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Intermediate Finance > Chapter 8 > Flashcards

Chapter 8 Flashcards

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1
Q

How do common stock holders have control of a firm

A

election of directors and

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2
Q

what is a proxy vote

A

stockholders transfer their rights to vote to another party by means of proxy

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3
Q

what is a proxy fight

A

an outside group may solicit the proxies in an effort to overthrow management and take control of the firm

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4
Q

What are preemptive rights

A

rights of current shareholders to purchase any new shares in proportion to their current holdings

protect shareholders against dilution

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5
Q

what is classified stock

A

stock that is classified into different classes (A, B, C)

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6
Q

what is a distinguishing characteristic between the different classes of stock

A

right to vote

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7
Q

What are the different approaches to valuing common stock

A
  1. Discount cash flow valuation
  2. FCF method
  3. Relative Valuation
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8
Q

What is Dt

A

dividend the stockholder expects to receive at the end of year t

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9
Q

what is D0

A

the most recent dividend

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10
Q

what is D1

A

the first dividend expected

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11
Q

what is P(hat) t

A

expected price of stock at the end of year t

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12
Q

what is P(hat) 0

A

estimated value of the stock today

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13
Q

what is P0

A

the current market price of the stock

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14
Q

for average or marginal investors P0=…

A

P(hat) 0

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15
Q

what is rs

A

the required rate of return on a stock

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16
Q

what is g

A

expected growth rate in dividends

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17
Q

When do you use the constant dividend growth model

A

when the firm is mature and dividends are expected to grow at a constant rate (constant g)

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18
Q

what is a necessary condition for the validity of the constant growth model

A

g must be smaller than rs

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19
Q

for constant growth stock the constant growth rate is equal to…

A

capital gain yeild

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20
Q

What are the conditions for a constant growth stock

A
  1. the dividend is expected to grow forever at a constant rate, g
  2. the stock price will also grow at the same rate
  3. the expected dividend yield is constant

4.the expected capital gains yield is also constant and equal to g, the dividend

  1. the expected total rate of return (R(hat)s) is equal to the expected dividend yield plus the expected growth rate
21
Q

why are stock prices volatile?

A
  1. required return could change
    - interest rates (Rrf) could change
    - Risk aversion (RPm) could change
    -Comany risk (beta) could change
  2. g could change
22
Q

T/F small changes in g or rs could cause large changes in the estimated price

A

True

23
Q

Why is it not always appropriate to use constant dividend growth model

A

because often times companies go through life cycles and that is what the non constant growth model is for

24
Q

What are the steps to estimate current stock values in a non constant growth model

A
  1. Forecast dividends for non-constant periods (ends at horizon date (N))
  2. Find the horizon value
  3. Plug inputs into NPV formula to find sum of PV
25
Q

What is the FCF valuation model”

A

a model that does not depend on dividends and it can be applied to divisions as well as the entire firm

26
Q

why would someone use FCF model instead of dividend growth model

A

the dividend growth model is not useful for startups and other companies that don’t pay dividends

27
Q

What is FCF

A

free cash flow is cash flow available for distribution to all the companies investors

28
Q

what is Weighted average cost of capital? (WAAC)

A

the overall rate of return required by companies investors

29
Q

what is the value of companies operations?

A

PV of expected FCF, discounted at the WAAC

30
Q

What are sources of corporate value?

A
  • operations
    -nonoperating assets
    -marketable securities
    -investment in other buisnesses
    -
31
Q

who has claims on corporate value

A
  • debtholders have first claims
    -then preferred stockholders
    -then the rest of the stockholders
32
Q

When should you use the dividend growth model?

A

mature company whose dividends are expected to grow steadily in the future

33
Q

when should a company use dividend growth model and FCF valuation model

A

when a company is paying dividends but is still in the high-growth stage of its life cycle

34
Q

when should a company uses FCF valuation model?

A

when a company has never paid a dividend, a private company or a division of a company

35
Q

What is discounted cash flow valuations?

A

find the value of assets, given their cash flows, growth, and risk characteristics

36
Q

what is relative valuation?

A

value assets based on how similar assets are currently priced in the market

37
Q

what are the two components to relative valuation?

A
  • value assets on a relative basis
  • find similar firms
38
Q

The price of a stock is a function of:

A
  • The value of the equity in a company
  • The number of shares outstanding
39
Q

What are earnings multiplese

A

when buying a stock it is common to look at the price paid as a mulitple of the earnings per share generated by the company

when buying a buisness it is common to look at the value of the operating asset as a multiple of the operating income

40
Q

what is book value or replacement value multiples

A

accounting estimate of a book value is influenced by the orginal price paid and accounting adjustments made since

41
Q

What are revenue multiples

A

revenue is far less affected by accounting choices compared to earnings and book values

42
Q

what are the advantages of using revenue multiples

A

it is easier to compare firms in different markets with different accounting systems

it is also useful in sectors composed of young companies

43
Q

what are the weaknesses of sector-specific multiples?

A
  • they cant be computed for other sectors
  • it is difficult to relate them to fundamentals
44
Q

What are the ratios of multiples for earnings multiples

A

Price/Earning Per Share
Price/Net Cash flow per share
Value/EBIT
Value/EBITDA

45
Q

what are the ratios for book value multiples

A

price/book value
value/book value of asset

46
Q

what are ratios for revenue multiples

A

price/sales per share
value/sales

47
Q

What are the four basic steps to using multiples

A
  1. Ensure that the multiple is defined consistently and it is measured uniformly (definitional test)
  2. Be ware of cross-sectional distribution of multiples (descriptional test)
  3. Understand how fundamentals determine the multiple - analytical test
  4. Find the right firms for comparison - application test
48
Q

multiples rule

A

Both numerator and denominator should be the same claim hold of the company

49
Q
A

Intermediate Finance (15 decks)

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