Chapter 9: Valuation of Stocks Flashcards
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.
False
(all securities are valued on the baiss of the cash inflows that they are expected to provide to their owners or investors.)
True or false
Value or current price should equal the Present Value
True
HAs a known and definite life, has fixed coupon payments paid on a regular basis.
Bonds
True or False
Equity does not offer the certainty of bond cash flows.
True
True or False
Common and preferred stocks are generally assumed to have definite lives.
False
(Common and preferred stocks are generally assumed to have infinite lives. )
True or False
The present value of all future dividends should not equal a stock’s intrinsic value.
False
The present value of all future dividends should equal a stock’s intrinsic value.
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.
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.
If the firm’s dividends are expected to remain constant, so that D0 = D1 = D2, we can treat its stock as a ___________.
Perpetuity
is an annuity that never ends. It keeps going and going, paying cash flows on a regular basis throughout time.
Perpetuity
A scarcity that pays a constant periodic cash flow as long as the issuer exists. It can be considered to be an “infinite annuity”.
Perpetuity
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.
True
Formula of Preferred stocks
Po = Do / Rs
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.
Found in paper
Po = $2.00 / 0.10 = $20.00
Formula of Dividend Growth rates (shorter version)
Dt = Do(1+g)t
Formula of Dividend Growth rates (the expansion)
Po = Do(1+g) / (1+rs)
assume that a dividend is currently being paid, and this dividend will grow or increase at a constant rate over time.
Gordon Model
Other term of Gordon Model
Constant dividend growth model
The four major influences on a stock’s price.
- Earnings per share
- Dividend payout ratio
- Expected growth rate
- Required rate of return
Formula of Dividend Payout ratio
Annual Dividend (in dollars) = dividend payout ratio x earnings per share
Required return of stock
Rs = D1/Po + g
Formula of Future Dividend Growth
g = (Po x r - Do) / (Po + Do)
Pay fixed annual dividends forever (that is, as long as the firm exists and can pay the dividend).
preferred stocks
The annual gorwth rate
G
The suceeding year’s dividend
D1
The preceeding year’s dividend
Do
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.
True
FY Corp. stock dividends = $2.00
Required Rate of Return = 10%
Compute the Preferred Stocks
Po = $2.00 / 0.10 = $20.00
An annuity of $1,000 every year for 3 years at an 8% discount rate.
Price = $2,577.11
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
g= 8.5%
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:
Po = $58.57
Who are you?
A CPA, Lawyer, Doctor, Master Degree holder and someone who has 3 certifications in my belt.
Represents the current worth of the future cash flows
Present Value
represents the price someone would be willing to pay today (usually for an investment) to receive the expected future cash flows.
Present Value
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
True
