Chapter 4 Flashcards
If you own a share of common stock, your cash payoff comes in two forms:
(1) cash dividends
(2) capital gains or losses
what is equilibrium in economics?
In economics, economic equilibrium is a situation in which economic forces such as supply and demand are balanced and in the absence of external influences, the values of economic variables will not change.
What Is Payout Ratio?
The payout ratio is a financial metric showing the proportion of earnings a company pays its shareholders in the form of dividends, expressed as a percentage of the company’s total earnings.
What Is Return on Equity (ROE)?
Return on equity (ROE) is a measure of financial performance calculated by dividing net income by shareholders’ equity. Because shareholders’ equity is equal to a company’s assets minus its debt, ROE is considered the return on net assets.
ROE is considered a gauge of a corporation’s profitability and how efficient it is in generating profits. The higher the ROE, the more efficient a company’s management is at generating income and growth from its equity financing.
What Is Terminal Value (TV)?
Terminal value (TV) is the value of an asset, business, or project beyond the forecasted period when future cash flows can be estimated. Terminal value assumes a business will grow at a set growth rate forever after the forecast period. Terminal value often comprises a large percentage of the total assessed value.
Weighted Average Cost of Capital (WACC)
Weighted average cost of capital (WACC) represents a firm’s average after-tax cost of capital from all sources, including common stock, preferred stock, bonds, and other forms of debt. WACC is the average rate that a company expects to pay to finance its assets.
WACC is a common way to determine required rate of return (RRR) because it expresses, in a single number, the return that both bondholders and shareholders demand to provide the company with capital. A firm’s WACC is likely to be higher if its stock is relatively volatile or if its debt is seen as risky because investors will require greater returns.
Because all valuations are not very reliable we consider them all and add them all together to?
the football field valuation
The value of a stock is equal to?
The value of a stock is equal to the stream of cash payments discounted at
the rate of return that investors expect to receive on other securities with equivalent risks.
