FINN 3160- Ch. 7 Equity Markets and Stock Valuation
What information do we need to determine the value of a stock using the zero growth model?
Discount rate and Dividend
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
True or false: A PE ratio that is based on estimated future earnings is called a regressive PE ratio.
False
True or false: Daily stock prices can only be found by looking up the stock in newspapers.
False: Up-to-the-minute stock prices are available on many websites
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)
Match the following terms relating to stock valuation. P1 D1 R P0 D0
P1- Price in one year D1- Next expected Dividend R- Discount rate P0- Price today D0- Dividend just paid
Shares of stock are first brought to the market and sold to investors in the _____ market.
Primary
The ______ can be interpreted as the capital gains yield.
growth rate
The trading of existing shares occurs in the ______ market.
secondary
The dividend yield is determined by dividing the expected dividend (D1) by:
the current price (P0)
If the growth rate (g) is zero, the capital gains yield is ____.
zero
True or false: Common stock has a set maturity.
False
The constant-growth model assumes that _________.
dividends change at a constant rate
The price of a share of common stock is equal to the present value of all ______ future dividends.
expected
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
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 ____.
decreases
The value of a firm is derived using the firm's ______ rate and its _______ rate.
growth; discount
Stock price reporting has increasingly moved from traditional print media to the ______ in recent years.
internet
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
Which of the following are rights of common stock holders?
(1) The right to vote on matters of importance. (2) The right to share proportionally in any common dividends paid. (3) The right to share proportionally in any residual value in the event of liquidation.
Preferred stock has preference over common stock in the:
(1) distribution of corporate assets (2) payment of dividends
Which of the following are cash flows to investors in stocks?
(1) Dividends (2) Capital gains
In the dividend growth model, the expected return for investors comes from which two sources?
(1) Growth rate (2) Dividend Yield
Which of the following are reasons that make valuing a share of stock more difficult than valuing a bond?
(1) Stock has no set maturity (2) Dividends are unknown and uncertain (3) The required rate of return is unobservable
Which of the following represents the valuation of stock using a zero growth model?
Dividend/Discount rate = D/R
Which one of the following is true about dividend growth patterns?
Dividends may grow at a constant rate.
A PE ratio that is based on estimated future earnings is known as a ____________ PE ratio.
forward
Which of the following ratios might be used to estimate the value of a stock?
(1) The Price/Earnings ratio (2) The Price/Sales ratio
A benchmark PE ratio can be determined using:
(1) a company's own historical PEs (2) the PEs of similar companies
Three special case patterns of dividend growth discussed in the text include:
(1) non-constant growth (2) constant growth (3) zero growth
