Chapter 15: Stock Valuation Flashcards
A type of liability that does not exceed the initial amount a person invested into a partnership
Limited liability
A constant stream of identical cash flows with no end
Perpetuity
The price at which a fixed asset is expected to be sold at the end of its useful life
Residual value
The annual return, which is equal to the sum of the dividends paid plus the net change in a stock’s price, divided by the beginning price of the stock or initial investment
Return to stockholders
Suggested by Miller and Modigliani, that the dividend policy of a firm should not affect the current value of a stock
Dividend irrelevance hypothesis
A method of evaluating a stock by attempting to measure its intrinsic value. Studies everything from the overall economy and industry conditions, to the financial condition and management of companies
Fundamental Analysis
The value of a company or an asset based on an underlying perception of the value
Intrinsic value
Forecasts a firm’s future earnings per share, or EPS, which is then multiplied by the P/E ratio
Primary target stock price
Employs a measure, commonly the P/E ratio, for a company and similar stocks and industry peers
Relative Valuation
A valuation method used to estimate the attractiveness of an investment opportunity. Uses future free cash flow projections and discounts them (most often using the WACC) to arrive at a present value which is used to evaluate the potential for investment
DCF Analysis
If the value arrived at through DCF is higher than current cost of the investment, the opportunity may be a good one
A procedure for valuing the price of a stock by using predicted dividends and discounting them back to present value
Dividend Discount Model
If the value obtained from the DDM is higher than what shares are currently trading at, then the stock is undervalued
This a measure of how much cash can be paid to the equity shareholders of the company after all expenses, reinvestment and debt repayment
Free cash flow to equity
A firm’s operating income less expenses, taxes and changes in net working capital and investments
Free cash flow to firm
A method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. They do not attempt to measure a security’s intrinsic value, but instead use charts to identify patterns that can suggest future activity
Technical analysis
A theory on how risk averse investors can construct portfolios in order to optimize market risk for expected returns, emphasizing that risk is an inherent part of higher reward
Modern portfolio theory (Portfolio Theory or Portfolio management theory)
The degree to which stock prices reflect all available, relevant information
Efficient capital markets
A calculation of a firm’s cost of capital in which each category of capital is proportionately weighted. All sources of capital are included (common stock, preferred stock, bonds and any other long term debt)
Weighted average cost of capital
The value of the corporation as a whole. Calculated by adding residual value and short term assets to cash flow from operations
Corporate value
Any cash made from general business transactions from the company
Cash flows from operations
We subtract the value of the company’s senior liabilities, debt and preferred stock, from the enterprise or corporate value to get this
Value to common equity
Because of a competitive advantage, the company may be able to earn returns on new investments that are greater than its cost of capital during this period
Excess return period
Investments into working capital, which is made up of current assets in excess of current liabilities
Working capital investment
Investment into fixed assets such as property, plant and equipment
Fixed capital investment
The minimum rate of return, determined with the markets current long term risk free rate of interest
Base rate of return
The risk that payments of interest or principal on bonds may not be made, or the risk that dividend payments to preferred shareholders may not be made
Risk of default
A measure of the volatility or systematic risk of a security or a portfolio in comparison to the market as a whole
Specific risk (beta or beta coefficient)
