Ch 7 Flashcards
Valuating A zero growth dividend stock
Because the dividend is always the same the stock can
be viewed as an ordinary perpetuity
cash flow = D every period
P0 = D/R
Present value and Current price of stock based on cash flows equation:
P0 = (D1 + P1)/(1 + R)
Where p0 = current price of stock
D1 = cash dividend paid at end of period
P1 = price of stock in 1 period
R = required rate of return (discount rate)
Constant dividend growth rate equation?
Dt = D0 x (1 + g)^t
Dt = dividend t periods in the future g = constant growth rate of dividend
Growing perpetuity
Asset with cash flows that grow at a constant rate forever
Value of a stock with a constantly growing dividend, equation?
P0 = [D0 x (1 + g)]/(R - g) = D1/(R - g)
Pt = [Dt x (1 + g)]/(R - g) = Dt+1/(R - g)
Dividend growth model
Model that determines the current price of stock
As its dividend next period divided by the discount rate
Less the dividend growth rate
Dividend yield
Stocks expected cash divided by its current price
D1/P0
Equation to solve for required rate of return?
R = D1/(P0) + g
R = Dividend yield + Capital gains yield
Capital gains yield
Dividend growth or rate at which value of investment grows
g
Common stock
Equity without priority for dividends or in bankruptcy
Cumulative voting
Procedure in which shareholder may cast all votes
For one member of the board of directors
If N directors are up for election what fraction ownership of stock will guarantee you a seat? Example?What makes it easier to get elected?
N directors, so 1/(N + 1)
Ex, 4 directors than 1/5 = 20%
Easier/ cheaper to get elected if more directors up for election
Straight voting
Procedure where shareholder may cast all votes for
Each member of the board of directors
Classified or staggered boards?
Only a fraction of directorships are up for election
At a particular time
2 basic effects of staggering the board?
1 makes it more difficult for minority to elect director
Because less directors being elected at one time
2 makes takeover attempts less likely to be successful
Because its more difficult to vote in a majority of new directors
Proxy
Grant of authority by a shareholder allowing another
individual to vote that shareholder’s shares
Proxy fight
Outside group of shareholders obtain votes via proxy
And vote by proxy to replace management by electing
Enough directors
Other rights of shareholders aside from voting for directors 3?
1 right to share proportionately in dividends paid out
2 right to share proportionately in assets remaining
After liabilities have been paid in liquidation
3 right to vote on stockholder matters of importance
Such as mergers
Preemptive right
Right to share proportionally in any new stock sold
Dividends
Payments by a corporation to shareholders made in
Either cash or stock
3 important characteristics of dividends?
1 unless dividend is declared by board of directors, it’s not
A liability of a corporation
2 not a business expense, dividends are paid out from
Corporations after tax profits
3 dividends received by individual shareholders are taxable,
But corporations that own stock are only taxed on 30% of
Their stock holdings (70% excluded from taxes)
Preferred stock
Stock with dividend priority over common stock
Normally through fixed dividend rate
Sometimes without voting rights
Stated value for preferred shares
Usually $100
Cumulative dividends
If dividend of preferred stock isn’t paid one year
It will be carried over to a later year
How are preferred dividends treated?
Like common stock dividends
Primary market
Market in which new securities are originally sold to
Investors
Secondary market
Market in which previously issued securities are traded
Among investors
Dealer
Agent who buys and sells securities from inventory
Broker
Agent who arranges security transactions among investors
Member, license
As of 2006 a member is the owner of a trading license on NYSE
Limited to 1366 licenses, allows you to buy and
sell securities on floor of exchange
Hybrid market
Trading takes place electronically and face to face
Designated market maker (DMM) formerly known as specialists?
NYSE members who act as dealers in particular stocks
Floor brokers
NYSE members who execute customer buy and sell orders
Supplemental liquidity providers (SLPs)
Investment firms that are active participants in stocks
Assigned to them
Their job is to make a one sided market (offering either
To buy or to sell)
They trade purely for their own accounts
Order flow
Flow of customer orders to buy and sell securities
DMM’s post
Fixed place on exchange floor where DMM operates
Inside quotes
Highest bid quotes and lowest ask quotes for a security
Electronic communications networks (ECNs)
Websites that allow investors to trade directly with one another
