Financial Management Ch. 7 Equity Markets and Stock Valuation
R = Blank______.
D1/P0 + g
P1 = (______ + P2)/(1 + R)
D2 (little)
R
Discount rate
D0
Dividend just paid
Which of the following represents the valuation of stock using a zero growth model?
Dividend/Discount rate = D/R
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 one of the following is true about dividend growth patterns?
Dividends may grow at a constant rate.
Websites that allow investors to trade directly with one another are termed _______.
ECNs
True or false: A PE ratio that is based on estimated future earnings is called a regressive PE ratio.
False
The two most important stock markets in the United States are the New York Stock Exchange and Blank______.
Nasdaq
D1
Next expected dividend
This type of growth describes a company that grows quickly at first, then slower in future years.
Non-constant
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)
P1
Price in one year
P0
Price today
P0 = (D1 + P1)/(1 + Blank______)
R
Which of the following defines the primary market?
The primary market is where stocks are issued for the first time.
The NYSE differs from the Nasdaq primarily because the NYSE has Blank______.
a face-to-face auction market a physical location
A person who brings buyers and sellers together is called a(n) Blank______.
broker
Which of the following are cash flows to investors in stocks?
capital gains dividends
Nasdaq has which of these features?
computer network of securities dealers multiple market maker system
If unpaid preferred dividends must be "caught up" before any common dividends can be paid, they are called Blank______ dividends.
cumulative
Someone who maintains an inventory of stocks and buys and sells those stocks is known as a Blank______.
dealer
All else constant, the dividend yield will increase if the stock price Blank______.
decreases
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
The constant growth model assumes that Blank______.
dividends change at a constant rate
The price of a share of common stock is equal to the present value of all Blank______ future dividends.
expected
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 Blank______ PE ratio.
forward
The Blank______ can be interpreted as the capital gains yield.
growth rate
The value of a firm is derived using the firm's Blank______ rate and its Blank______ rate.
growth; discount
Stock price reporting has increasingly moved from traditional print media to the Blank______ in recent years.
internet
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
Three special case patterns of dividend growth discussed in the text include:
nonconstant growth. zero growth. constant growth.
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 fundamental business of the New York Stock Exchange is to attract Blank______.
order flow
Preferred stock has preference over common stock in the:
payment of dividends. distribution of corporate assets
Initial public offerings of stock occur in the Blank______ market.
primary
Shares of stock are first brought to the market and sold to investors in the market.
primary
The trading of existing shares occurs in the Blank______ market.
secondary
New York Stock Exchange Designated Market Makers (DMMs) were formerly called Blank______.
specialists
True or false: Daily stock prices can only be found by looking up the stock in newspapers.
stock
Earnings over the coming year are expected to be $3 and a benchmark PE of 15 applies to earnings over the previous year. The Blank______, or forecast, price over the coming year is $45.
target
Using a benchmark PE ratio against current earnings yields a forecasted price called a Blank______ price.
target
A benchmark PE ratio can be determined using:
the PEs of similar companies. a company's own historical PEs.
The dividend yield is determined by dividing the expected dividend (D1) by:
the current price (P0).
Which of the following ratios might be used to estimate the value of a stock?
the price-earnings ratio
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.
True or false: Total return is calculated by adding the dividend yield and the capital gains yield.
true
If the growth rate (g) is zero, the capital gains yield is Blank______.
zero
