Exam 2: Chapter 7

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

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

Cumulative

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

Target

The dividend yield is determined by dividing the expected dividend by:

The current price

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

1)Growth Rate 2)Dividend Yield

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

-Zero Growth -Constant Growth -Non-Constant Growth

What is supernormal growth?

Dividend growth is not consistent initially, but settles down to constant growth eventually

What formula represents the valuation of stock using a zero growth model?

Dividend/Discount Rate=D/R

What is one thing that defines the primary market?

The primary market is where stocks are issued for the firm time

Characteristics of Constant dividend/zero growth

-Firm will pay a constant dividend forever -Like preferred stock -Price is computed using the perpetuity formula

What are the features of classes of stock when it comes to common stock?

-Founders' shares -Class A and Class B shares

NASDAQ has which features?

-Multiple market maker system -Computer network of securities dealers

What ratios might be used to estimate the value of a stock?

-price/earnings ratio -Price/Sales Ratio

What type of security has the lowest priority in a bankruptcy Proceeding?

Common Stock

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

Growth; discount

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

Internet

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

Order Flow

Shares of stock are first bough to the market and sold to investors in the _______ market

Primary

Newly issued securities are sold to investors in which type of market?

Primary

An agent who buys and sells securities from inventory is called a:

Dealer

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

Decreases

What are the features of dividends when it comes to preferred stock?

-Must be paid before dividends can be paid to common stockholders -Not a liability of the firm -Can be deferred indefinitely -Most preferred dividends are cumulative

Preferred stock has preference over common stock in the:

-Payment of dividends -Distribution of corporate assets

What are the features of other rights when it comes to common stock?

-Share proportionally in declared dividends -Share proportionally in remaining assets during liquidation -Preemptive right

What are the features of voting rights when it comes to common stock?

-Stockholders elect directors -Cumulative voting vs. Straight voting -Boards are often staggered, or "classified" -Proxy voting

A benchmark PE ratio can be determined using:

-The PE's of similar companies -A company's own historical PE's

True or False: Preferred stock generally carries some voting rights

False

The constant-growth model assumes that _______.

Dividends change at a constant rate

What is true about dividend growth patterns?

Dividends may grow at a constant rate

The price of a share of common stock is equal to the present value of all _______ future dividends.

Expected

What is Constant dividend growth?

Firm will increase the dividend by a constant percent every period

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

Forward

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

Non-Constant

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

New York Stock Exchange Designated Market Makers (DMM's) were formerly called ______.

Specialists

What are rights of common stock holders?

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

What are the reasons that make valuing a stock more difficult than valuing a bond?

1)Dividends are unknown and uncertain 2)The required rate of return is unobservable 3)Stock has no set maturity date

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

Zero