Int. Finance lesson 10
In the one-period valuation model, a stock's value falls if the ______ rises.
Required return on equity
A stock's market value will be higher the higher its expected dividend stream is, all else being equal
Ture
in OTC markets, dealer increase the liquidity of thinly traded securities
Ture
A share of common stock in a firm represents an ownership interest in that firm and allows stockholders to
Vote and receive dividends
According to the Gordon model, what is an investor's valuation of a stock whose current dividend is $1.00 per year if dividends are expected to grow at a constant rate of 10% over a long period of time and the investors required return is 11%?
$110
According to the Gordon model, what is an investor's valuation of a stock whose current dividend is $1.00 per year if dividends are expected to grow at a constant rate of 10% over a long period of time and the investors required return is 15%?
$22
A stock currently sells for $25 per share and pays $0.24 per year in dividends. What is an investor's valuation of this stock if she expects it to be selling for $30 in one year and requires a 15% return on equity investments?
$26.30
A stock currently sells for $30 per share and pays $1.00 per year in dividends. What is an investor's valuation of this stock if he expects it to be selling for $37 in one year and requires a 12% return on equity investments?
$33.93
Holding other things constant, a stock's value will be highest if its most recent dividend is
$5 (highest)
(I) The market price of a security at a given time is the highest value any investor puts on the security. (II) Superior information about a security increases its value by reducing its risk.
(I) is false, (II) is true
(I) Preferred stockholders hold a claim on assets that has priority over the claims of common stockholders, but after that of bondholders. (II) Firms issue preferred stock in far greater amounts than common stock.
(I) is true, (II) is false
Holding other things constant, a stock's value will be highest if its dividend growth rate is
15% (highest)
Holding other things constant, a stock's value will be highest if the investor's required return on investments in equity is
5% (lowest)
Which of the following is not an objective of the SEC?
Advise investors about which particular stocks are good buys
(I) A share of common stock in a firm represents an ownership interest in that firm. (II) A share of preferred stock is as much like a bond as it is like common stock.
Both are true
(I) Firms issue common stock in far greater amounts than preferred stock. (II) In a given year, the total volume of stock issued is much less than the volume of bonds issued.
Both are true
(I) Preferred stockholders hold a claim on assets that has priority over the claims of common stockholders. (II) Bondholders hold a calamine assets that has priority over the claims of preferred stockholders.
Both are true
The riskiest capital market security is
Common Stock
A stock's market value will be higher the higher the investor's required rate of return is, all else equal
False
About half of new equity issues are preferred stock
False
All stocks pay dividends, as that is the only way an investor can profit from holding stock.
False
More stock trading in the US occurs in over-the-counter markets rather than on organized exchanges
False
The Dow is the broadest and best indicator of the stocks market's day to day performance
Fasle
The main cause of fluctuations in stock prices is changes in
Information available to investors
The Enron financial scandal increased uncertainty about the quality of accounting info and as a result, increased required return on investment in stocks.
True
The Gordon model assumes that a stock's dividend grows at a constant rate forever.
True
The SEC requires firms to submit various documents to increase the flow of information to investors but doesn't not verify the accuracy of that information.
True
Securities not listed on one of the exchanges trade in the over-the-counter market. In this exchange, dealers "make a market" by
buying/selling stocks for/from inventory when investors want to sell/buy
Preferred stockholders hold a claim on assets that has priority over the claims of
common stockholders, but after that of bondholders.
9/11 and Enron caused anticipated dividend growth to _____, investors' required return on equity to ______, and stock prices to _____.
decrease; increase; decrease
Stock values computed by valuation models may differ from actual market prices because it is difficult to
estimate future dividend growth rates, estimate the risk of a stock, forecast a stock's future dividends.
In the generalized dividend valuation model, a stock's value depends only on
its future dividend payments and the required return on equity
In the one-period valuation model, a stock's value will be higher
the higher its expected future price is
A basic principle of finance is that the value of any investment is
the present value of all future net cash flows generated by the investment
Which of the following is not an element of the Gordon growth model of stock valuation?
the stock's expected future price
Common stock is the riskiest corporate security, followed by preferred stock and then bonds
true
