Chapter 9: Valuation of Stocks

Question 1

True or False

Not all securities are valued on the baiss of the cash inflows that they are expected to provide to their owners or investors.

Answer 1

False

(all securities are valued on the baiss of the cash inflows that they are expected to provide to their owners or investors.)

Question 2

True or false

Value or current price should equal the Present Value

Answer 2

True

Question 3

HAs a known and definite life, has fixed coupon payments paid on a regular basis.

Answer 3

Bonds

Question 4

True or False

Equity does not offer the certainty of bond cash flows.

Answer 4

True

Question 5

True or False

Common and preferred stocks are generally assumed to have definite lives.

Answer 5

False

(Common and preferred stocks are generally assumed to have infinite lives. )

Question 6

True or False

The present value of all future dividends should not equal a stock’s intrinsic value.

Answer 6

False

The present value of all future dividends should equal a stock’s intrinsic value.

Question 7

True or False

The corporation currently pays no dividends and has no plans to pay dividends therefore the value of thsi company’s stock will be zero.

Answer 7

False

The corporation currently pays no dividends and has no plans to pay dividends therefore the value of thsi company’s stock will “not” be zero.

Question 8

If the firm’s dividends are expected to remain constant, so that D0 = D1 = D2, we can treat its stock as a ___________.

Answer 8

Perpetuity

Question 9

is an annuity that never ends. It keeps going and going, paying cash flows on a regular basis throughout time.

Answer 9

Perpetuity

Question 10

A scarcity that pays a constant periodic cash flow as long as the issuer exists. It can be considered to be an “infinite annuity”.

Answer 10

Perpetuity

Question 11

True or False

To determine the value of stocks, it can be assumed that the firm’s dividends will remain constant or will grow at a constant rate over time.

Answer 11

True

Question 12

Formula of Preferred stocks

Answer 12

Po = Do / Rs

Question 13

FY corporation’s preferred stock pays a $2.00 dividend and investors require a 10 percent rate of return on preferred stocks of similar risk.

Answer 13

Found in paper

Po = $2.00 / 0.10 = $20.00

Question 14

Formula of Dividend Growth rates (shorter version)

Answer 14

Dt = Do(1+g)t

Question 15

Formula of Dividend Growth rates (the expansion)

Answer 15

Po = Do(1+g) / (1+rs)

Question 16

assume that a dividend is currently being paid, and this dividend will grow or increase at a constant rate over time.

Answer 16

Gordon Model

Question 17

Other term of Gordon Model

Answer 17

Constant dividend growth model

Question 18

The four major influences on a stock’s price.

Answer 18

1. Earnings per share
2. Dividend payout ratio
3. Expected growth rate
4. Required rate of return

Question 19

Formula of Dividend Payout ratio

Answer 19

Annual Dividend (in dollars) = dividend payout ratio x earnings per share

Question 20

Required return of stock

Answer 20

Rs = D1/Po + g

Question 21

Formula of Future Dividend Growth

Answer 21

g = (Po x r - Do) / (Po + Do)

Question 22

Pay fixed annual dividends forever (that is, as long as the firm exists and can pay the dividend).

Answer 22

preferred stocks

Question 23

The annual gorwth rate

Answer 23

G

Question 24

The suceeding year’s dividend

Answer 24

D1

Question 25

The preceeding year’s dividend

Answer 25

Do

Question 26

True or False

As long as the dividend growth rate g is less than the expected rate of return rs, each future term will be smaller than the preceding term.

Answer 26

True

Question 27

FY Corp. stock dividends = $2.00
Required Rate of Return = 10%

Compute the Preferred Stocks

Answer 27

Po = $2.00 / 0.10 = $20.00

Question 28

An annuity of $1,000 every year for 3 years at an 8% discount rate.

Answer 28

Price = $2,577.11

Question 29

XYZ Company’s cash dividend per share last year was $1.89 and is expected to grow this year to $2.05

Compute the growth Rate

Answer 29

g= 8.5%

Question 30

XYZ Company’s cash dividend per share last year was $1.89 and is expected to grow this year to $2.05

If investors expect a rate of return is of 12%, then the current stock value Po is:

Answer 30

Po = $58.57

Question 31

Who are you?

Answer 31

A CPA, Lawyer, Doctor, Master Degree holder and someone who has 3 certifications in my belt.

Question 32

Represents the current worth of the future cash flows

Answer 32

Present Value

Question 33

represents the price someone would be willing to pay today (usually for an investment) to receive the expected future cash flows.

Answer 33

Present Value

Question 34

True or False

To determine the value of stocks, it can be assumed that the firm’s dividends will remain constant or will grow at a constant rate over time

Answer 34

True