Chapter 9 Stock Valuation

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

steady

A designated market maker, or DMM, continually posts and updates bid and ask prices as he or she maintains a ____ market.

two-sided

In theory, which of the following models are mutually consistent and can be used to determine the value of a share of stock?

The comparables method, the dividend discount model, and the firm cash flow model.

Which of the following help facilitate trades without necessarily maintaining an inventory?

broker

Most trading on the NYSE is done:

electronically

Most trades on the NYSE occur ____.

electronically without human intervention

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

future

Firms with many investment opportunities typically have ______ PE ratios.

higher

Higher growth opportunities create ______ value today.

higher

In a stock price quote, the ask price is ______ the bid price.

higher than

Enterprise value is equal to the market value of a firm's equity plus the market value of a firm's debt _____.

minus cash

A firm with growth opportunities should sell for ____ a firm without growth opportunities.

more than

What is the price of a stock if its dividend a year from now is expected to be $3.20, the discount rate is 9 percent, and the constant rate of growth is 5 percent?

$80=$3.20/(9%-5%)

What conditions must be met for a firm to increase value?

Earnings must be retained to fund projects .Projects must have positive net present values.

True or false: Trades on NASDAQ occur on a trading floor.

False

What is the value of a stock if next year's dividend is $6, the discount rate is 11 percent and the constant rate of growth is 3 percent?

Po = $6/(.11-.03) = $75

The dividend yield is determined by dividing next year's expected cash dividend by the ____.

current price

True or false: A market order allows the investor to choose the price they will transact at.

false

True or false: An asset's value is determined by the most recent cash flows.

false

The value of a firm is the function of It _____ rate and its _____ rate.

growth discount

The stock will be sold at (or near) the current market price in a ______ order.

market

Firms in the same industry ______ have the same multiples

may not

The price earnings (PE) ratio is a function of which three factors?

o Growth opportunities o Accounting practices o Risk level

Historically, most trading on the NYSE was done ____ but currently, most trading on the NYSE is done ______.

on the floor; electronically

Initial public offerings of stock occur in the ____ market.

primary

Valuing companies using the comparables approach is similar to valuation in

real estate

NASDAQ has which of these features?

Multiple market maker system. Computer network of securities dealers.

In an inflationary environment, reported earnings are _____ if a firm uses LIFO rather than FIFO accounting.

lower

In a stock price quote, the number of shares outstanding multiplied by the current price per share is known as the ____.

market cap

Comparable firms are assumed to have similar:

multiples

In an inflationary environment, reported earnings are lower if a firm uses ______ rather than ______ accounting.

LIFO FIFO

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

dealer

If the discount rate increases, the PE ratio will ______.

decreases

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 Reason: P0 = $2/0.10 = $20

A firm with an 8 percent dividend growth rate and a return on equity of 20 percent must have a retention ratio of ______ percent.

40%= 8%/20%

What are the three basic patterns of dividend growth?

Constant growth Zero growth Differential growth

__________ act as two-sided dealers in particular stocks.

DMM

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

decreases Reason: Let's take an example. Suppose a company pays a $2.50 dividend and the stock price is $50 - the dividend yield is $2.50/$50 = 5%. Suppose the stock price increases to $60 - then the dividend yield decreases to $2.50/$60 = 4.17%. Alternatively, if the stock price drops to $40, the dividend yield increases to $2.50/$40 = 6.25%.

For many companies, steady growth in _____ is an explicit goal.

dividends

In theory, which of the following models are best used to determine the value of a non-dividend paying share of stock?

the firm cash flow model

Investors select a stock based on the cash they expect to receive from that stock. That cash comes in the form of ____.

the future sales price dividends

A calculated stock price that discounts earnings instead of dividends will usually be:

too high

Growth opportunities may be lost if a firm pays out _________ in dividends

too much

A zero-growth model for stock valuation is distinguished by a ____.

A constant dividend amount

The price earnings ratio is found by dividing the current price per share by last year's ______.

Earnings per share

Which of the following occurs in the primary market?

Newly-issued stocks are initially sold

Which of the following has a physical trading floor?

NYSE

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

Dividend yield and growth Rate/capital gains yield

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

Dividends Capital Gains

The constant-growth model assumes that _________.

Dividends change at a constant rate

Which one of the following is true about dividend growth patterns?

Dividends may grow at a constant rate

What differences might cause firms in the same industry to have different multiples?

Investment opportunities, accounting treatments, and risk levels

Which one of these represents the present value of a growing perpetuity?

P0= Div/(R−g)

What is 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 + 0.08 = 10%

The determinants of a firm's growth rate include which factors?

Return on retained earnings The retention ratio

P1 DIV1 R P0

Stock Price in one year Dividend at end of year 1 Discount rate Stock Price Today

The PE ratio is negatively related to the ____.

Stock's risk Firm's discount rate

If a zero-dividend stock is purchased for $80 and sold one year later for $84, the 1-year return is ______ percent.

(84/80)-1=5%

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

false

The value of a firm is the function of its ______ rate and its _______ rate.

growth discount

When enterprise value is calculated, cash is subtracted from the market value of debt and equity because ____.

o Many firms hold more cash than necessary o An EV ratio should reflect the ability of productive assets to create cash flow

The current price per share divided by last year's earnings per share gives you:

price earnings ratio