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Finances > Chapter 7 > Flashcards

Chapter 7 Flashcards

1
Q

What is a common stock?

A

Ownership shares in a publicly held corporation

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2
Q

What is the primary market?

A

Place where the sale of new stock (equity) first occurs

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3
Q

What is an IPO?
(Initial Public Offering)

A

The first offering of stock to the general public

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4
Q

What is a seasoned issue?

A

The sale of new shares by a firm that has already been through an IPO

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5
Q

What is the secondary market?

A

Market in which already issued securities are traded by investors

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6
Q

What is a dividend?

A

The share of the firm’s profit which are distributed

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7
Q

What are retained earnings?

A

Profits that are retained in the firm and reinvested in its operations

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8
Q

What are the 3 methods for valuing shares?

A
  1. Book Value
  2. Liquidation Value
  3. Market Value
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9
Q

What is the book value?

A

Net worth of the firm according to the balance sheet

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10
Q

What is the liquidation value?

A

Net proceeds that would be realized by selling the firm’s assets and paying off its creditors

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11
Q

What is the market value?

A

Amount investors are willing to pay for the shares,
treating the firm as a going concern

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12
Q

What is a going concern?

A

An accounting term for a company that has the resources to continue operating indefinitely until it provides evidence to the contrary

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13
Q

What are some sources of going concern value? (3)

A
  1. Extra earning power
  2. Intangible assets
  3. Value of future investments
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14
Q

What is the expected return when valuing common stocks?

A

The percentage yield that an investor forecasts from a specific investment over a set period of time

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15
Q

What is an another name for the expected return?

A

Holding Period Return (HPR)

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16
Q

What is the expected return formula?

A

(dividend income + price ∆) / investment

dividend yield + capital gains yield

17
Q

Whats is the dividend yield formula? **

A

Dividend / Investment

18
Q

What is the capital gains yield formula? **

A

Price ∆ / investment

19
Q

What is the condition to use the constant growth DDM formula?

P0 = Div1/ (r - g)

A

g must be smaller than r

20
Q

Why do investors buy growth stocks?

A

Primarily in the expectations of capital gains

21
Q

Why do investors buy income stocks?

A

Principally for the cash dividends

22
Q

What are capital gains?

A

The increase in the value of an asset relative to the price that was originally paid for it

23
Q

What is the plowback ratio (or retention ratio)

A

The fraction of earnings retained by the firm

24
Q

What is the payout ratio?

A

The fraction of earnings a company pays out in dividends

25
Q

What is the growth rate equation?

A

g = ROE x Plowback Ratio

Return on equity

26
Q

What is the present value of growth opportunities?

A

Net present value of a firm’s future investments

27
Q

What is a sustainable growth rate?

A

Steady rate at which a firm can grow

28
Q

What is the price-earnings (P/E) ratio (equation)?

A

Stock Price / EPS

29
Q

Is a high price earnings ratio always bad? Why?

A

No
because sometimes the higher price is because you believe there are enough growth opportunities to justify it

30
Q

What is the Dividend Discount Model (DDM)?

A

The price of a stock is the present value of its future dividends

31
Q

What happens to the PV of dividends and stock value if the discount rate gets lowered ?

A

In increases

32
Q

What is the PVGO equation?

A

P0 - EPS/r

Price of stock - no growth value

33
Q

What is the no-growth value equation?

A

EPS/r

34
Q

Holding dividends constant, what happens to the stock price and the P.E. ratio when there is a decrease in “r”?

A

They both increase

(Q27)

Finances (5 decks)

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