Chapter 7 Flashcards
Stock vs. Bond Valuation
Stocks are more difficult to value than bonds:
1) with common stock, not even the promised cash flows are known beforehand
2) the life of the investment is essentially forever
3) there is no easy metric to the rate of return that the market requires
Preferred Stock
a class of stock that is granted superior rights to common stock, like higher dividend payments are higher claim to assets in terms of liquidation
Common Stock
represents a larger share of voting ownership than preferred stock, but generally is last when it comes to rights of assets in liquidations
Time and Stock Valuation
stocks unlike bonds, do not have a maturity
the value of a share of stock does not depend on how long you expect to keep it
Type of Stock and Dividend Growth
common stock has a lesser share of dividend, but has a consistent, common growth pattern, year over year
Cash Flows of Common Stock Valuation
the relevant cash flows for valuing a share of common stock are the dividends an investor excepts to receive in the future, as well as the expected future selling price of the stock
Dividend Growth Rate Model
model that determines the current of stock as its dividend next period dividend by the discount rate less the dividend growth rate
P=D(1+g)/(R-g)
R is the discount rate
g is the growth rate
Non constant Dividend Growth
there are varying cases where the growth rate can exceed the Required rate of return for short periods of time
Formula for Stock Price Calculation
P=D(1)/(1+r) continued for each year in which the dividend is present, which would also include the exponent equal to the number of periods
Components of the Required return
the Dividend Yield and Capital Gains Yield
The Dividend Yield
a stock’s expected cash dividend divided by its current price
Capital Gains Yield
another term for the growth rate, the dividend growth rate or the rate at which the value of an investment grows
Stock Valuations using Comparable (Comps)
some companies do not pay dividends, in this case, the company can utilize a comp, such as the PE ratio to determine valuations metrics
Common Stock Features
- equity without priority in dividends or in bankruptcy
- the common practice is “one share, one vote”, not one shareholder one vote
Types of Corporate Voting
1) Cumulative voting
2) Straight Voting
3) Staggering Voting
Cumulative Voting
Procedure in which a shareholder may cast all votes for one member of the board of directors
Straight Voting
Procedure in which a shareholder may cast all votes for each member of a board of directors
Staggering Voting
Companies may only elect a few directors at a time
Proxy Voting
Grant of authority of a shareholder for another party to cast their vote in their stead
Common Stock Classes
a company can have multiple “classes” of common stock
Other Shareholder Rights
- right to a proportion of dividends paid
- right to a claim in assets if a company, such as a merger
- right to vote on major events the company, such as a merger
Characteristics of a Dividend
unless a dividend is declared by the board of directors, it is not a liability of the company
Preferred Stock Features
stock with dividend policy over common stock, normally with a fixed dividend rate, sometimes without voting rights
