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Finance 3300 > Chapter 14 > Flashcards

Chapter 14 Flashcards

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1
Q

Why do corporations issue common stock? (5)

A

to raise money for startup costs/expansion/business activities; don’t have to repay money a stockholder pays for stock; investors can sell shares to another investor; dividends not mandatory but corporations distribute 30-70% of earnings to stockholders; common stockholders have voting rights

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2
Q

Define private corporation.

A

stock held by a few people and not traded openly on stock markets

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3
Q

Define public corporation.

A

stock held widely and traded openly on stock markets

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4
Q

Corporations must accommodate stockholders by (4)

A

holding annual meetings; allowing stockholders to elect a board of directors and approve major policy changes; allowing for pre-emptive rights; distributing quarterly and annual reports

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5
Q

Investors can make money in what two ways?

A

income from dividends in the form of cash or additional stock; dollar appreciation of stock value

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6
Q

What happens when a corporation splits its stock? (3)

A

shares owned by existing stockholders are increased into a larger number of shares; price per share is reduced by proportionate amount; total value unchanged

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7
Q

The ex-dividend date is set

A

two business days before the record date

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8
Q

What is the record date?

A

cut-off date established by a company in order to determine which shareholders are eligible to receive a dividend or distribution

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9
Q

What is the payable date?

A

date that any declared stock dividends are due to be paid out

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10
Q

Give four examples of the dates for common shareholders.

A

May 14 (eligible for dividend); May 17 (ex-dividend date); May 19 (record date); June 10 (payable date)

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11
Q

What is the ex-dividend date?

A

the day the stock starts trading without the value of its next dividend payment

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12
Q

What is preferred stock?

A

a “middle” investment representing a “callable”
ownership position between common stock and
corporate bonds

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13
Q

What is the biggest difference between common and preferred stock?

A

preferred stockholders receives cash dividends before common stockholders are paid any cash dividends

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14
Q

Why would an investor choose preferred stock over common stock?

A

preferred stock is a more predictable source of income because you own the stock and know the rate of return

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15
Q

Which stock has higher dividends, common stock or preferred stock?

A

preferred stock

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16
Q

Describe cumulative preferred stock.

A

Unpaid cash dividends accumulate and must be paid before cash dividends are paid to the common stockholders

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17
Q

Describe convertible preferred stock.

A

Can be traded for shares of common stock in the same company

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18
Q

If a company goes bankrupt, what is the order of payments?

A

taxing authorities at all levels; secured creditors; unsecured bond holders; preferred stock holders; common stock holders

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19
Q

Give two examples of blue-chip stock.

A

AT&T; Coke

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20
Q

Give two examples of cyclical stock.

A

GM, Whirlpool

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21
Q

Give two examples of defensive stock.

A

P&G; Kimberly Clark

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22
Q

Give two examples of growth stock.

A

Target; Netflix

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23
Q

Give two examples of income stock.

A

McDonald’s; IBM

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24
Q

Give two examples of large cap stock.

A

Apple; Dow Chemical

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25
Q

Give two examples of mid cap stock.

A

Ulta; Best Buy

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26
Q

Give two examples of small cap stock.

A

Bankrate; Fossil

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27
Q

Give an example of micro cap stock.

A

PC Connection

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28
Q

Give two examples of penny stock.

A

Avon; Groupon

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29
Q

Give three examples of stock advisory services.

A

Standard and Poor’s reports; Value Line; Morningstar

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30
Q

What is the formula for rate of return?

A

(ending value of investment - beginning value of investment) / beginning value of investment * 100

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31
Q

What six categories of information does the federal government require companies to disclose to the public?

A

earnings; assets; liabilities; products; services; management qualifications

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32
Q

Define earnings per share (EPS).

A

corporation’s after-tax earnings divided by the number of outstanding shares of a common stock

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33
Q

Define price-earnings (P/E) ratio.

A

price of one share of stock divided by the earnings per share of stock over the last 12 months.

34
Q

Dividend payout =

A

(annual dividend amount) / EPS

35
Q

Dividend yield =

A

(annual dividend amount) / price per share

36
Q

Total return =

A

total dividends + capital gain

37
Q

Annualized holding period yield =

A

(total return / original investment) * (1/N), where N = number of years investment is held

38
Q

What is beta?

