S4- Stock Valuation Flashcards
(21 cards)
Stockholders own the remaining earnings after operations are paid for and creditors are paid, making equity a ________ claim.
A. Backlog
B. Fixed
C. Residual
D. Limited
C. Residual
Stock and equity essentially mean the same thing in finance.
True or False
True
Common stock shareholders (in the aggregate) have all of the following rights EXCEPT:
A. Voting rights to elect the board of directors
B. Input on hiring and firing upper management
C. Highest claims position in a liquidation case
D. The right to sell shares at will
C. Highest claims position in a liquidation case
Common stock represents ownership in the firm.
True or false
True
Common stock guarantees an equal stream of future cash flows.
True or False
False
Unlike bonds or loans, which may guarantee a fixed repayment or regular coupon payments, common stock does not guarantee an equal stream of future cash flows. In fact, although dividends could be paid on common stock, some companies do not pay dividends or do not pay the same amount in dividends to shareholders from year to year.
What are the two main types of stock?
A. Common and preferred
B. Fixed and preferred
C. Common and fixed
D. Directed and common
A. Common and preferred
Stocks are _____________.
A. Variable return securities.
B. Constant return securities.
C. Temporary return securities.
D. Fixed return securities.
A. Variable return securities.
Because the future cash flow is pertaining to a sheriff of stock are highly uncertain and vary from year to year, they are term variable return securities
Investing in a good, stable company is always a good investment.
True or false
False
The company may be a great company, but if the stock is overvalued, then it will most likely not make for a good investment
We can value stocks like debt by discounting all future cash flow flows to the present value.
True or false
True
The value of any sock is equal to the present value of its future expected cash flows
Suppose the company is planning to pay a two dollar dividend in the upcoming year and a $2.50 dividend in year two. Also assume the stock price in two years will be $100. If the required return by shareholders is 15%, what is the price today?
A. $38.97.
B. $45.98.
C. $64.81.
D. $79.25.
D. $79.25.
Vo = 2/1.15 + 2.50/(1.15)^2 + 100/(1.15)^2 =79.25
Suppose a different company is planning to pay a two dollar dividend in the upcoming year, a $2.50 dividend in year two, and a dividend of three dollars in year three. Also assume the stock price in three years will be $100. If the required return by shareholders is 15%, what is the price today?
A. $38.97.
B. $46.25.
C. $71.35.
D. $79.25.
C. $71.35.
Vo = 2/1.15 + 2.50/(1.15)^2 + 3/(1.15)^3 + 100/(1.15)^3 =71.35
Suppose another company is planning to pay $1.25 dividend to the upcoming year, $1.75 dividend in year two, and a dividend of two dollars in year three. Also assume the stock price and three years will be $50.65. If the required return by shareholders is 13%, what is the price today?
A. $38.97.
B. $49.91.
C. $66.29.
D. $79.25
A. $38.97
Vo = 1.25/1.13 + 1.75/(1.13)^2 + 2/(1.13)^3 + 50.65/(1.13)^3 =38.97
You’re considering purchasing a stock that recently paid a dividend of $2.10 and is expected to grow at the average industry rate of 3% a year. What would you pay for the stock if you require a 10% return on your investments?
A. $28.76.
B. $29.87
C. $30.09
D. $30.90
D. $30.90
Using the Gordon growth model, we compute Vo. Remember to grow the dividend.
Vo = (2.1 x 1.03)/(0.10 - 0.03) =30.9
Honeywell’s common stock just paid a dividend of $1.95 dividends are expected to grow at a 5% annual rate forever. If Honeywell stock is currently selling at $25.45, what is the stocks expected rate of return?
A. 11.98%.
B. 12.5%.
C. 12.72%.
D. 13.05%.
D. 13.05%.
Vo= $25.45
Do= $1.95
g= 5%
((1.95 x 1.05) / 25.45) + 0.05 =0.13
XYZ motors paid a $2.75 dividend last year. At a constant growth rate of 8%, what is the value of the common stock if the investors require a 14% rate of return?
A. $41.75.
B. $45.
C. $47.25.
D. $49.50.
B. $45.00
Do= $2.75
g= 8%
kcs= 14%
Vo= (2.75 x 1.08) / (0.14 - 0.08) =49.5
Which of the following is true for preferred stockholders?
A. Their dividends will increase as a company growth.
B. They will have dividend priority over common stockholders.
C. Their dividends fluctuate every year.
D. They receive the same dividend as common stockholders.
B. They will have dividend priority over common stockholders.
Preferred stockholders have priority overcome stockholders when it comes to dividend. This means they receive dividends before any dividends are paid to common stockholders, and these dividends are typically set a fixed rate
If a company neglect paying dividends to a preferred stockholder in year one, but they pay the dividends in year two, they must do, which of the following?
A. Pay year one preferred dividend before paying any common stockholder dividends.
B. File for dismissal of last year’s dividends with the SEC.
C. Pay common stockholder dividends in year two
D. Convert preferred stock to common stock shares.
A. Pay your preferred dividend before paying any common stockholder dividend.
If a company has a dividend payment to preferred stockholders, they are generally required to pay these dividends before they can pay any dividends to common stockholders. This is especially the case with cumulative preferred stock, or dividends accumulate and must be paid in full before any dividends can be distributed to common stockholders.
Most corporations in the US issue preferred stock
True or false
False
Most companies do not issue preferred stock in general. The two types that do our utilities and VC back to new ventures.
You own 175 shares of Rains preferred stock, which currently sells for $45 per share and pays annual dividends of $2.90 per share. What is your expected return?
A. 5.25%
B. 2.86%
C. 3.29%
D. 6.44%
D. 6.44%
Using the perpetuity equation, we compute kps = D/V
Kps = 2.90 / 45
FredCo preferred stock pays a constant dividend of $3.55 to its shareholders. If your required rate of return on investments is 9%, what would you be willing to pay for FredCo stock?
A. $22.72
B. $32.59
C. $38.08
D. $39.44
D. $39.44
Using the perpetuity equation, compute Vo
Vo = D / kps
Vo = 3.55 / 0.09
You have purchased 1000 shares of omega corporation for $11 per share. You require a 35% return for investing and startup companies. How much must the dividend be in order to reach or required rate of return?
A. $31.43.
B. $3.85.
C. $4.02.
D. $28.24.
B. $3.85.
Using the perpetuity equation, solve for D
D=Vo x kps
D= 11 x 0.35
