Chapter 6 Flashcards
Examination of a firm’s accounting statements and other financial and economic information to assess the economic value of a company’s stock
Fundamental Analysis
Method of estimating the value of a share of stock as the present value of all expected future dividends
Dividend Discount Model (DDM)
A version of the dividend discount model in which dividends grow forever at the same rate, and the growth is strictly less than the discount rate
Constant Perpetual Growth Model
A dividend growth rate based on a geometric average of historical dividends
Geometric Average Dividend Growth Rate
A dividend growth rate based on an arithmetic average of historical dividends
Arithmetic Average Dividend Growth Rate
A dividend growth rate that can be sustained by a company’s earnings
Sustainable Growth Rate
Earnings retained within the firm to finance growth
Retained Earnings
Proportion of earnings paid out as dividends
Payout Ratio
Proportion of earnings retained for reinvestment
Retention Ratio
A dividend discount model that assumes a firm will temporarily grow at a rate different from its long-term growth rate
Two-Stage Dividend Growth Model
Measure of a stock’s risk relative to the stock market average
Beta
A financial performance measure based on the difference between a firm’s actual earnings and required earnings
Economic Value Added (EVA)
A method for valuing stock in a company that does not pay dividends
Residual Income Model (RIM)
An accounting relationship in which earnings minus dividends equals the change in book value per share
Clean Surplus Relationship (CSR)
Current stock price divided by annual earnings per share (EPS)
Price-Earnings (PE) Ratio
