FINC 3610 UPDATED FINAL PAPER QUESTIONS AND
ANSWERS MARKED A+
✔✔3 steps of nonconstant growth problems : - ✔✔1. draw timeline with cash flows
2. deal with the right hand side once dividend reaches a no/zero or constant growth
status
3. bring it all back to today (or whatever time fram is asked for )
✔✔dividend yield - ✔✔dividend income portion of stock's return (D1/P0)
✔✔required rate of resturn (Re) = - ✔✔D1/P0 + g
✔✔Capital gains yield - ✔✔price change portion of a stock's return
✔✔how to estimate dividend growth rate - ✔✔- historical growth rate
- accounting measures of growth
- analyst forecasts
✔✔P/E Ratio - ✔✔Price/EPS : Willingto pay for $1 share of earnings of company's stock
✔✔Eps = - ✔✔net income / shares outstanding
✔✔Pt = - ✔✔benchmark PE ratio x EPSt ( can be used to value companies not paying
dividends )
✔✔Features of common stock - ✔✔- voting rights
- dividends fluctuate
- more volatility
- have investment risks and pay dividends
- classes of stock
✔✔features of preferred stock (very similar to debt) - ✔✔- no voting rights
- dividends are set
- less volatility
-investment risks and pay dividends
✔✔commonality among preferred and common stock - ✔✔have investment risks and
pay dividends
✔✔__ stock acts more like a bond with a set dividend and redemption price -
✔✔preferred stock
✔✔___ stock dividends are less guaranteed and carry more risk of loss if a company
fails - ✔✔common stock
, ✔✔Dealers v brokers - ✔✔- dealers : OWNS INVENTORY : acts as a principal by
trading for their own account : (ex. car dealer)
- broker : MANAGES TRANSACTIONS : acts as an agent for a client
✔✔primary v secondary market - ✔✔- primary : initial sales in which proceeds go
directly to company
- secondary: previously issued securities traded among investors (company not directly
involved)
✔✔NYSE v NASDAQ - ✔✔- NYSE: hybrid auction market model
- NASDAQ : fully electronic dealer market, famous for listing technology and growth-
oriented stocks
✔✔__ describes a company buying back its own stock in order to reduce shares
outstanding - ✔✔stock repurchases
✔✔a __ is paid via additional shares of stock as opposed to cash - ✔✔stock dividend
✔✔__ is an increase or decrease in shares outstanding with NO change in overall vlaue
to investor - ✔✔stock split
✔✔details of equity (common stock ) - ✔✔- ownership intereset
- common stockholders vote for board of directors and other issues
- dividends are not considered a cost of doing business and are not tax deductible
- dividends are not liabliity of the firm and stockholders have no legal recourse if the
dividends are not paid
- an all-quity firm cannot technically go bankrupt but it could still become insolvent and
forced to shut down
✔✔** module 6 quizzes, additional practice, suggested problems - ✔✔
✔✔most important investment measure : - ✔✔NPV
✔✔___ is a measure of how much value is created or added TODAY by undertaking an
investment (did between investment's market value and its cost) - ✔✔NPV
✔✔how to measure NPV - ✔✔Estimate future cash flows : Calculate present value of
those cash flows minus initial cost
✔✔rule of NPV acceptance : - ✔✔an investment should be accepted if the net present
value is positive and rejected if negative (assumes cash flows are reinvested at the cost
of capital)
ANSWERS MARKED A+
✔✔3 steps of nonconstant growth problems : - ✔✔1. draw timeline with cash flows
2. deal with the right hand side once dividend reaches a no/zero or constant growth
status
3. bring it all back to today (or whatever time fram is asked for )
✔✔dividend yield - ✔✔dividend income portion of stock's return (D1/P0)
✔✔required rate of resturn (Re) = - ✔✔D1/P0 + g
✔✔Capital gains yield - ✔✔price change portion of a stock's return
✔✔how to estimate dividend growth rate - ✔✔- historical growth rate
- accounting measures of growth
- analyst forecasts
✔✔P/E Ratio - ✔✔Price/EPS : Willingto pay for $1 share of earnings of company's stock
✔✔Eps = - ✔✔net income / shares outstanding
✔✔Pt = - ✔✔benchmark PE ratio x EPSt ( can be used to value companies not paying
dividends )
✔✔Features of common stock - ✔✔- voting rights
- dividends fluctuate
- more volatility
- have investment risks and pay dividends
- classes of stock
✔✔features of preferred stock (very similar to debt) - ✔✔- no voting rights
- dividends are set
- less volatility
-investment risks and pay dividends
✔✔commonality among preferred and common stock - ✔✔have investment risks and
pay dividends
✔✔__ stock acts more like a bond with a set dividend and redemption price -
✔✔preferred stock
✔✔___ stock dividends are less guaranteed and carry more risk of loss if a company
fails - ✔✔common stock
, ✔✔Dealers v brokers - ✔✔- dealers : OWNS INVENTORY : acts as a principal by
trading for their own account : (ex. car dealer)
- broker : MANAGES TRANSACTIONS : acts as an agent for a client
✔✔primary v secondary market - ✔✔- primary : initial sales in which proceeds go
directly to company
- secondary: previously issued securities traded among investors (company not directly
involved)
✔✔NYSE v NASDAQ - ✔✔- NYSE: hybrid auction market model
- NASDAQ : fully electronic dealer market, famous for listing technology and growth-
oriented stocks
✔✔__ describes a company buying back its own stock in order to reduce shares
outstanding - ✔✔stock repurchases
✔✔a __ is paid via additional shares of stock as opposed to cash - ✔✔stock dividend
✔✔__ is an increase or decrease in shares outstanding with NO change in overall vlaue
to investor - ✔✔stock split
✔✔details of equity (common stock ) - ✔✔- ownership intereset
- common stockholders vote for board of directors and other issues
- dividends are not considered a cost of doing business and are not tax deductible
- dividends are not liabliity of the firm and stockholders have no legal recourse if the
dividends are not paid
- an all-quity firm cannot technically go bankrupt but it could still become insolvent and
forced to shut down
✔✔** module 6 quizzes, additional practice, suggested problems - ✔✔
✔✔most important investment measure : - ✔✔NPV
✔✔___ is a measure of how much value is created or added TODAY by undertaking an
investment (did between investment's market value and its cost) - ✔✔NPV
✔✔how to measure NPV - ✔✔Estimate future cash flows : Calculate present value of
those cash flows minus initial cost
✔✔rule of NPV acceptance : - ✔✔an investment should be accepted if the net present
value is positive and rejected if negative (assumes cash flows are reinvested at the cost
of capital)
