FINA 5170

the horizon value used

Estimates of a stock's value calculated with the free-cash-flow methodology depends most critically on _______.

False: Neither dividends nor capital gains are fixed or guaranteed.

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

True

For investors in the stock market, neither dividends nor capital gains are fixed or guaranteed.

decrease

Generally speaking, as the firm progresses through the industry life cycle you would expect the PVGO to ________ as a percent of share price.

low or no dividends.

Generally, high growth stocks pay

Payout

The _________ ratio is the ratio of dividends to earnings per share.

dividends change at a constant rate

The constant-growth model assumes that _________.

Return on equity The plowback ratio

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

Market

A _______ order is an order to sell stock at the best available price.

Limit

A _______ order sets a price limit at which an investor is willing to buy or sell stock, whereas a market order is to simply buy or sell at the best available price.

Limit

A __________ order is an order to sell a stock at a stated price.

Too high

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

Reduce

A company that reinvests earnings at below the market capitalization will _________ share value.

ECN (electronic communications network)

A computer network that connects traders directly with one another is called a(n):

plowback ratio will increase.

A firm cuts its dividend payout ratio. As a result you know that the firm's _______.

High

A firm may choose to forgo dividends today if growth opportunities are _____.

P0 = (2/1.15) + [(3 + 32)/(1.15^2)] = $28.20.

Deluxe Company expects to pay a dividend of $2 per share at the end of year 1, $3 per share at the end of year 2, and then be sold for $32 per share at the end of year 2. If the required rate of return on the stock is 15 percent, what is the current value of the stock?

Electronic Communication Network

In addition to the NYSE and Nasdaq, ---- ----- ----- connect traders with each other.

Future sales price & Dividends

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

Income

Investors typically buy ________ stocks for the cash dividends.

Growth

Investors typically buy ________ stocks primarily for the expectation of capital gains.

Capital Gains

Investors typically buy growth stocks primarily for the expectation of ________.

Div5 = (2.00) × (1.20^4) × (1.06) = 4.40.

Michigan Co. just paid a dividend of $2 per share. Analysts expect future dividends to grow at 20 percent per year for the next four years and then grow at 6 percent per year thereafter. Calculate the expected dividend in year 5.

growth rate

Multiplying the plowback ratio by the ROE for a firm gives an of the firm's ___________.

8% Sustainable growth = ROE ? plowback ratio; Payout ratio = 50%; Plowback ratio = 50%; g = (1 - 0.5)(4/25) = 0.08, or 8%.

Ocean Co. just paid a dividend of $2 per share out of earnings of $4 per share. If the book value per share is $25, what is the expected growth rate in dividends (g)?

$1.98 D5 = (1.40) × (1.10) × (1.08^2) × (1.05^2) = 1.98.

Ottocell Motor Company just paid a dividend of $1.40. Analysts expect its dividend to grow at a rate of 10 percent next year, 8 percent for the following two years, and then a constant rate of 5 percent thereafter. What is the expected dividend per share at the end of year 5?

Earnings per share

Return on equity is the ratio of __________ to book equity per share.

Primary market

Sales of new shares of stock occur in the:

r = (114 + 6 - 100)/100 = 20%.

Super Computer Company's stock is selling for $100 per share today. It is expected that-at the end of one year-it will pay a dividend of $6 per share and then be sold for $114 per share. Calculate the expected rate of return for the shareholders.

Earnings per share

The payout ratio is the ratio of dividends to:

Expected

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

Secondary

The trading of existing shares occurs in the ______ market.

NASDAQ

The two most important stock markets in the United States are the New York Stock Exchange and the ______.

New York Stock Exchange

The two most important stock markets in the United States are the ________ and the NASDAQ,

$75 Reasoning: P0 =$6/(.11 - .03) = $75 Do not multiply the dividend by 1 + the growth rate, because you're given next year's dividend.

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?

P0=EPS/r+PVGO

When valuing a stock we often think of it as the value of average earnings under no growth plus the present value of growth opportunities. Which of the following represents this?

Newly-issued stocks are initially sold

Which of the following occurs in the primary market?

P0= Div/R−g

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

r = [(Div1/P0 ) + g] = (2/20) + 0.04 = 14%.

Will Co. is expected to pay a dividend of $2 per share at the end of year 1(Div1), and the dividends are expected to grow at a constant rate of 4 percent forever. If the current price of the stock is $20 per share, calculate the expected return or the cost of equity capital for the firm.

15% : Stocks of the same risk must have the same expected return.

You are evaluating a particular stock and observe that the companies in that stock's risk class offer an expected rate of return of 15%. You therefore expect that the stock will earn:

Income

You notice a utility stock that always pays a fixed dividend. This stock would be categorized as a ________ stock.

Return on equity

__________ is the ratio of earnings per share to book equity per share.

Growth

__________ stocks are primarily bought for the expectation of capital gains instead of dividends.

Current stock price (Dividend yield = Div1/P0)

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

.105 Reason: g= plowback x ROE = (1-.30)x.15 =.105

A firm has an expected ROE of 15%. If it pays out 30% of it earnings as dividends, its dividend growth rate will be _____.

40 Reasoning: 0.2 × Plowback Ratio = 0.08 Plowback Ratio = 0.08/0.2= 40%

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

More than

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

more than

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

Less than

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

Having capital gains.

A no-dividend firm can still pay off for an investor by ______.

$30 Reason: P0 = $3/0.10 = $30

A zero-growth stock pays a dividend of $3 per share and has a discount rate of 10%. What will the stock's price be?

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%.

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

Present

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

Future

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

Market capitalization = (10.3)(37.10) = $382.13 billion.

Assume Boeing has about 10.3 billion shares outstanding and the stock price is $37.10. Also, assume the P/E ratio is about 18.3. Calculate the approximate market capitalization for GE.

Decrease

Generally speaking, as the firm progresses through the industry life cycle you would expect the PVGO to ________ as a percent of share price.

Decline, Drops

Growth rates often ___________ in the future and ROE ________. Therefore it is often useful to use a two-stage DCF model to value stocks.

$714 million Reason: Total value = 50/(.10 -.03) = 714

If a firm has a free cash flow equal to $50 million and that cash flow is expected to grow at 3% forever, what is the total firm value given a WACC of 10%?

$769 million Reason: Total value = 50/(.095 - .03) = 769.23

If a firm has a free cash flow equal to $50 million and that cash flow is expected to grow at 3% forever, what is the total firm value given a WACC of 9.5%?

No growth value = 7.5/0.15 = 50; P0 = 4.00/(0.15 - 0.10) = 80; PVGO = 80 - 50 = 30.

Summer Co. expects to pay a dividend of $4.00 per share—one year from now—out of earnings of $7.50 per share. If the required rate of return on the stock is 15 percent and its dividends are growing at a constant rate of 10 percent per year, calculate the present value of growth opportunities for the stock (PVGO).

Auction

The NASDAQ market is a dealer market rather than an _________ market.

Dealer

The NASDAQ market is a(n) ______ market rather than an auction market.

Constant growth DCF

The underlying assumption of the ________ formula is that there will be regular future growth.

growth; discount

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

discount

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

False Reason: Free cash flow is the firm's earnings less any new investment expenditures.

True or false: Free cash flow is the firm's new investments less any old tax expenditures.

False

True or false: Securities in the same risk will likely have different expected rates of return.

$80 Reason: P0 = $3.20/(.09 - .05) = $80

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?

6.46% Reason: R = ($3.20/$108) + .035 = .0646, or 6.46%

What is the total return for a stock currently sells for $108, pays a dividend in one year of $3.20, and has a constant growth rate of 3.5 percent?

10% Reason: R = ($2/$100) + .08 = .10, or 10%

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?

Growth

You notice a technology stock that has never paid a dividend. The market value of the stock is based on the expected value of its future investments rather than current earnings. This stock would be categorized as a Blank______ stock.