Chapter 7 Valuing Stocks

Question 1

PRIMARY MARKET

Answer 1

Market for the sale of new securities by corporations

Question 2

INITIAL PUBLIC OFFERING (IPO)

Answer 2

First offering of stock to the general public

Question 3

PRIMARY OFFERING

Answer 3

The corporation sells shares in the firm

Question 4

COMMON STOCK

Answer 4

Ownership shares in a publicly held corporation

Question 5

SECONDARY MARKET

Answer 5

Market in which previously issued securities are traded among investors

Question 6

DIVIDEND

Answer 6

Periodic cash distribution from the firm to the shareholders

Question 7

P/E RATIO

Answer 7

Ratio of stock to EPS

Question 8

BID PRICE

Answer 8

The prices at which investors are willing to buy shares

Question 9

ASK PRICE

Answer 9

The prices at which current shareholders are willing to sell their shares

Question 10

BID-ASK PRICE

Answer 10

The difference between the bid price and the ask price

Question 11

MARKET ORDER

Answer 11

An order to buy/sell shares at the best currently available market price

Question 12

LIMIT ORDER

Answer 12

An order to buy/sell shares at a pre-determined price, to be executed when the market price reaches the requested price

Question 13

BOOK VALUE

Answer 13

Net worth of the firm according to the balance sheet

Question 14

LIQUIDATION VALUE

Answer 14

Net proceeds that could be realized by selling the firm’s assets and paying off its creditors

Question 15

MARKET VALUE BALANCE SHEET

Answer 15

Financial statement that uses market value of all assets and liabilities

Question 16

GOING CONCERN VALUE

Answer 16

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)

Question 17

HOW TO VALUE STOCKS

Answer 17

1) Valuation by comparables (ratios)
2) Intrinsic value
3) Dividend Discount Model

Question 18

PAYOUT RATIO

Answer 18

Fraction of earnings paid out as dividends

Question 19

PLOWBACK RATIO

Answer 19

Fraction of earnings retained by the firm

Question 20

SUSTAINABLE GROWTH RATE

Answer 20

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

Question 21

PRESENT VALUE OF GROWTH OPPORTUNITIES (PVGO)

Answer 21

Net present value of a firm’s future investments (i.e. Price with plowback - Price without plowback)

Question 22

TECHNICAL ANALYSTS

Answer 22

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.

Question 23

FUNDAMENTAL ANALYSTS

Answer 23

Investors who attempt to find mispriced securities by analyzing fundamental information (i.e. accounting data and business reports)

Question 24

RANDOM WALK THEORY

Answer 24

Security prices change randomly, with no predictable trends/patterns

Question 25

EFFICIENT MARKET

Answer 25

Market in which prices reflect all available information

Question 26

WEAK FORM EFFICIENCY

Answer 26

Market prices reflect all past historical information

Question 27

SEMI-STRONG FORM EFFICIENCY

Answer 27

Market prices reflect all publicly available information

Question 28

STRONG FORM EFFICIENCY

Answer 28

Market prices reflect all information, both public and private