Chapter 9: Stock Valuation

Question 1

Where stocks trade

Answer 1

in primary and secondary markets?

Question 2

primary markets

Answer 2

• in primary markets, firms sell new shares of stock to investors to raise money

Question 3

secondary markets

Answer 3

• in secondary markets, outstanding shares of stock are bought and sold among investors

Question 4

4 types of secondary markets

Answer 4

direct search
broker
dealer
auction

Question 5

efficient market theory

Answer 5

?

Question 6

preferred stock definition

Answer 6

• preferred think first
• preferred comes before common
• so with dividends and bankruptcy, preferred comes before common and you give up voting rights

an equity share in a corporation that entitles the owner to preferred treatment over owners of common stock with respect to dividend payments and claims against the firm’s assets in the event of bankruptcy or liquidation, but that typically has no voting rights

Question 7

preferred stock attributes

Answer 7

• Like common stock, preferred stock represents an ownership interest in the corporation, but as the name implies, preferred stock receives preferential treatment over common stock
• Specifically, preferred stockholders take precedence over common stockholders in the payment of dividends and in the distribution of corporate assets in the event of liquidation
• Unlike the interest payments on bonds, which are contractual obligations, preferred stock dividends are declared by the board of directors, and if a dividend is not paid, the lack of payment is not legally viewed as a default

Question 8

preferred stock valuation

Answer 8

• Preferred = present value (dividends) + PV (par)

Question 9

common stock

Answer 9

• an equity share that represents the basic ownership claim in a corporation; the most common type of equity security

Question 10

common stock attributes

Answer 10

• Owners of common stock are not guaranteed any dividend payments and have the lowest-priority claim on the firm’s assets in the event of bankruptcy
• Legally, common stockholders enjoy limited liability; that is, their losses are limited to the original amount of their investment in the firm, and their personal assets cannot be taken to satisfy the obligations of the corporation
• Finally, common stocks are perpetuities in the sense that they have no maturity. Common stock can be retired only if management buys it in the open market from investors or if the firm is liquidated, in which case its assets are sold

Question 11

common stock valuation