Chapter 8

Question 1

the life of the common stock investment is

Answer 1

essentially forever bc common stock has no maturity

Question 2

Pꜜ0 =

Answer 2

the current price of the stock

Question 3

Pꜜ1 =
(Cash flows)

Answer 3

the price of the stock in one period

Question 4

D1=
(Cash flows)

Answer 4

the cash dividend paid at the end of one period

Question 5

R=
(Cash flows)

Answer 5

the required return in the market on this investment

Question 6

Cash flows formula for
Pꜜ0 =

Answer 6

Pꜜ0 =
(Dꜜ1 + Pꜜ1) / (1 + R)

Question 7

price of stock =
(cash flows)

Answer 7

its present value

Question 8

if the dividend is alwasy the same, the stock can be viewed as an ordinary perpetuity with a cash flow equal to D every period

Answer 8

zero growth

Question 9

Pꜜ0 =
(zero growth)
formula

Answer 9

Pꜜ0 =
D / R
(the stock can be viewed as an ordinary perpetuity)
(AKA: present value of a perpetuity = payment / interest rate

Question 10

a model that determines the current price of stock as its dividend next period dividend by the discount rate less the dividend growth rate

Answer 10

Dividend growth model

Question 11

g =
(dividend growth model)

Answer 11

growth rate (must be less than the discount rate)

Question 12

Dꜜ0 =
(dividend growth model)

Answer 12

the dividend just paid

Question 13

Dꜜ1 =
(dividend growth model)

Answer 13

the next dividend

Question 14

Pꜜ0 =
(dividend growth model)
formula

Answer 14

Pꜜ0 =
Dꜜ1 / (R - g)
(can be used to find the stock price at any point in time)
(AKA: Pꜜt = Dꜜt-1 / (R - g)

Question 15

• allows for supernormal growth rates over some finite length of time
• requires the assumption that dividends start growing at a constant rate sometime in the future
• future stock price falls one period before the constant growth begins
• could have zero or uneven dividends for a certain time period prior to constant growth

Answer 15

Nonconstant growth

Question 16

• assumes the dividend will grow at a certain rate for certain numbers of years and then grow at another thereafter and forever
• future stock price falls one period before the second stage of growth begins

Answer 16

two stage growth

Question 17

• in the first stage of growth, the growth rate can be greater than the required return.
• in the second stage of growth, the growth rate must be

Answer 17

less than the required return

Question 18

R =
(components of the required return)

Answer 18

the required return, or discount rate

Question 19

in the dividend growth model, R =
formula

Answer 19

R = (Dꜜ1 / Pꜜ0) + g

Question 20

R has two components in the components of the required return

Answer 20

1. Dꜜ1 / Pꜜ0 / dividend yield
2. g / capital gains yield

Question 21

Dꜜ1 / Pꜜ0 in components of the required return is

Answer 21

the dividend yield

Question 22

a stocks expected cash dividend divided by its current price

Answer 22

dividend yield

Question 23

g in components of the required return is

Answer 23

capital gains yield

Question 24

the divdend growth rate, or the rate at which the value of an investment grows

Answer 24

capital gains yield

Question 25

required return =
(components of the required return)

Answer 25

dividend yield + capital gains yield

Question 26

the ratio of a stocks price per share to its earnings per share (EPS) over the previous year

Answer 26

Price to earnings (PE) ratio

Question 27

Price at time t =
(Price to earnings (PE) ratio)

Answer 27

Price at time t =
benchmark PE ratio * EPSꜜt

Question 28

A PE ratio that is based on estimated future earnings

Answer 28

Forward PE ratio

Question 29

Price at time t =
(forward PE ratio)

Answer 29

price at time t =
benchmark PE ratio * EPSꜜt+1

Question 30

dont look at difference in stocks besided something and common
if in book and not in lecture or recitation dont worrya bout it