FIN 331 Ch. 8
Which of the following are cash flows to investors in stocks?
Capital gains; Dividends
What information do we need to determine the value of stock using the zero-growth model?
Discount rate; annual dividend amount
In the dividend discount model, the expected return for investors comes from which two sources?
Growth rate; Dividend Yield
Which of the following is a feature of common stock?
It generally has voting rights; It has no special preference in bankruptcy; It has no special preference in receiving dividends
One common reason for having two classes of common stock with different voting rights is:
It is easier for insiders such as founding families to maintain control of the company
NASDAQ has which of these features?
Multiple market maker system; computer network of securities dealers
Which of the following occurs in the primary market?
newly-issued stocks are initially sold
The two most important stock markets in the U.S. are the New York Stock Exchange and ___.
the NASDAQ
The dividend yield is determined by dividing the expected dividend (D1) by:
the current price
The trading of existing shares occurs in the ___ market.
secondary
Mota Motors has eight directors on its board, two of whom go up for election each year. This is an example of a:
staggered board
When valuing a stock, the advantage to considering the stock price in the distant future (rathen than a more near-term price) as a cash flow is that:
when discounted to present value, a stock price in the distant future is nearly zero
If the growth rate (g) is zero, the capital gains yield is ___.
zero
Scott Corporation does not pay dividends. The PE ratio for its industry is 13.3, and Scott's EPs were $1.47. At what price should Scott's stock trade?
$19.55
You expect the following dividends from ABC Stock: Year 1- $3.00 Year 2- $2.00 Year 3 $1.00 You expect that from year 4 onward, the dividend will grow at a constant 3% growth rate. If your required rate of return is 7%, what is your estimate for the current stock price?
$26.39
Dusty Corporation has an issue do preferred stock that pays a dividend of 7% of its state value, which is $100. Which of the following would be a commonly used name for that preferred stock?
$7 preferred
What is the value of a stocks if next year's dividend is $6, the discount rate is 11 percent and the constant rate of growth is 3 percent?
$75 because $6/(0.11-0.03)
A zero-growth stock pays a dividend of $2 per share and has a discount rate of 10%. The stock's price will be 0.
20.00
The NYSE differs from the NASDAQ primarily because the NYSE has:
A physical location; an auction market; specialists
In which way(s) is preferred stock like a bond?
Preferred shareholders receive a stated value if the firm liquidates, like bondholders; Preferred shareholders receive a stated dividend, similar to interest on a bond; Some preferred stock has credit ratings, like bonds; Preferred stock sometimes has a sinking fund, giving in a set maturity like bonds.
Match the following terms relating to stock valuation. P1 D1 R P0
Price in one year; Dividend in one year; Discount rate; Price today
Which of the following entities declares a dividend?
The board of directors
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; The rate of return required by the market is not easily observed; Common stock cash flows are not known in advance
Which of the following is usually a right of common shareholders?
The right to a proportional share of dividends paid; Voting rights; The right to purchase a proportional share of new stock issued
Will is deciding whether or not to buy Dang Corporation stock, whose current price is $54.95. Dang paid a dividend of $2.17 this year. Will estimates that dividends will grow very quickly, at a rate of 12%, for the next four years. After that, he expects the dividend growth rate to fall 5%. Should Will buy the stock if his required rate of return is 10%?
Yes; using the two stage growth model, the stock's value is $58.06
The largest number of NYSE members are registered as ___.
commission brokers
All else constant, the dividend yield will increase if the stock price ___.
decreases
Preferred stock has preference over common stock in the:
distribution of corporate assets; payment of dividends
The constant-growth model infers that ___.
dividends change at a constant rate
A PE ratio that is based on estimated future earnings is known as a ___ PE ratio.
forward
An asset's value is determined by the present value of its ___ cash flows.
future
The ___ can be interpreted as the capital gains yield.
growth rate
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
When the stock being valued does not pay dividends,
the dividend growth model can still be used
Three special case patterns of dividend growth include:
non-constant growth; zero growth; constant growth
A benchmark PE ratio can be determined using:
the PEs of similar companies; a company's own historical PEs
