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Exam 9: Share Valuation

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Question 31

Multiple Choice

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Direct search markets are characterised by:

A) complete price information.
B) extensive broker and dealer participation
C) private placement transactions and sale of ordinary shares of small private companies.
D) a high level of efficiency.

E) A) and B)
F) A) and C)

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Question 32

Multiple Choice

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The largest holders of equity securities are:

A) managed funds.
B) superannuation funds.
C) foreign investors.
D) households.

E) None of the above
F) C) and D)

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Question 33

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Whenever the dividend growth rate exceeds the required rate of return, the constant-growth model provides invalid solutions.

In terms of total volume of activity and total capitalisation of the companies listed, the NYSE is the largest in the world and NASDAQ is the second largest.

Dealer markets are characterised by:

If a company has paid no tax on a dividend, the Australian Financial Review will note what next to the value?

Preference share valuation: The National Bank of Columbia has issued perpetual preference shares with a $100 par value. The bank pays a quarterly dividend of $1.40 on this share. What is the current price of this preference share given a required rate of return of 8.5 percent?

The New York Stock Exchange is the best-known example of an auction market.

Constant growth: Priority Shift Ltd is expected to grow at a constant rate of 9 percent. If the company's next dividend is $2.75 and its current price is $37.35, what is the required rate of return on this share? (Round to the nearest percent.)

Companies raise capital in secondary markets by issuing new securities.

Failure to pay a preference dividend signals to the market that the company is in serious financial trouble.

Preference share valuation: The Burleigh Basin Surf Co. has issued perpetual preference shares with a $100 par value. The company pays a quarterly dividend of $2.60 on this share. What is the current price of this preference share given a required rate of return of 12.5 percent?

Applying the valuation procedure to ordinary shares is more difficult than applying it to bonds because:

The constant-growth dividend model tells us that the current price of a share is the next period divided by the difference between the discount rate and the dividend growth rate.

PV of dividends: Harvey's Toymakers is introducing a new line of digital toys, which it expects to grow their earnings at a much faster rate than normal over the next three years. After paying a dividend of $2.00 last year, it does not expect to pay a dividend for the next three years. After that Harvey's plans to pay a dividend of $4.00 in year 4 and then increase the dividend at a rate of 10 percent in years 5 and 6. What is the present value of the dividends to be paid out over the next six years if the required rate of rate of return is 15 percent?

Direct search markets provide the best price information.

Valuation of ordinary and preference shares is done using a different valuation model than that used for bonds.

The constant-growth dividend model will provide invalid solutions when:

The opening price of a share equals the closing price of the share the trading day before.

In brokered markets: