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Questions and Answers
What does the intrinsic value of a stock represent?
What does the intrinsic value of a stock represent?
- The value of the stock based on historical performance
- The future market price of the stock
- The present value of expected future cash flows (correct)
- The potential dividends paid in the past
If expected dividends are $3 per share and the expected price in 1 year is $81 per share, what is the intrinsic value assuming a discount rate of 12%?
If expected dividends are $3 per share and the expected price in 1 year is $81 per share, what is the intrinsic value assuming a discount rate of 12%?
- $72.32
- $78.57
- $75.00 (correct)
- $80.00
In the Dividend Discount Model, what does P0 represent?
In the Dividend Discount Model, what does P0 represent?
- The present value of all expected future dividends (correct)
- The immediate cash dividend received
- The price of the stock in the future
- The total market capitalization of the stock
How is the expected return defined in the context of stock valuation?
How is the expected return defined in the context of stock valuation?
What is the role of the discount rate in stock valuation?
What is the role of the discount rate in stock valuation?
If you expect to receive dividends of $3.00, $3.24, and $3.50 over the next three years, along with a market price of $94.48, what is required to calculate the stock price?
If you expect to receive dividends of $3.00, $3.24, and $3.50 over the next three years, along with a market price of $94.48, what is required to calculate the stock price?
What would be the effect of increasing the discount rate on the intrinsic value of a stock?
What would be the effect of increasing the discount rate on the intrinsic value of a stock?
Which formula best describes the intrinsic value calculation for a stock?
Which formula best describes the intrinsic value calculation for a stock?
What is the expected dividend yield in the given example?
What is the expected dividend yield in the given example?
In the expected return formula, what does the term 'P1 - P0' represent?
In the expected return formula, what does the term 'P1 - P0' represent?
According to Random Walk Theory, how do security prices change?
According to Random Walk Theory, how do security prices change?
What do technical analysts primarily focus on to forecast stock prices?
What do technical analysts primarily focus on to forecast stock prices?
What is the expected capital gain from the example given?
What is the expected capital gain from the example given?
Which type of analysis involves looking at accounting data and business prospects to find mispriced securities?
Which type of analysis involves looking at accounting data and business prospects to find mispriced securities?
What does the term 'npv' in fundamental analysis mean?
What does the term 'npv' in fundamental analysis mean?
What is the combined expected return formula made up of?
What is the combined expected return formula made up of?
Which term describes the first offering of stock to the general public?
Which term describes the first offering of stock to the general public?
What is the market called where previously issued securities are traded among investors?
What is the market called where previously issued securities are traded among investors?
Which ratio compares the stock price to earnings per share?
Which ratio compares the stock price to earnings per share?
What does a dividend represent in the context of stocks?
What does a dividend represent in the context of stocks?
If the ask price for a stock is $200, what does this price represent?
If the ask price for a stock is $200, what does this price represent?
When purchasing 100 shares of a stock at an ask price of $167.43, what is the total expected cost?
When purchasing 100 shares of a stock at an ask price of $167.43, what is the total expected cost?
Which of the following best describes common stock?
Which of the following best describes common stock?
What is the significance of the bid price in stock trading?
What is the significance of the bid price in stock trading?
What is the formula for valuing a stock that is expected to have no growth and be held indefinitely?
What is the formula for valuing a stock that is expected to have no growth and be held indefinitely?
If a stock is expected to pay a dividend of $0.86 next year and dividends grow at 4.75% with a required return of 7.0%, what is the value of the stock?
If a stock is expected to pay a dividend of $0.86 next year and dividends grow at 4.75% with a required return of 7.0%, what is the value of the stock?
What does the Payout Ratio represent?
What does the Payout Ratio represent?
In the context of dividend growth models, the variable 'g' represents what?
In the context of dividend growth models, the variable 'g' represents what?
Which of the following statements about stock dividends is true?
Which of the following statements about stock dividends is true?
What is the expected return if the stock price is $38.22, the dividend next year is $0.86, and the growth rate is 4.75%?
What is the expected return if the stock price is $38.22, the dividend next year is $0.86, and the growth rate is 4.75%?
Which of the following correctly describes the term 'Plowback Ratio'?
Which of the following correctly describes the term 'Plowback Ratio'?
If dividends grow at a constant rate, which approach is used to assess the stock price?
If dividends grow at a constant rate, which approach is used to assess the stock price?
What is the value of the stock before the plowback decision?
What is the value of the stock before the plowback decision?
What is the expected growth rate after the plowback decision based on the company's ROE and plowback ratio?
What is the expected growth rate after the plowback decision based on the company's ROE and plowback ratio?
What is the Present Value of Growth Opportunities (PVGO) when comparing stock prices before and after the plowback?
What is the Present Value of Growth Opportunities (PVGO) when comparing stock prices before and after the plowback?
If the company decides not to plowback any earnings, what would happen to the stock price?
If the company decides not to plowback any earnings, what would happen to the stock price?
What is the formula used to calculate the present value in a non-constant growth scenario?
What is the formula used to calculate the present value in a non-constant growth scenario?
What is the growth rate assumed to begin in year 6 of the given example?
What is the growth rate assumed to begin in year 6 of the given example?
What is the total amount of dividends paid in year 4 based on the example provided?
What is the total amount of dividends paid in year 4 based on the example provided?
What would the stock price be with growth after the plowback decision?
What would the stock price be with growth after the plowback decision?
Study Notes
Primary Market
- Corporations issue new securities for sale
- Initial Public Offering (IPO) is the first time shares are offered publicly
- Corporations sell shares in their business, raising capital
Common Stock
- Ownership shares in a publicly held corporation
- Secondary Market is where previously issued securities are traded among investors
- Dividends are periodic cash distributions from the company to shareholders
- P/E Ratio compares the stock price to the company's earnings per share
Bid and Ask Prices
- Bid Price is what investors are willing to pay for shares
- Ask Price is what current shareholders are willing to sell their shares for
Intrinsic Value Method
- Uses discounted cash flow model
- Predicts the intrinsic value of a company based on future dividends and expected price in a year
Dividend Discount Model
- States the current stock price equals the present value of all anticipated future dividends
- Model takes into account dividends, discount rate, and time horizon of investment
Simplifying the Dividend Discount Model
- Perpetuity assumes no growth and indefinite stock holding
- Constant-Growth DDM is a version of the dividend growth model with a constant growth rate
- Plowback Ratio is the percentage of earnings retained by the company
- Sustainable Growth Rate is a measure of how much a company can grow organically
- Present Value of Growth Opportunities (PVGO) is the difference between the stock price with and without earnings plowback
Valuing Non-Constant Growth
- Calculates the present value of dividends over a period with non-constant growth
Expected Return
- Can be broken down into dividend yield and capital appreciation
- Dividend yield is the annual dividend divided by the stock price
- Capital appreciation is the expected growth in stock price
Technical Analysts
- Search for patterns in historical stock prices to identify undervalued securities
- Forecast stock prices based on past price fluctuations
Random walk theory
- Security prices are unpredictable and fluctuate randomly
- Movement of stock prices is random
Fundamental Analysts
- Analyze fundamental information (accounting data, business prospects) to identify mispriced securities
- Research the value of stocks using Net Present Value (NPV) and other cash flow measurements
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Description
Explore the fundamentals of the primary market, common stock, and essential trading concepts like bid and ask prices. Learn about valuation methods such as the Intrinsic Value Method and the Dividend Discount Model, essential for understanding stock pricing. This quiz is perfect for students seeking to enhance their knowledge of financial markets.
