Chapter 7: Valuing Stocks Flashcards
common stock; common equity; common shares
ownership shares in a corporation
primary market
market for the sale of new securities issued by corporations
initial public offering (IPO)
first offering of stock to the general public
seasoned equity offering (SEO)
sale of additional stock by a public company
secondary market
market in which already-issued securities are traded among investors
price-earnings multiple (or P/E ratio)
ratio of stock price to earnings per share
dividend yield
a stock’s cash dividend by its current price
preferred stock
stock that takes priority over common stock in regards to dividends
book value of equity
net worth of the firm according to the balance sheet
liquidation value
net proceeds that would be realized by selling the firm’s assets and paying off its creditors
market-value balance sheet
financial statement that uses the market value of all assets and liabilities
intrinsic value
present value of expected future cash flows from a stock or other security
dividend discount model
discounted cash flow model that states that today’s stock price equals the present value of all expected future dividends
constant-growth dividend discount model
version of the dividend discount model in which dividends grow at a constant rate
payout ratio
fraction of earnings paid out as dividends
plowback ratio
fraction of earnings retained by the firm (also called retention ratio)
sustainable growth rate
steady rate at which a firm can grow; return on equity x plowback ratio
present value of growth opportunities (PVGO)
net present value of a firm’s future investments
technical analysts
investors who attempt to identify undervalued stocks by searching for patterns in past stock prices
random walk
the movement of security prices that change randomly, with no predictable trends or patterns
fundamental analysts
investors who attempt to find mispriced securities by analyzing fundamental information, such as accounting data and business prospects
inside information
relevant information about a company known by its board of directors, management and/or employees, and other insiders but not by the public
insider
member of the board of directors, management, employees, and others with a close relationship to a company, including lawyers, financial advisors, and accountants
insider trading
illegal trading of securities, including stocks, bonds and options, by insiders or those tipped by insiders, on the basis of inside information
efficient market
market in which prices reflect all available information
weak-form efficiency
market prices rapidly reflect all information contained in the history of past prices
semi-stong-form efficiency
market prices rapidly reflect all publicly available information
strong-form efficiency
market prices rapidly reflect all information that could in principle be used to determine true value
