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Finance > Chapter 8 SmartBook > Flashcards

Chapter 8 SmartBook Flashcards

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1
Q

A share of common stock is ______
(less/more) difficult to value in practice than a bond.

A

More

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2
Q

P1 =
D1 =
R =
P0 =

A

P1 = Price in one year
D1 = Dividend in one year
R = Discount Rate
P0 = Price today`

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3
Q

The price of a share of common stock is equal to the present value of all expected future _____.

A

Dividends

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4
Q

When the stock being valued does not pay dividends,

A

the dividend growth model can still be used.

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5
Q

The value of a firm is the function of its ______ rate and its _______ rate.

A

growth; discount

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6
Q

Which of the following are reasons why it is more difficult to value common stock than it is to value bonds?

A. All bond and stock cash flows are guaranteed to be paid.

B. Common stock cash flows are not known in advance

C. The rate of return required by the market is not easily observed.

D. The life of a common stock is essentially forever.

A

B, C and D

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7
Q

Three special case patterns of dividend growth include _____.

A. nonconstant growth

B. fast growth

C. zero growth

D. negative growth

E. discounted growth

F. constant growth

A

A, C and F

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8
Q

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 ______.

A

($84/$80) - 1

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9
Q

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?

A

20.00

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10
Q

The price of a share of common stock is equal to the present value of all ______ future dividends.

A

Expected

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11
Q

The formula for valuing a constant growth stock is _____.

A

P0 = D1/(R - g)

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12
Q

The dividend growth model determines the current price of a stock as its dividend next period _______(multiplied/divided) by the discount rate _____
(less/plus) the dividend growth rate.

A

Dividend, Less

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13
Q

The value of a firm is the function of its ________
rate and its discount rate.

A

growth

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14
Q

The main reason for considering nonconstant growth in dividends is to allow for _____ growth rates over _____.

A

supernormal; some finite length of time

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15
Q

Which one of the following is true about dividend growth patterns?

A

Dividends may grow at a constant rate.

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16
Q

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.

A

two

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17
Q

A zero-growth model for stock valuation is distinguished by a ____.

A

constant dividend amount

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18
Q

For investors in the stock market, dividends from stocks are fixed and guaranteed, while capital gains are variable and not guaranteed.

A

F

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19
Q

The goal of many successful organizations is a(n) ______ rate of growth in dividends.

A

Steady

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20
Q

All else constant, the dividend yield will increase if the stock price ____.

A

decreases

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21
Q

The constant growth formula calculates the stock price:

A

one year prior (year t) to the first dividend payment (Dt +1)

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22
Q

If the growth rate (g) is zero, the capital gains yield is ____.

A

zero

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23
Q

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 _____.

A

start growing at a constant rate sometime in the future

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24
Q

A benchmark PE ratio can be determined using:

A. the constant-growth model

B. the PEs of similar companies

C. a company’s own historical PEs

D. Bank of Canada estimates

A

B and C

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25
Q

When applying two-stage growth, in the second stage, g2 _____.

A

must be less than R

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26
Q

Which of the following are expected cash flows to investors in stocks?

A. Capital gains

B. Interest

C. Dividends

D. Fees

A

Capital Gains and Dividends

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27
Q

Common stock has no special preference either in receiving ______
or in bankruptcy.

A

Dividends

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28
Q

The dividend yield is determined by dividing the expected dividend (D1) by _____.

A

the current price (P0)

29
Q

When voting for the board of directors, the number of votes a shareholder is entitled to is generally determined as follows:

A

one vote per share held

30
Q

The ______ can be interpreted as the capital gains yield.

A

constant growth rate

31
Q

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?

A

Cumulative voting

32
Q

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

straight

33
Q

In a _______
board, only a fraction of the directorships are up for election at any one time.

A

staggered

34
Q

Which of the following are features of common stock?

