Chapter 7 - Stock Valuation Flashcards
common stock def
ownership share in a corporation
primary market def
market for the sale of new securities issued by corporations
secondary markets def
market in which already issued securities are traded among investors
dividend def
share of the firm’s profits which are distributed
retained earnings def
profits that are retained in the firm and reinvested in its operations
3 methods for valuing shares
- book value: net worth of the firm according to its balance sheet
- liquidation value: net proceeds that would be realized by selling the firm’s assets and paying off its creditors
- market value: amount investors are willing to pay for the shares treating the firm as a going concern
Reasons why a firm is worth more than the sum of the value of its assets
- extra earning power
- intangible assets
- value of future investments
expected return def
the percentage yield that an investor forecasts from a specific investment over a set period of time
(also called the holding period return)
Present value of a stock
The present value of a stock is equal to all its forecasted future dividends + PV of the expected stock price at the end of the horizon
growth stocks vs income stocks
- investors buy growth stocks for capital gains
- investors buy income stocks for cash dividends
plowback ratio or retention ratio def
the fraction of earning retained by the firm
payout ration def
the fraction of earnings a company pays out in dividends
present value of growth opportunities def
net present value of a firm’s future investment
sustainable growth rate def
steady rate at which a firm can grow
Price- Earning (P/E) ratio
P/E = Stock Price/ Earnings per Share
