.
dividends
The assumption of constant growth infers that _________.
dividends change at a constant rate
The price of a share of common stock is equal to the present value of all ______ future dividends.
expected
An asset's value is determined by the present value of its ______ cash flows.
future
The value of a firm is the function of its ______ rate and its _______ rate.
growth; discount
Stock price reporting has increasingly moved from traditional print media to the ______ in recent years.
internet
A share of common stock is _____ 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 constant growth formula calculates the stock price:
one year prior (year t) to the first dividend payment (Dt +1)
Fundamentally, the business of the NYSE is to attract and process ____ flow.
order
Fundamentally, the business of the NYSE is to attract and process ____.
order flow
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
When a company is new and does not pay dividends and is not yet profitable, then you may use a benchmark price-_____ ratio to estimate the stock price.
sales
The trading of existing shares occurs in the ______ market.
secondary
Using the dividend growth model requires that the growth rate be ____ the discount rate.
smaller than
The NYSE member who acts as a dealer in a small number of securities is called a(n) _____.
specialist
When assuming nonconstant 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 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 _______.
- nonconstant growth - zero growth - constant growth
Which one of the following is true about dividend growth patterns?
Dividends ay grow at a constant rate.
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
P1
Price in one year
A person who brings buyers and sellers together is called a(n) ______.
broker
A website that allows investors to trade directly with each other is called an electronic ________ network.
communications
The ______ can be interpreted as the capital gains yield.
constant growth rate
One requirement of the dividend growth model is ______.
g<R
The value of a firm is the function of its ______ rate and its discount rate.
growth
A share of common stock can be valued by determining the ____ value of its future cash flows.
present
P0
price today
The main reason for considering nonconstant growth in dividends is to allow for ____ growth rates over ______.
supernormal; some finite length of time
If a zero-dividend stock is purchased for $80 and sold one year later for $84, the 1-year return can be found using the formula ______.
($84/$80)-1
Which of the following are expected cash flows to investors in stocks?
- Capital gains - Dividends
In the dividend discount model, the expected return for investors comes from which two sources?
- Dividend yield - Growth rate
NASDAQ has which of these features?
- Multiple maker system - Computer network of securities dealers
Which of the following are reasons why it is more difficult to value common stock than it is to value bonds?
- The life of a common stock is essentially forever. - Common stock cash flows are not known in advance. - The rate of return required by the market is not easily observed.
A benchmark PE ratio can be determined using:
- a company's own historical PEs - the PEs of similar companies
The NYSE differs from the Nasdaq primarily because the NYSE has _____.
- a physical location - specialists - an auction market
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?
20.00
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.