A. It has no special preference in bankruptcy.

B. It generally has voting rights.

C. It receives dividends every quarter.

D. It has no special preference in receiving dividends.

E. It receives interest semi-annually.

A

A, B and D

35
Q

When voting for the board of directors, the number of votes a shareholder is entitled to is usually
vote per share held.

A

One

36
Q

One reason corporations use staggered boards is that _____.

A

it makes takeover attempts less likely to be successful

37
Q

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.

A

False

38
Q

A _______
is the grant of authority by a shareholder to someone else to vote his or her shares.

A

proxy

39
Q

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?

A

No minority shareholder would have enough votes to win any seat on the board.

40
Q

One common reason for having two classes of common stock with different voting rights is _____.

A

it is easier for insiders such as founding families to maintain control of the company

41
Q

Mota Motors has eight directors on its board, two of whom go up for election each year. This is an example of a:

A

staggered board

42
Q

Matthews Company has two classes of common stock, and each share represents the same proportion of ownership in the company. Class A has 2 votes for each share. Class B has one vote per share. Which class is more valuable?

A

Class A

43
Q

Common stock has no special preference either in receiving ______
or in bankruptcy.

A

dividends

44
Q

A ______
is a payment by a corporation to shareholders, made in either cash or stock.

A

Dividned

45
Q

It can be advantageous to have a staggered board because it provides “institutional memory.”

A

T

46
Q

A stock with dividend priority over common stock is called a ______ stock.

A

preferred

47
Q

Most voting in large corporations is done by proxy because _____.

A

most small shareholders do not attend the annual meeting

48
Q

With more than one class of common stock, it is easier for insiders such as founding families to maintain control of the company.

A

True

49
Q

Dusty Corporation has an issue of preferred stock that pays a dividend of 7 percent of its state value, which is $100. Which of the following would be a commonly used name for that preferred stock?

A

$7 Preffered

50
Q

The value of a share of common stock in a corporation is _____ to the general rights of shareholders.

A

directly related

51
Q

Is a company required to pay preferred dividends?

A

No; the company may defer dividends on preferred stock; however they can not pay dividends to common shareholders until preferred dividends are paid.

52
Q

Which of the following entities declares a dividend?

A

The board of directors

53
Q

Which of the following occurs in the primary market?

A

Newly-issued stocks are initially sold

54
Q

Preferred stock has preference over common stock in the _____.

A. payment of dividends

B. portfolios of individual investors

C. distribution of corporate assets

D. number of votes given

A

A and Cq

55
Q

Someone who maintains an inventory of stocks and buys and sells those stocks is known as a ___.

A

Dealer

56
Q

A ______
is the grant of authority by a shareholder to someone else to vote his or her shares.

A

Proxy

57
Q

Investment firms that are active participants in stocks assigned to them are called _______
liquidity providers.

A

supplemental

58
Q

Preferred shares have a stated liquidating value, typically $_____ per share.

A

100

59
Q

NASDAQ has which of these features?

A. Single DMM system

B. Multiple market maker system

C. Computer network of securities dealers

D. Physical trading floor

A

B and C

60
Q

If preferred dividends are
______ and are not paid in a given year, they will be carried forward as an arrearage.

A

cumulative

61
Q

The two most important stock markets in the United States are the New York Stock Exchange and ______.

A

Nasdaq

62
Q

The trading of existing shares occurs in the ______ market.

A

secondary

63
Q

Stock price reporting has increasingly moved from traditional print media to the ______ in recent years.

A

internet

64
Q

A person who brings buyers and sellers together is called a(n) ______.

A

broker

65
Q

An NYSE member who acts as a dealer in particular stocks is called a _________
market maker.

A

designated

66
Q

The NYSE differs from the Nasdaq primarily because the NYSE has _____.

A. an auction market

B. specialists

C. brokers

D. a faster network

E. a physical location

A

A, B and E

67
Q

Stock price reporting has increasingly moved from traditional print media to the ______
in recent years.

A

Internet

68
Q

The two most important stock markets in the United States are the New York Stock Exchange and ______.

A

Nasdaq

69
Q
A

Finance (7 decks)

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