Finance Exam #2

You can vote in person at the company’s annual meeting, by mail, or through proxy, but not by his preemptive right. T or F True
A legal document that gives the shareholder the right to appoint another person to vote on his behalf Proxy
Dilution
Preemptive Right
In some cases, individuals who start a business have a special voting right and restricted dividends for specified number of years that helps them exercise more control over the firm. Founder’s Shares
Type of structure firms that have founder’s shares along with common shares. Dual-class structure
Name of different types of common stock, such as Class A or B given to specific shareholders. classified stock
Issued Class B with 10 votes per shareIssued Class A with 1 vote per shareClassified stock is issued to give more votes per share to the founders of the firm. T or F True
Gives a certain class special voting rights called super voting rights in which each share in the class has more votes per share than shares in other classes. Classified shares
You work for an investment bank, you track Google’s stock and create reports that brokers distribute to investors. Investors then decide whether to invest.You are acting as? Sell-side analyst
A stock’s intrinsic value is based on true risk in the company. T or F True
Intrinsic value is also known as? Fundamental value
The value perceived by stock market investors determines the ? market price of a stock
Refers to the stock’s true value based on expected future cash flows and the risks involved. fundamental or intrinsic
When a stock’s intrinsic value equals its market value, or market price of the stock, it is considered what? In equilibrium
If the intrinsic value estimate is less than the market price, the investor would? sell
If the intrinsic value estimate is greater than the market price, the investor would? buy
When investors are buying or selling stocks which are fairly valued, then they are in what? equilibrium
What company would you evaluate using the corporate valuation model to estimate the value of the company’s stock? A company that is not expected to distribute any earnings to its stockholders for the next few years
Name the two models used to evaluate intrinsic value of a stock Discounted Dividend ModelCorporate Valuation Model
This model uses future dividends that a company distributes to its stockholders. Discounted Dividend Model
This model uses free cash flows that a company has Corporate Valuation Model
Three companies list P/E ratios: 5, 17, 15. Vistou has 5. What can you hypothesize from this? Investors expect Vistou’s earnings to grow more slowly than the other companies’ earnings, thus riskier.
The last price per share of that stock divided by the company’s net earnings per share in the previous year. P/E ratio
If a stock’s price is far above or below earnings, could be a sign of over or undervaluation. Can you tell valuation is accurate just by looking at P/E ratio? No
The constant growth model implies that dividend growth remains constant from now to infinity. T or F True
Which formula states that a firm’s constant growth stock price equals the next expected dividend divided by the difference between the firm’s required return and the expected dividend growth rate? Constant Growth Formula
When using this model, there is an assumption that dividends will grow at a constant rate until infinity. There is no terminal year for this model. Constant Growth Model
What must be less than the stock’s required return? Expected dividend growth rate
The sum of dividend yield and growth rate? Expected return
The required rate of return will be higher than the growth rate. T or F True
What formula can be used to value negative and zero formula growth stocks? Constant growth formula
When using a constant growth model to analyze a stock, if an increase in the required rate of return occurs while the growth rate remains the same, this will lead to a decreased value of the stock. T or F True
Increasing dividends may not always increase the stock price, because less earnings may bee invested back into the firm and that impedes growth. T or F True
D means Dividend
r means required return
g means growth rate

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