Equities Flashcards
what are the two ways of raising equity
private (from yourself, savings, family, friends, venture capital funds) going public (issuing shares to be exchanged on the stock exchange)
what are the three types of private investors
angel investors
corporate ventures
private equity investing
what are angel investors
investors who finance companies in the earliest stages of growth
typically wealthy individual investors
who are corporate ventures
corporations that offer venture assistance to finance young and promising companies, usually strategically picked as their product/service is something that could be of use to the company
what are private equity investors
investors who offer funds to finance firms that do not trade on pubilic stock exchanges
eg venture capital
what does IPO stand for
initial public offering
what does SEO stand for
subsequent equity offerings
which are the primary market where equities are traded
IPOs
SEOs
what are the secondary markets where equities are traded
NYSE Euronext NASDAQ LSE TSE
what is the difference between a company’s market value and its book value is determined by
- future earnings expectations
- intangible assets
- value of future investments
what is the difference between growth stick and income stock
growth stock is stock which values grows rapidly. People buy this to resell for higher
income stock is stock from a mature, stable company. People buy this for the dividends
what does EPS stand for
earnings per share
what does the price earnings ratio show
the price per share vs the earnings per share
which is more senior in payout queue preferred stock or common stock
preferred stock
do common stock holders get voting rights
yes
do preferred stock holders get voting rights
no
who gets dividends first preferred or common stock
preferred
what does residual claim mean
in the case of the company ending, they must pay out their debts, bonds and other liabilities
then they will pay their preferred stock
what’s left will go to the common stock holders (this is called the residual claim)
why aren’t dividends tax deductible
not considered a business expense
what does the dividend discount model value the price of shares based on
the present value of all expected future dividends
+
the price of selling the share
what are the three cases for dividend growth
no growth
constant growth
non constant growth
what does DGM stand for
dividend growth model
if the current price of the share is less than the market value, should it be purchased
undervalued so yes
if the current price of the share is greater than the market value, should it be purchased
overvalued so should be avoided
and sold if held
why do companies watch their share price closely
- may need to go to market to issues more shares (to fund expansions etc), a higher share price will mean less shares will have to be issued and current ownership is less diluted
- corporate aquisitions, if share price is lower you’re a target
- indicates health of company
- declining price makes it harder to secure credit
- employees have share options (incentive to perform well)
what are the two components of rate of return of holding equity
income (dividend)
price appreciation
how is dividend discount model used for companies that do not pay dividends
all firms are expected to pay dividends at some stage
when they reach maturity and become more stable
why might a company hold off on paying dividends in the high initial growth phase
hang onto their earnings to re invest into the firm
what does it mean when you say dividends are sticky
they are not contractional but once they’re paid out they’re expected to continue to be paid out
what is the difference between value of share and price of share
value is made up of the present value of dividends received out to the investment horizon plus the present value of the forecast stock price at the horizon
price is what you’d pay for share
Which of the following statements are CORRECT regarding the advantages for a firm of issuing debt rather than equity?
The interest payments on debt are tax deductible.
There is no change in ownership.
The firm cannot go bankrupt if it misses interest payments on its debt.
The firm does not give up any voting rights.
The interest payments on debt are tax deductible.
There is no change in ownership.
The firm does not give up any voting rights.
true or false
In the event of a default, preference shares will incur losses before common shares but after bonds.
false
