Chapter 8: True/False
Under the dividend growth model, as the growth rate moves away from the cost of equity, the stock price becomes more sensitive to estimation error.
False
Under the dividend growth model, if the dividends are growing at 3% per year, we expect the price will grow at less than 3% per year.
False
The decreasing number of publicly traded companies in the U.S. is likely due, in part, to an increased regulatory burden.
True
Typically, a company that cuts its dividend will see a quick sharp drop in its shares' trading volume.
False
The zero growth model is a reasonable assumption for preferred stock.
True
A company with a poor corporate governance score will have analyst target prices bellow the current receive market price.
False
Common stock has priority claim on the cash flows of the issuer above preferred stock.
False
Dividends received by corporations have a minimum exclusion from taxable income to maximize the triple taxation of corporate profits.
False
For a given company, the cost of preferred should be greater than the cost of equity.
False
If a company has cumulative preferred stock and goes into arrears, it is not obligated to pay the missed dividends at a later date.
False
If a stock trades ex-dividend, the buyer gets the current dividend.
False
In general, over-the-counter markets are a bunch of market participants linked by telecommunications and computer networks, with a physical trading location.
False
In the U.S., dividends are considered a business expense and are tax deductible.
False
It is easier to value a stock than a bond because it is harder to identify the bond's opportunity cost of capital.
False
It is easier to value a stock than a bond because the equations are much simpler.
False
It is easier to value a stock than a bond because, unlike a bond, a stock does not have default risk.
False
It is more difficult to value a stock than a bond because, unlike a bond, a stock has a maturity date.
False
Modeling the dividend stream as a perpetuity is a terrible assumption because it is unlikely the company will last forever.
False
NASDAQ is a broker market.
False
NASDAQ's market maker is called a designated market maker.
False
Stock valuations may be sensitive to assumptions but not estimates.
False
Stock valuations may be sensitive to estimates but not assumptions.
False
The NYSE engages in secondary but not primary market transactions.
False
The cost of equity is the return required by the preferred stockholders.
False
The cost of preferred is the return required by common stockholders.
False
The law of one price states that similar assets should have similar governance structures.
False
The three simplifying assumptions of the dividend growth model are: 1. The cost of equity is strictly positive. 2. The cost of equity and the growth rate in dividends are constant forever. 3. The cost of equity is greater than or equal to the growth rate in dividends.
False
The two-stage growth model is a special case of constant dividend growth.
False
The zero growth model is not a very good assumption for preferred stock.
False
There is no good reason to list on the NYSE because it has tougher listing requirements.
False
Under the dividend growth model, if the dividends are growing at 3% per year, we expect the price will grow at more than 3% per year.
False
Under the dividend growth model, if the price is growing at 2% every quarter, then we expect the dividends will grow at more than 2% every quarter.
False
Under the dividend growth model, the cost of equity is the dividend yield less the capital gains yield.
False
Under the dividend growth model, the dividend yield is next period's dividend divided by next period's share price.
False
Under the dividend growth model, the price grows slower than the rate at which the dividends grow because the price represents the present value of all the expected future dividends, so discounting makes present values smaller than the nominal value of the dividends paid in the future.
False
We arrive at the price of a stock as the future value of all the expected future dividends through repeated substitutions for the future prices.
False
We arrive at the price of a stock as the present value of all the expected future dividends through repeated substitutions for the future dividends.
False
When applying the zero growth model the discount rate is the cost of equity.
False
When firms are comparable in some sense, we can use the multiples approach to determine the value of a benchmark firm based on the value of another target firm.
False
When relaxing assumptions, you usually make problems more realistic and tractable.
False
True
If a stock trades cum-dividend, the buyer gets the current dividend.
A company with a poor corporate governance score may receive a "strong buy" recommendation from analysts.
True
Deriving the price of a stock as the present value of all the expected future dividends requires an infinite number of substitutions for the future prices.
True
If possible, it is better to use a set of comparable firms rather than a single benchmark company when using the multiples approach.
True
In general, over-the-counter markets are a bunch of market participants linked by telecommunications and computer networks, without a physical trading location.
True
In the U.S., dividends are not considered a business expense and are not tax deductible.
True
It is easier to value a bond than a stock because a bond must converge on a terminal value, whereas a stock does have to converge on anything.
True
NASDAQ engages in primary and secondary market transactions.
True
NASDAQ is an OTC market.
True
Shareholders cannot sue the company if it misses an undeclared dividend.
True
The NYSE's market maker was called a specialist.
True
The New York Stock Exchange is a publicly traded company.
True
The decreasing number of publicly traded companies in the U.S. is largely due to the smallest firm segment.
True
The three simplifying assumptions of the dividend growth model are: 1. The cost of equity is strictly positive. 2. The cost of equity and the growth rate in dividends are constant forever. 3. The cost of equity is strictly greater than the growth rate in dividends.
True
Typically, the estimation error in a bond's valuation is much smaller than that of a stock's valuation.
True
Typically, the estimation error in a stock's valuation is much greater than that of a bond's valuation.
True
Under the dividend growth model, as the growth rate approaches the cost of equity, the stock price becomes more sensitive to estimation error.
True
Under the dividend growth model, the capital gains yield is the dividend growth rate.
True
Under the dividend growth model, the cost of equity is a function of the current share price.
True
When relaxing assumptions, you usually make problems more realistic and less tractable.
True
