Chapter 7 Flashcards
Includes all borrowing incurred by a firm, including bonds, and is repaid according to a fixed schedule of payment
debt
Funds provided by the firm’s owners (investors or stockholders) that are repaid subject to the firm’s performance.
equity
The common stock of a firm is owned by private investors; this stock is not publicly traded.
privately owned (stock)
The common stock of a firm is owned by public investors; this stock is publicly traded.
publicly owned (stock)
The common stock of a firm is owned by an individual or a small group of investors (such as a family); these are usually privately owned companies.
closely owned (stock)
The common stock of a firm is owned by many unrelated individual or institutional investors.
widely owned (stock)
An arbitrary value established for legal purposes in the firm’s corporate charter and which can be used to find the total number of shares outstanding by dividing it into the book value of common stock.
par-value common stock
Allows common stockholders to maintain their proportionate ownership in the corporation when new shares are issued, thus protecting them from dilution of their ownership
preemptive right
A reduction in each previous shareholder’s fractional ownership resulting from the issuance of additional shares of common stock.
dilution of ownership
A reduction in each previous shareholder’s fractional claim on the firm’s earnings resulting from the issuance of additional shares of common stock.
dilution of earning
Financial instruments that allow stockholders to purchase additional shares at a price below the market price, in direct proportion to their number of owned share
rights
Shares of common stock that a firm’s corporate charter allows it to issue.
authorized shares
Issued shares of common stock held by investors, including both private and public investors
outstanding shares
Issued shares of common stock held by the firm; often these shares have been repurchased by the firm.
treasury stock
Shares of common stock that have been put into circulation; the sum of outstanding shares and treasury stock
issued shares
A statement transferring the votes of a stockholder to another party.
proxy statement
The attempt by a nonmanagement group to gain control of the management of a firm by soliciting a sufficient number of proxy votes.
proxy battle
Stock that carries with it multiple votes per share rather than the single vote per share typically given on regular shares of common stock.
supervoting shares
voting rights; issued when the firm wishes to raise capital through the sale of common stock but does not want to give up its voting control.
nonvoting common stocK
Dollar-denominated receipts for the stocks of foreign companies that are held by a U.S. financial institution overseas.
American depositary shares (ADSs)
Preferred stock with a stated face value that is used with the specified dividend percentage to determine the annual dollar dividend.
par-value preferred stock
Preferred stock with no stated face value but with a stated annual dollar dividend.
no-par preferred stock
Preferred stock for which all passed (unpaid) dividends in arrears, along with the current dividend, must be paid before dividends can be paid to common stockholder
cumulative (preferred stock
Preferred stock for which passed (unpaid) dividends do not accumulate.
noncumulative (preferred stock)
A feature of callable preferred stock that allows the issuer to retire the shares within a certain period of time and at a specified price.
callable feature (preferred stock) A feature
A feature of convertible preferred stock that allows holders to change each share into a stated number of shares of common stock.
conversion feature (preferred stock)
Privately raised external equity capital used to fund earlystage firms with attractive growth prospects.
venture capitaL
Providers of venture capital; typically, formal businesses that maintain strong oversight over the firms they invest in and that have clearly defined exit strategies.
venture capitalists (VCs)
Wealthy individual investors who do not operate as a business but invest in promising early-stage companies in exchange for a portion of the firm’s equitY
angel capitalists (angels
The first public sale of a firm’s stock.
initial public offering (IPO)
A portion of a security registration statement that describes the key aspects of the issue, the issuer, and its management and financial position.
prospectus
A preliminary prospectus made available to prospective investors during the waiting period between the registration statement’s filing with the SEC and its approval.
red herring
Financial intermediary that specializes in selling new security issues and advising firms with regard to major financial transactions.
investment banker
The role of the investment banker in bearing the risk of reselling, at a profit, the securities purchased from an issuing corporation at an agreed-on price.
underwriting
A group of other bankers formed by an investment banker to share the financial risk associated with underwriting new securities.
underwriting syndicate
A large number of brokerage firms that join the originating investment banker(s); each accepts responsibility for selling a certain portion of a new security issue on a commission basis.
selling group
Theory describing the behavior of an assumed “perfect” market in which (1) securities are in equilibrium, (2) security prices fully reflect all available information and react swiftly to new information, and (3), because stocks are fully and fairly priced, investors need not waste time looking for mispriced securities.
efficient-market hypothesis (EMH)
A growing body of research that focuses on investor behavior and its impact on investment decisions and stock prices. Advocates are commonly referred to as “behaviorists.”
behavioral finance
An approach to dividend valuation that assumes a constant, nongrowing dividend stream.
zero-growth mode
A widely cited dividend valuation approach that assumes that dividends will grow at a constant rate, but a rate that is less than the required return.
constant-growth model
A model that determines the value of an entire company as the present value of its expected free cash flows discounted at the firm’s weighted average cost of capital, which is its expected average future cost of funds over the long run.
free cash flow valuation model
The amount per share of common stock that would be received if all of the firm’s assets were sold for their exact book (accounting) value and the proceeds remaining after paying all liabilities (including preferred stock) were divided among the common stockholders
book value per share
The
actual amount
per share of common stock that would be received if all of the firm’s assets were sold for their market value, liabilities (including preferred stock) were paid, and any remaining money were divided among the common stockholders.
liquidation value per share
A popular technique used to estimate the firm’s share value; calculated by multiplying the firm’s expected earnings per share (EPS) by the average price/earnings (P/E) ratio for the industry.
price/earnings multiple approach
A collection, or group, of assets.
portfolio
A measure of the uncertainty surrounding the return that an investment will earn or, more formally, the variability of returns associated with a given asset
risk
The total gain or loss experienced on an investment over a given period of time; calculated by dividing the asset’s cash distributions during the period, plus change in value, by its beginning-ofperiod investment value.
total rate of return
The attitude toward risk in which investors would require an increased return as compensation for an increase in risk
risk averse
The attitude toward risk in which investors choose the investment with the higher return regardless of its risk
risk neutral
The attitude toward risk in which investors prefer investments with greater risk even if they have lower expected returns.
risk seeking
An approach for assessing risk that uses several possible alternative outcomes (scenarios) to obtain a sense of the variability among returns.
scenario analysis
A measure of an asset’s risk, which is found by subtracting the return associated with the pessimistic (worst) outcome from the return associated with the optimistic (best) outcome
range
The
chance
that a given outcome will occur.
probability
A model that relates probabilities to the associated outcomes.
probability distribution
