Contested inputs included the terminal growth rate, the equity risk premiumand beta. This form of valuation is based on historic ratios and statistics and aims to assign value to a stock based on measurable attributes. This form of valuation is typically what drives long-term stock prices.
A proxy is a document giving one party the authority to act for another party, including the power to vote shares of common stock.
Proxies can be important tools relating to control of firms. False Preemptive rightF GAnswer: The preemptive right gives current stockholders the right to purchase, on a pro rata basis, any new shares issued by the firm.
This right helps protect current stockholders against both dilution Stocks and their valuation control and dilution of value. If a firm's stockholders are given the preemptive right, this means that stockholders have the right to call for a meeting to vote to replace the management.
Without the preemptive right, dissident stockholders would have to seek a change in management through a proxy fight. False Classified stockF GAnswer: Classified stock differentiates various classes of common stock, and using it is one way companies can meet special needs such as when owners of a start-up firm need additional equity capital but don't want to relinquish voting control.
False Founders' sharesF GAnswer: Founders' shares are a type of classified stock where the shares are owned by the firm's founders, and they generally have more votes per share than the other classes of common stock.
False Total stock returnsF GAnswer: The total return on a share of stock refers to the dividend yield less any commissions paid when the stock is purchased and sold. False Common stock cash flowsF GAnswer: The cash flows associated with common stock are more difficult to estimate than those related to bonds because stock has a residual claim against the company versus a contractual obligation for a bond.
False Stock valuationF GAnswer: According to the basic DCF stock valuation model, the value an investor should assign to a share of stock is dependent on the length of time he or she plans to hold the stock.
False Marginal investor and priceF GAnswer: When a new issue of stock is brought to market, it is the marginal investor who determines the price at which the stock will trade.
False Constant growth modelF GAnswer: The constant growth DCF model used to evaluate the prices of common stocks is conceptually similar to the model used to find the price of perpetual preferred stock or other perpetuities.
False Nonconstant growth modelF GAnswer: According to the nonconstant growth model discussed in the textbook, the discount rate used to find the present value of the expected cash flows during the initial growth period is the same as the discount rate used to find the PVs of cash flows during the subsequent constant growth period.
False Corporate valuation modelF GAnswer: The corporate valuation model can be used only when a company doesn't pay dividends. The corporate valuation model cannot be used unless a company pays dividends. False Free cash flows and valuationF GAnswer: Projected free cash flows should be discounted at the firm's weighted average cost of capital to find the firms total corporate value.
False Preferred stockF GAnswer: Preferred stock is a hybrid--a sort of cross between a common stock and a bond--in the sense that it pays dividends that normally increase annually like a stock but its payments are contractually guaranteed like interest on a bond.
From an investor's perspective, a firm's preferred stock is generally considered to be less risky than its common stock but more risky than its bonds. However, from a corporate issuer's standpoint, these risk relationships are reversed: ConceptualSome of the questions require calculations. The constant growth model is often appropriate for evaluating start-up companies that do not have a stable history of growth but are expected to reach stable growth within the next few years.
The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate. The constant growth model cannot be used for a zero growth stock, where the dividend is expected to remain constant over time. An increase in a firms expected growth rate would cause its required rate of return toa.
If in the opinion of a given investor a stocks expected return exceeds its required return, this suggests that the investor thinksa. The preemptive right is important to shareholders because ita.Apr 14, · A Better Way to Value Stocks. I teach institutional and individual investors how to close the gap between their investment responsibilities and their skill sets, specializing in valuation .
The chart below differs from the one above in that the two valuation ratios (P/E and Q) are adjusted to their geometric mean rather than their arithmetic mean (which is what most people think of as the "average"). The geometric mean increases our attention to outliers.
Chapter 10 Stocks and Their Valuation ANSWERS TO SELECTED END-OF-CHAPTER QUESTIONS a. A proxy is a document giving one person the authority to act for Most preferred stocks entitle their owners to regular fixed dividend payments.
True. The value of a share of stock is the PV of its expected future dividends. If the two investors. Their public prices are often misleading for reasons nefarious or otherwise.
If you own , shares of one of these companies, you may find that the $1 bid posted for . Men like Vanguard founder John Bogle went so far as to sell off all but a fraction of their stocks, moving the capital to fixed income investments such as bonds.
Such situations tend only arise every few decades but when they do, tread carefully and make sure you know what you are doing. Start studying Chapter 9: Stocks and Their Valuation.
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