Ch 6 - Stock markets and equity valuation Flashcards
What are primary markets?
Markets where securities are issued for the 1st time
What are secondary markets?
Markets where already issued financial instruments are traded
Common stock holders receive a _________ and liability is limited to the value of _______
Residual income, value of the ownership they hold
What are the 2 methods equity holders receive income in?
Dividends, income from selling shares
Value/ price of any financial instruments is equal to the __________
PV of all FCFs associated with it
Price of a share is equal to _____
The PV of the sum of all future dividends
What are the 3 main methods of valuing shares/ equity?
- dividend discount model
- constant growth model
- multi stage growth model
Describe the dividend discount model
This assumes dividend receivable on a stock is constant (it will not grow or decline in the future)
What is a disadvantage of the divided discount model?
It assumes dividend payment to be constant over time
In what 2 ways can a listed company utilise its profits?
- distribute profits as dividends to shareholders
2. retain profits and invest them in profitable opportunities, so that in the future higher dividends can be paid
What is pay out ratio?
Proportion of earnings paid out as dividends
What is plowback ratio?
Proportion of earnings retained by the firms
What is ROE?
Return on the funds invested again into the company
g= ______ x __________
retention rate x ROE
What is meant by the ‘sustainable growth rate’?
The rate at which the company can grow at without having to borrow money to fund investments
