Finance 303 CH 7

R = ______

D1/P0 + g

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

Dealer

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

Decrease

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

growth; discount

"Inside Quotes" represent the _________ and the ________.

highest bid price; lowest ask price

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

Expected

P0 = (D1 + P1)/(1 + __)

R

The trading of existing shares occurs in the ______ market.

Secondary

This 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

What is the formula for the present value of a growing perpetuity where C1 is the net cash flow, R is the required return and g is the growth rate?

P = C1/(R-g)

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

cumulative

The ______ can be interpreted as the capital gains yield.

growth rate

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

order flow

New York Stock Exchange Designated Market Makers (DMMs) were formerly called ________ .

specialists

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

Dividends may grow at a constant rate.

The dividend yield is determined by dividing the expected dividend (D1) by:

the current price (P0)

True or false: Daily stock prices can only be found by looking up the stock in newspapers.

False

True or false: A PE ratio that is based on estimated future earnings is called a regressive PE ratio.

False (Forward PE Ratio)

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

0 (Zero)

P1 = (__ + P2)/(1 + R)

D2 (little 2)

NASDAQ has which of these features?

-Multiple market maker system. -Computer network of securities dealers.

A benchmark PE ratio can be determined using:

-a company's own historical PEs -the PEs of similar companies

The NYSE differs from the NASDAQ primarily because the NYSE has:

-a face-to-face auction market -a physical location

Preferred stock has preference over common stock in the:

-distribution of corporate assets -payment of dividends

Which of the following represents the valuation of stock using a zero growth model?

Dividend/Discount rate = D/R

The constant-growth model assumes that _________.

dividends change at a constant rate

If a company's growth for Years 1 through 3 is 20% but stabilizes at 5% beginning in Year 4, its growth pattern would be described as _______.

non-constant

What information do we need to determine the value of a stock using the zero growth model?

-Dividend -Discount rate

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

-Dividend Yield -Growth rate

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

-Dividends

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

-non-constant growth -constant growth -zero growth

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

False

True or false: Common stock has a set maturity.

False

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

-The Price/Earnings ratio -The Price/Sales ratio

Which of the following are rights of common stock holders?

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

A person who brings buyers and sellers together is called a(n) ______.

Broker

Initial public offerings of stock occur in the ____ market.

Primary

Shares of stock are first brought to the market and sold to investors in the ________ market.

Primary

Which of the following are reasons that make valuing a share of stock more difficult than valuing a bond?

Stock has no set maturity The required rate of return is unobservable Dividends are unknown and uncertain

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

Target

True or false: Total return is calculated by adding the dividend yield and the capital gains yield.

True

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

forward

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

internet

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

NASDAQ

Match the following terms relating to stock valuation.

P1 <--> Price in one year D1 <--> Next expected Dividend R <--> Discount rate P0 <--> Price today D0 <--> Dividend just paid

Earnings over the coming year are expected to be $3 and a benchmark PE of 15 applies to earnings over the previous year. The _____, or forecast, price over the coming year is $45.

Target

Which of the following defines the primary market?

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