Equity Securities Flashcards
Statutory voting
Each share gets one vote in each election
Cumulative voting
Shares can be allocated to one or more candidates
Cumulative preferred shares
Must make up preferred dividends before common dividend can be issued
Participating preferred shares
Extra dividend if profit exceeds certain level
Depository Receipts (e.g. ADRs)
Ownership in foreign firm and traded in local markets/local currencies.
Book value of equity
Assets - liabilities
ROE
(net income - preferred dividends) / average book value of common equity
Cyclicals
(1) high operating leverage
(2) Dependent on business cycle
(3) Expensive products, non necessities
Defensives
(1) Least affected by business cycles
Growth
Demand so large, not affected by business cycle
Industry life cycle (5)
(1) Embryonic
(2) Growth
(3) Shakeout
(4) Mature
(5) Decline
Dividend discount model formula
Sum[(dividend / (1+required return)^t]
i.e. discounted cash flows
Free cash flow to equity (FCFE)
cash flow from operations - fixed investments + net borrowing
Gordon growth model
Value = dividend / (required return - growth rate)
Assumes constant growth rate
Estimating dividend growth
(1) historical growth rates
(2) median industry growth rate
(3) estimate sustainable growth rate
Sustainable growth rate
ROE * retention rate
Value of stock that is expected to pay dividends in the future
(1) Calculate value at point when dividends are going to start being paid
(2) Discount value back to today
Multi-stage divined models
(1) Discount individual dividends back
(2) Then calculate gordon from x period on
(3) Discount gordon back and sum
Note: Gordon assumes first dividend is paid today
Payout ratio
Dividend / earnings
