finance ch 7 stocks
Using a benchmark PE ratio against current earnings yields a forecasted price called a _______ price.
target
A benchmark PE ratio can be determined using:
the PEs of similar companies a company's own historical PEs
three special case patterns of dividend growth discussed in the text include:
zero, constant, and non-constant growth rate
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
If the growth rate (g) is zero, the capital gains yield is ____.
zero
A PE ratio that is based on estimated future earnings is known as a ____________ PE ratio.
forward
The value of a firm is derived using the firm's ______ rate and its _______ rate.
growth; discount
The trading of existing shares occurs in the ______ market.
secondary market
Which of the following represents the valuation of stock using a zero growth model?
Dividend/Discount rate = D/R
If unpaid preferred dividends must be "caught up" before any common dividends can be paid, they are called _________ dividends.
cumulative
Total return is calculated by adding
dividend yield and the capital gains yield.
The constant-growth model assumes that _________.
dividends change at a constant rate
Which of the following ratios might be used to estimate the value of a stock?
-P/E -Price/Sales
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
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
Preferred stock has preference over common stock in the:
-distribution of corporate assets -payment of dividends
What information do we need to determine the value of a stock using the zero growth model?
-dividend -discount rate
What are cash flows to investors in stocks?
Dividends Capital gains
Someone who maintains an inventory of stocks and buys and sells those stocks is known as a ____.
dealer
True or false: Common stock has a set maturity.
F
True or false: A PE ratio that is based on estimated future earnings is called a regressive PE ratio.
False - A PE ratio that is based on estimated future earnings is called a forward PE ratio
For investors in the stock market, dividends from stocks are fixed and guaranteed, while capital gains are variable and not guaranteed
False, neither are guarenteed
The ______ can be interpreted as the capital gains yield
Growth rate EX: In the formula R = dividend yield plus capital gains yield, dividend yield = D/P and capital gains yield = g.
In the dividend growth model, the expected return for investors comes from which two sources?
R = Div/P0+g (dividend yield and growth rate)
The dividend yield is determined by dividing the expected dividend (D1) by:
The current price (P0)
which defines the primary market?
Where stocks are issued for the first time
A person who brings buyers and sellers together is called a(n) _____
broker
The price of a share of common stock is equal to the present value of all ______ future dividends.
expected
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)
All else constant, the dividend yield will increase if the stock price ____.
decreases -The stock price is in the denominator of the dividend yield equation, so a decrease in the stock price will increase the dividend yield.
