University of Phoenix - FIN370_WK3_P2 APLCTN & THEORY. Document contains 52 Questions and Answers.

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WK3 – P2 APLCTN & THEORY 1. Which of these terms best describes the trading process used by NASDAQ? 2. What is the definition of market capitalization? 3. Which one of these statements is c... orrect? 4. Which statements are correct? Select all that apply. A limit sell order will only execute at the limit price or higher. 5. Assume you are computing P0, which is the current price of a stock. What discount factor will you use to discount the dividend in year 3? 6. A stock is expected to pay a dividend of $2 in year 2, $3 in year 3, and sell for $40 at the end of year 3. The discount rate is 11 percent. Which one of these is the correct formula for computing the current stock price? 7. What is the key premise upon which the dividend discount model is based? 8. A stock is expected to pay a dividend of $1.42 next year and increase that amount by 3 percent annually thereafter. The discount rate is 12 percent. How do you compute the current price? 9. What is the basic assumption of the constant-growth model? 10. Which of these accurately recaps dividend growth estimations and limitations as they apply to the dividend growth model? Dividends can grow quickly in the short-run but cannot exceed the overall economic growth rate over the 11. A preferred stock has which of these characteristics? 12. Which of these applies to the valuation of a preferred stock? Select all that apply. Preferred dividends are assumed to be a constant dollar amount. 13. How is the dividend yield on a constant-dividend preferred stock defined? 14. A stock has a dividend yield of 1.4 percent. What is the expected return if the growth rate is 4 percent? What if the growth rate is 8 percent? 15. How is the discount rate used to value a stock related to the expected return on the stock? Assume the stock price failry reflects the stock’s value. 16. Lew's increases its annual dividend by 2 percent annually. The last dividend paid was $1.42 and the stock price is $46. How is the expected rate of return computed? 17. Approximately how much of a decline occurred in the NASDAQ composite index in the two and a half years following its peak in March of 2000? 18. Mary placed an order to purchase 100 shares of ABC at the going price. The order was filled as soon as it reached the floor of the exchange. What type of order did Mary place? 19. The overall rate of growth for a firm and its industry is 3.5 percent. Which of these combinations of dividend growth rate are acceptable when computing the current value of the firm’s stock? 20. Which of these descriptions apply to common stock? A security that provides the potential for its owner to receive both dividends and gains 21. Which of these are basic assumptions of a variable growth rate valuation? g1 applies to a designated number of years 22. What is the purpose of the terminal price that is used in conjunction with a variable-growth rate stock valuation formula? 23. A stock just paid an annual dividend of $0.40 per share. The firm expects to increase the dividend by 20 percent per year for the next four years and 3 percent per year thereafter. The discount rate is 11 percent. Which one of these is correct regarding the two-stage growth formula 24. Which of these is a correct interpretation of a P/E ratio? 25. What does it mean when a P/E is designated as a trailing P/E? 26. Which of these characteristics apply to the New York Stock Exchange (NYSE) Market maker (Specialist) 27. The textbook lists four key factors that affect the market value of a firm’s common stock. Which of these is one of those four factors? 28. Which one of these is the primary basis for a stock's value? 29. Which of these are current trends related to stock trading? Select all that apply Exchanges are becoming more global in nature. 30. Which one of these applies to stock valuation? 31. Which one of these best summarizes stock valuation? 32. A firm just paid its annual dividend of $1.80 and expects to increase that dividend each year. The discount rate is 11 percent. Which one of these correctly identifies an error when computing the current value of this firm's stock? 33. A preferred stock is currently selling for $68 a share. What will happen to the stock price if market interest rates increase? 34. What is the definition of a growth stock? 35. Why are dividends an important part of a common stock's rate of return? Dividends increase the return for stocks with capital gains and reduce the loss for stocks with capital 36. Which one of these defines the current value of stock? 37. Which of these services should you expect to receive from a full-service brokerage firm? Investment advice 38. A stock quote shows a P/E of 18. How is the ratio defined? Current stock price / last four quarters of earnings. 39. What is the key difference between a floor broker on AMEX and a dealer on NASDAQ? A dealer buys and sells only from his own inventory while a floor broker executes trades both for himself and others. 40. Which of these indexes is the most technology-oriented? NASDAQ Composite 41. Which of these is correct? 42. Marcos owns 1,500 shares of ABC stock which he purchased at $44 a share. The stock has been steadily decreasing in value and he wants to cut his losses now as he expects the stock price to decline further. Which type of order should Marcos place? Market sell order for 1,500 shares 43. Just before the market closes, ABC stock is selling for $43 a share, so you place a market sell order for 300 shares. The order reaches the trading floor after the market closes for the day. The next morning, ABC stock opens at a price of $28 a share. What happens to you order? The order is executed at a price of $28 a share. 44. You own 500 share of ABC stock. The stock has been declining in price and is now selling for $30 a share. You decide to sell all your shares and place a limit sell order at a price of $30 a share. When you order reaches the trading desk, the market price has declined to $29 a share. The next day the price falls to $18 a share. What is the status of your order? The order has not executed. You still own 500 shares. 45. What is the primary disadvantage of a limit order? 46. Which of these is the key service provided by stock exchanges that attracts investors? Liquidity 47. Which one of the following is the key financial market feature that must be present if investors are to be attracted to equity securities? 48. Which of these firms are considered to be incorrectly priced? Low growth high P/E High growth low P/E 49. Which of these indicates a value stock? Low P/E, high growth 50. What is the primary purpose of the P/E valuation formula? Estimate the future price of a stock 51. A firm is expected to have net earnings of $1,480,000 three years from now. There are 500,000 shares of stock outstanding. The firm's current P/E ratio is 18 and it is expected to remain at that level. What is the firm's expected stock price for year 3? 52. A stock just paid an annual dividend of $0.70. The dividend is expected to increase by 10 percent per year for the next three years and by 2 percent per year thereafter. What is the current price at a discount rate of 9 percent? [Show More]

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