Valuation of Common Stock and Dividend Models

chapter 8 Question A share of common stock is (less/more) difficult to value in practice than a bond. When the stock being valued does not pay dividends The value of a firm is the function of its ______ rate and its _______ rate. Three special case patterns of dividend growth include _____. Which of the following are reasons why it is more difficult to value common stock than it is to value bonds? Answer more the dividend growth model can still be used. growth; discount nonconstant growth zero growth constant growth Common stock cash flows are not known in advance The life of a common stock is essentially forever. The rate of return required by the market is not easily observed. A zero-growth stock pays a dividend of $2 per share and has a discount rate of 10%. What will the stock's price be? If a zero-dividend stock is purchased for $80 and sold one year later for $84, the 1-year return can be found using the formula ______. The formula for valuing a constant growth stock is _____. The value of a firm is the function of its rate and its discount rate. Which one of the following is true about dividend growth patterns? When assuming nonconstant growth in dividends, to avoid the problem of having to forecast and discount an infinite number of dividends, we must require that the dividends _____. What information do we need to determine the value of stock using the zero-growth model? The idea for -stage growth is that the dividend will grow at a rate of g1 for t years and then grow at a rate of g2 thereafter, forever. The assumption of constant growth infers that _________. Which of the following are expected cash flows to investors in stocks? The dividend yield is determined by dividing the expected dividend (D1) by _____. 20.00 A benchmark PE ratio can be determined using: a company's own historical PEs the PEs of similar companies The main reason for considering nonconstant growth in dividends is to allow for _____ growth rates over _____. When applying two-stage growth, in the second stage, g2 _____. True or False Question For investors in the stock market, dividends from stocks are fixed and guaranteed, while capital gains are variable and not guaranteed. Common stock has no special preference either in receiving or in bankruptcy.6 All else constant, the dividend yield will increase if the stock price ___ When voting for the board of directors, the number of votes a shareholder is entitled to is generally determined as follows: Cumulative voting means board members are elected one at a time, with each shareholder casting his or her allotted votes for each seat on the board. WinWin Corporation has five board members, and each shareholder gets one vote per share. The company uses a straight board voting procedure. How does this arrangement affect minority shareholders? ($84/$80) − 1 P0 = D1/(R − g) growth Dividends may grow at a constant rate. start growing at a constant rate sometime in the future Annual dividend amount Discount rate 2 dividends change at a constant rate Capital gains Dividends the current price (P0) supernormal; some finite length of time must be less than R False dividends decreases one vote per share held false No minority shareholder would have enough votes to win any seat on the board. Mota Motors has eight directors on its board, two of whom go up for election each year. This is an example of a: Which of the following are features of common stock? One reason corporations use staggered boards is that _____. Suppose Bob owns 20 shares and Vikki owns 30 shares in Good Company, and there are five members of the board of directors. Under which voting arrangement can Bob assure himself of a board member that represents his interests? One common reason for having two classes of common stock with different voting rights is _____. With voting, the directors are elected one at a time and the only way to guarantee a seat is to own 50 percent plus one share A is a payment by a corporation to shareholders, made in either cash or stock. In a board, only a fraction of the directorships are up for election at any one time. A stock with dividend priority over common stock is called a Blank______ stock. It can be advantageous to have a staggered board because it provides "institutional memory." Preferred shares have a stated liquidating value, typically $_____ per share. staggered board It has no special preference in receiving dividends. It generally has voting rights. It has no special preference in bankruptcy. it makes takeover attempts less likely to be successful Cumulative voting it is easier for insiders such as founding families to maintain control of the company straight dividend staggered preferred true 100 small shareholders do not attend the Most voting in large corporations is done by proxy because _____. most annual meeting If preferred dividends are and are not paid in a given year, they Cumulative will be carried forward as an arrearage. With more than one class of common stock, it is easier for insiders such as founding families to maintain control of the true company. Which of the following occurs in the primary market? Newly-issued stocks are initially sold Which of the following entities declares a dividend? The board of directors of corporate assets payment of Preferred stock has preference over common stock in the _____. distribution dividends Investment firms that are active participants in stocks assigned Supplemental to them are called liquidity providers. Dusty Corporation has an issue of preferred stock that pays a dividend of 7 percent of its state value, which is $100. Which of $7 the following would be a commonly used name for that preferred stock? Computer network of securities dealers NASDAQ has which of these features? Multiple market maker system No; the company may defer dividends on preferred stock; however they can not pay Is a company required to pay preferred dividends? dividends to common shareholders until preferred dividends are paid. The two most important stock markets in the United States are Nasdaq the New York Stock Exchange and ______. Initial public offerings of stock occur in the ____ market. primary Someone who maintains an inventory of stocks and buys and dealer sells those stocks is known as a ____. Stock price reporting has increasingly moved from traditional internet print media to the internet in recent years. An NYSE member who executes customer buy and sell orders is floor called a broker. The AAR is calculated by taking the average net income and book dividing it by the average _ value. The NYSE differs from the Nasdaq primarily because the NYSE a physical location specialists an auction market has _____ Which of the following occurs in the primary market? Capital Corp is considering a project whose internal rate of return is 14%. If Capital's required return is 14%, the project's NPV is: Stock price reporting has increasingly moved from traditional print media to the ______ in recent years The point at which the NPV profile crosses the vertical axis is the: An NYSE member who acts as a dealer in particular stocks is called a market maker. According to the average accounting return rule, a project is acceptable if its average accounting return exceeds: The point at which the NPV profile crosses the horizontal axis is the Newly-issued stocks are initially sold 0 internet sum of the cash flows of the project designated a target average accounting return internal rate of return