Management Question. Equity markets and stock valuation 1.

Part 1 The dividend yield increases as _____.

EARNINGS PER SHARE INCREASE

EARNINGS PER SHARE DECREASE

THE STOCK PRICE INCREASES

the stock price decreases

2.

Part 1 Which are rights of common stockholders?

Check all that apply:

THE RIGHT TO A SHARE OF DIVIDENDS PAID

THE RIGHT TO RECEIVE REGULAR DIVIDENDS

THE RIGHT TO VOTE FOR MEMBERS OF THE BOARD OF DIRECTORS

THE RIGHT TO VOTE ON MAJOR DECISIONS AT THE ANNUAL GENERAL MEETING

3.

Part 1 Preferred stock is like long-term debt since both _____, but preferred stock also resembles equity since both _____.

MAKE REGULAR, FIXED PAYMENTS; DON’T GUARANTEE DIVIDEND PAYMENTS

RANK ABOVE COMMON STOCK IN THE PRIORITY OF CLAIMS; GRANT VOTING RIGHTS TO THE STOCKHOLDER

ARE TAX-DEDUCTIBLE EXPENSES FOR THE FIRM; HAVE NO DEFINITE MATURITY DATE

HAVE A FINITE MATURITY DATE; HAVE UNLIMITED UPSIDE POTENTIAL

4.

Part 1 The NYSE is an _____ and NASDAQ is a _____.

EXCHANGE; DEALER MARKET

OVER-THE-COUNTER MARKET; DEALER MARKET

EXCHANGE; BROKER MARKET

OVER-THE-COUNTER MARKET; BROKER MARKET

5.

Part 1 The dividend growth model is based on the assumption that _____.

DIVIDENDS GROW AT A CONSTANT RATE EVERY PERIOD

DIVIDENDS GROW BY A CONSTANT DOLLAR AMOUNT EVERY PERIOD

DISCOUNT RATES GROW AT A CONSTANT RATE EVERY PERIOD

STOCK PRICES GROW BY A CONSTANT AMOUNT EVERY PERIOD

6.

Part 1 The P/E ratio measures

THE PRICE EQUIVALENT OF $1 OF EARNINGS

THE GROWTH RATE OF DIVIDENDS

THE PRICE AN INVESTOR PAYS FOR $1 OF EARNINGS

THE EXPECTED CAPITAL GAIN

7.

Intro You find the following quotation for a stock:

Stock (ticker)

Div

Yld%

PE (ttm)

High (ttm)

Low (ttm)

Volume (100)

Last

Change

AAPL

2.92

1.56

18.17

202.15

171.89

29,204

188.22

4.98

Part 1 What was the most recent stock price?

Part 2 What was the close price on the day before the one reported in the table?

8.

Intro You bought a share of stock for $100. It is now worth $104 and has just paid an annual dividend of $3 per share.

Part 1 What was the dividend yield?

Part 2 What was the capital gains yield?

Part 3 What was the total rate of return?

Intro Samsung has preferred stock outstanding with a constant annual dividend of $1.7 that is promised forever. Samsung has a required return of 10%.

Part 1 What is the value of Samsung’s preferred stock?

10.

Intro Forever 21 is expected to pay an annual dividend of $4 per share in one year, which is then expected to grow by 3% per year. The required rate of return is 14%.

Part 1 What is the stock’s value?

11.

Intro A stock just paid an annual dividend of $5. The dividend is expected to grow by 3% per year for the next 4 years. In 4 years, the P/E ratio is expected to be 20 and the payout ratio to be 60%.

The required rate of return is 8%.

Part 1 What is the value of the stock?

12.

Intro Microsoft paid the following annual dividends over the last 5 years:

Year

Dividend

2012

0.34

2013

0.3536

2014

0.3677

2015

0.3825

2016

0.3978

The next dividend is expected 12 months from now.

Part 1 Based on the historical dividends, what is the expected growth rate of dividends?

13.

Intro IBM has expected earnings per share (EPS) of $0.47 and the industry’s P/E ratio is 16.

Part 1 What is the value of the stock?

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