Ch 7

Question 0

Valuating A zero growth dividend stock

Answer 0

Because the dividend is always the same the stock can
be viewed as an ordinary perpetuity

cash flow = D every period

P0 = D/R

Question 1

Present value and Current price of stock based on cash flows equation:

Answer 1

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

Where p0 = current price of stock
D1 = cash dividend paid at end of period
P1 = price of stock in 1 period
R = required rate of return (discount rate)

Question 2

Constant dividend growth rate equation?

Answer 2

Dt = D0 x (1 + g)^t

Dt = dividend t periods in the future
g = constant growth rate of dividend

Question 3

Growing perpetuity

Answer 3

Asset with cash flows that grow at a constant rate forever

Question 4

Value of a stock with a constantly growing dividend, equation?

Answer 4

P0 = [D0 x (1 + g)]/(R - g) = D1/(R - g)

Pt = [Dt x (1 + g)]/(R - g) = Dt+1/(R - g)

Question 5

Dividend growth model

Answer 5

Model that determines the current price of stock
As its dividend next period divided by the discount rate
Less the dividend growth rate

Question 6

Dividend yield

Answer 6

Stocks expected cash divided by its current price

D1/P0

Question 7

Equation to solve for required rate of return?

Answer 7

R = D1/(P0) + g

R = Dividend yield + Capital gains yield

Question 8

Capital gains yield

Answer 8

Dividend growth or rate at which value of investment grows

g

Question 9

Common stock

Answer 9

Equity without priority for dividends or in bankruptcy

Question 10

Cumulative voting

Answer 10

Procedure in which shareholder may cast all votes

For one member of the board of directors

Question 11

If N directors are up for election what fraction ownership of stock will guarantee you a seat? Example?What makes it easier to get elected?

Answer 11

N directors, so 1/(N + 1)

Ex, 4 directors than 1/5 = 20%

Easier/ cheaper to get elected if more directors up for election

Question 12

Straight voting

Answer 12

Procedure where shareholder may cast all votes for

Each member of the board of directors

Question 13

Classified or staggered boards?

Answer 13

Only a fraction of directorships are up for election

At a particular time

Question 14

2 basic effects of staggering the board?

Answer 14

1 makes it more difficult for minority to elect director
Because less directors being elected at one time

2 makes takeover attempts less likely to be successful
Because its more difficult to vote in a majority of new directors

Question 15

Proxy

Answer 15

Grant of authority by a shareholder allowing another

individual to vote that shareholder’s shares

Question 16

Proxy fight

Answer 16

Outside group of shareholders obtain votes via proxy

And vote by proxy to replace management by electing
Enough directors

Question 17

Other rights of shareholders aside from voting for directors 3?

Answer 17

1 right to share proportionately in dividends paid out

2 right to share proportionately in assets remaining
After liabilities have been paid in liquidation

3 right to vote on stockholder matters of importance
Such as mergers

Question 18

Preemptive right

Answer 18

Right to share proportionally in any new stock sold

Question 19

Dividends

Answer 19

Payments by a corporation to shareholders made in

Either cash or stock

Question 20

3 important characteristics of dividends?

Answer 20

1 unless dividend is declared by board of directors, it’s not
A liability of a corporation

2 not a business expense, dividends are paid out from
Corporations after tax profits

3 dividends received by individual shareholders are taxable,
But corporations that own stock are only taxed on 30% of
Their stock holdings (70% excluded from taxes)

Question 21

Preferred stock

Answer 21

Stock with dividend priority over common stock
Normally through fixed dividend rate

Sometimes without voting rights

Question 22

Stated value for preferred shares

Answer 22

Usually $100

Question 23

Cumulative dividends

Answer 23

If dividend of preferred stock isn’t paid one year

It will be carried over to a later year

Question 24

How are preferred dividends treated?

Answer 24

Like common stock dividends

Question 25

Primary market

Answer 25

Market in which new securities are originally sold to

Investors

Question 26

Secondary market

Answer 26

Market in which previously issued securities are traded

Among investors

Question 27

Dealer

Answer 27

Agent who buys and sells securities from inventory

Question 28

Broker

Answer 28

Agent who arranges security transactions among investors

Question 29

Member, license

Answer 29

As of 2006 a member is the owner of a trading license on NYSE

Limited to 1366 licenses, allows you to buy and
sell securities on floor of exchange

Question 30

Hybrid market

Answer 30

Trading takes place electronically and face to face

Question 31

Designated market maker (DMM) formerly known as specialists?

Answer 31

NYSE members who act as dealers in particular stocks

Question 32

Floor brokers

Answer 32

NYSE members who execute customer buy and sell orders

Question 33

Supplemental liquidity providers (SLPs)

Answer 33

Investment firms that are active participants in stocks
Assigned to them

Their job is to make a one sided market (offering either
To buy or to sell)

They trade purely for their own accounts

Question 34

Order flow

Answer 34

Flow of customer orders to buy and sell securities

Question 35

DMM’s post

Answer 35

Fixed place on exchange floor where DMM operates

Question 36

Inside quotes

Answer 36

Highest bid quotes and lowest ask quotes for a security

Question 37

Electronic communications networks (ECNs)

Answer 37

Websites that allow investors to trade directly with one another