Finance unit 2 chp 7

Which of the following defines the primary market?

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

What right does a proxy give to a shareholder?

the right to vote on behalf of another shareholder

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

zero

What beneficial purpose does staggering serve?

It provides institutional memory.

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

R

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

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

cumulative

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

dividends capital gains

The constant growth model can be used to value the stock of firms that have which type(s) of dividends?

dividends that are either constant or change annually at a constant rate

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

expected

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

expected

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

false

True or false: All classes of stock issued by a firm must have equal voting rights.

false

True or false: Common stock has a set maturity

false

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

false

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

forward

The ______ can be interpreted as the capital gains yield.

growth rate

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

growth; discount

The dividend yield is defined as

next year's expected dividend divided by the current market price per share.

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

The business of the NYSE is to attract ______.

order flow

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

order flow

______ refers to the stream of customer orders to buy and sell stocks.

order flow

Dividends are

paid out of aftertax profits

Initial public offerings of stock occur in the ______ market.

primary

What is the market called that facilitates the sale of shares between individual investors?

secondary

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

specialist

Institutional memory can be enhanced by

staggering board elections

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.

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

the price-earnings ratio

A written authorization for one shareholder to vote the stock of another shareholder is called a(n)

proxy

Kate could not attend the last shareholders' meeting and thus she granted the authority to vote on her behalf to the managers of the firm. Which term applies to this granting of authority?

proxy

Which of the following is true of classes of common stock?

-the classes of common stock often have unequal voting rights. -a primary reason for creating more than one class of stock is to maintain control.

Which of the following statements are true of cumulative preferred dividends? (Select all that apply.)

-they are carried forward as an arrearage. -preferred shareholders receive no interest on the cumulated dividends.

If there are nine directors to be elected, what is the least number of shares you will need to guarantee a seat on the board under cumulative voting?

10 percent of the stock plus 1 share

If you hold 50 shares of a particular corporation's common stock and there are 5 directors to be elected, how many votes will you be allowed to cast under cumulative voting?

250

If there are nine directors that need to be elected, how many shares do you need to own in order to guarantee a seat on the board under straight voting?

50 percent of the stock + 1 share

Which type of stock pays a fixed dividend, receives first priority in dividend payment, and maintains the right to a dividend payment, even if that payment is deferred?

cumulative preferred

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

current price

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

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

decrease

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

dividend yield, growth rate

Payments to shareholders that represent a return on the capital contributed to the corporation are referred to as

dividends

True or false: Common stock has a set maturity.

false

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

D2 (low 2)

Under a _____ voting mechanism, the minimum number of votes required to acquire a seat on a board ______ is PLUS ______.

Blank 1: straight Blank 2: 50% Blank 3: 1

Stoneheart Group is expected to pay a dividend of $3.07 next year. The company's dividend growth rate is expected to be 4.4 percent indefinitely and investors require a return of 11.2 percent on the company's stock. What is the stock price?

$45.15

Preferred stock has preference over common stock in the:

- distribution of corporate assets. - payment of dividends.

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

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

true

You are considering purchasing stock in Canyon Echo. You feel the company will increase its dividend at 4.6 percent indefinitely. The company just paid a dividend of $3.35 and you feel that the required return on the stock is 10.8 percent. What is the price per share of the company's stock?

$56.52

Michael's, Incorporated, just paid $2.65 to its shareholders as the annual dividend. Simultaneously, the company announced that future dividends will be increasing by 5.7 percent. If you require a rate of return of 9.9 percent, how much are you willing to pay today to purchase one share of the company's stock?

$66.69

McKerley Corporation has preferred stock outstanding that will pay an annual dividend of $4.00 per share with the first dividend exactly 10 years from today. If the required return is 3.66 percent, what is the current price of the stock?

$79.08

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

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

Which of the following are true of dividends?

-they are taxable to individual shareholders. -they are paid at the discretion of the board of directors.

CDB stock is currently priced at $83. The company will pay a dividend of $5.61 next year and investors require a return of 11.7 percent on similar stocks. What is the dividend growth rate on this stock?

4.94%

R = ______.

D1/P0 + g

Which of the following are rights of common stock holders?

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

Identify the two types of preferred dividends:

cumulative and noncumulative

Which one of the following will increase the current value of a stock?

increase in the capital gains yield