Chapter 7 Valuing Stocks Flashcards
PRIMARY MARKET
Market for the sale of new securities by corporations
INITIAL PUBLIC OFFERING (IPO)
First offering of stock to the general public
PRIMARY OFFERING
The corporation sells shares in the firm
COMMON STOCK
Ownership shares in a publicly held corporation
SECONDARY MARKET
Market in which previously issued securities are traded among investors
DIVIDEND
Periodic cash distribution from the firm to the shareholders
P/E RATIO
Ratio of stock to EPS
BID PRICE
The prices at which investors are willing to buy shares
ASK PRICE
The prices at which current shareholders are willing to sell their shares
BID-ASK PRICE
The difference between the bid price and the ask price
MARKET ORDER
An order to buy/sell shares at the best currently available market price
LIMIT ORDER
An order to buy/sell shares at a pre-determined price, to be executed when the market price reaches the requested price
BOOK VALUE
Net worth of the firm according to the balance sheet
LIQUIDATION VALUE
Net proceeds that could be realized by selling the firm’s assets and paying off its creditors
MARKET VALUE BALANCE SHEET
Financial statement that uses market value of all assets and liabilities
GOING CONCERN VALUE
The value of a company under the assumption that it will continue to operate for the foreseeable future (in contrast, liquidation value assumes company is going out of business)
HOW TO VALUE STOCKS
1) Valuation by comparables (ratios)
2) Intrinsic value
3) Dividend Discount Model
PAYOUT RATIO
Fraction of earnings paid out as dividends
PLOWBACK RATIO
Fraction of earnings retained by the firm
SUSTAINABLE GROWTH RATE
The firm’s growth rate if it plows back a constant fraction of earnings, maintains a constant return on equity, and keeps its debt ratio constant
PRESENT VALUE OF GROWTH OPPORTUNITIES (PVGO)
Net present value of a firm’s future investments (i.e. Price with plowback - Price without plowback)
TECHNICAL ANALYSTS
Investors who attempt to identify undervalued stocks by searching for patterns in past stock prices. They forecast stock prices based on watching the fluctuation in historical prices.
FUNDAMENTAL ANALYSTS
Investors who attempt to find mispriced securities by analyzing fundamental information (i.e. accounting data and business reports)
RANDOM WALK THEORY
Security prices change randomly, with no predictable trends/patterns