A

measure of volatility

39
Q

A beta value of 1 indicates

A

that a stock’s risk is equal to the market’s risk

40
Q

A beta value of 2 indicates

A

that a stock’s risk is twice that of the market

41
Q

What is the formula for book value?

A

(assets - liabilities) / shares outstanding

42
Q

Book value equals

A

net worth per share

43
Q

If a share costs more than the book value,

A

the stock may be overpriced

44
Q

What is the formula for market-to-book ratio?

A

(market value per share) / (book value per share)

45
Q

A low market-to-book value indicates

A

undervalued stock

46
Q

A high market-to-book value indicates

A

overvalued stock

47
Q

What are the two main investment theories?

A

active; passive

48
Q

What is the active investment theory?

A

doing research to determine which stock or sector will outperform the market, using fundamental analysis and technical analysis

49
Q

What is the passive investment theory?

A

believe few can predict future, so instead, diversify very well

50
Q

What is fundamental analysis?

A

based on the assumption that a stock’s intrinsic/real value is determined by the company’s future earnings

51
Q

Give an example of a fundamentalist.

A

Warren Buffet

52
Q

Warren Buffet considers what aspects of a company, in the context of fundamental analysis?

A

financial strength of the company; type of industry; new-product development; economic growth of the overall economy

53
Q

What is technical analysis?

A

based on the assumption that a stock’s value is based on the forces of supply and demand in the stock market as a whole

54
Q

What do chartists do?

A

plot past price movements and other market averages to observe trends they use to predict a stock’s future value

55
Q

The efficient market theory falls into which of the two investment theories?

A

passive

56
Q

What are the main points of the efficient market theory?

A

based on assumption that stock price movements are purely random; stock’s current market price reflects true value; impossible for investor to systematically outperform average for stock market as a whole over time; be well diversified

57
Q

What percent of U.S. mutual fund managers beat the S&P 500 index fund in 2010?

A

32%

58
Q

What percent of U.S. mutual fund managers beat the S&P 500 index fund over an annualized 15 year period?

A

17%

59
Q

What percent of U.S. mutual fund managers beat the S&P 500 index fund every year for the past five years??

A

<1%

60
Q

Which investment strategy has the highest average annual total returns?

A

buy and hold strategy

61
Q

Define primary market.

A

market in which an investor purchases financial securities through investment bank (or other representative) from issuer of those securities

62
Q

Define investment bank.

A

firm that assists corporations in raising funds, usually by helping to sell new security issues

63
Q

When does an IPO occur?

A

when corporation sells stock to the general public for the first time

64
Q

Define secondary market.

A

market for existing financial securities that are currently traded among investors through brokers

65
Q

Give two examples of secondary markets.

A

NYSE, NASDAQ

66
Q

Define security exchanges.

A

Marketplace where member brokers who represent investors meet to buy and sell securities

67
Q

Most over-the-counter securities are traded on

A

NASDAQ

68
Q

How many stocks does NASDAQ have?

A

3,100

69
Q

Define market order.

A

request to buy or sell stock at the current market value when executed

70
Q

Define limit order.

A

request to buy or sell a stock at a specific price or better

71
Q

Define stop (loss) order.

A

request to sell a stock at the next available opportunity after its market price reaches a specified amount

72
Q

What is dollar cost averaging?

A

buy equal dollar amount of stock at equal time periods (i.e. $3,000 worth of XOM every quarter)

73
Q

What is direct investment?

A

buy stock from corporation

74
Q

What is the dividend re-investment plan?

A

reinvest cash dividends to buy additional shares of stock

75
Q

Give four examples of long-term investing techniques.

A

buy and hold; dollar cost averaging; direct investment; dividend re-investment plan

76
Q

Give four examples of short-term investing techniques.

A

day trading; buying stock on margin; selling short; trading in options (call option, put option)

77
Q

Define buying stock on margin.

A

borrowing up to 50% of stock purchase to have more shares

78
Q

Define selling short.

A

borrowing stock to make profits when stock prices are falling

79
Q

Define trading in options.

A

right to buy (call) or sell (put) at predetermined price during specified time period

80
Q

Give an example of a call option.

A

$20 stock with $23 exercise price and $1 fee — make profit once stock rises above $24

81
Q

Give an example of a put option.

A

$20 stock with a $16 exercise price and $1 fee — make profit once stock falls below $!5

Finance 3300 (15 decks)

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