Lecture 9 Flashcards
corporate equity capital = ?
financial capital supplied by the owners if a corporation
funds raised by issuing equity shares in a corporation
stock certificate = ?
certificate showing an ownership claim of a specific company
what does common stock represent?
ownership shares in a corporation
what’s the purpose of the board of directors?
they oversee the firm on behalf of the shareholders and enforce the corporate charter
do common stockholders have voting rights?
yes
common stockholders have voting rights over who’s appointed as board members and other important issues allowed by the corporate charter
corporate charter = ?
a document to establish details regarding the governance, objectives, operations and other major details of the company
how are common stockholders treated with regards to claims against assets and cash flow?
common stockholders get the lowest claim against assets and cash flow
they are paid after all other claims are paid out first
how does common stock differ from a bond as a security?
bonds represent debt, whereas common stock represents ownership
bonds are obliged to be repaid regardless of bankruptcy, but common stockholders run the risk of the company not being able to repay for their investment
is the par value of the price for which the stock was bought important to common stockholders?
no, par value is meaningless for common stock
this is because common stock doesn’t have a maturity date
due to going concern, we assume a company will continue to exist infinitely
how can one profit from their stock in a company?
buy low, sell high (capital gains)
dividends (annual distributions to shareholders)
what is the value of the dividends’ dependent on?
the company’s performance
when/how are dividends paid?
dividends are paid out from after-tax earnings and cash flow
for how long does a firm’s stock remain in existance?
until the firm goes bankrupt, merges with another firm or is acquired by another firm
preferred stock = ?
an equity security that has preference, or a senior claim, to the earnings and assets over common stockholders
do preferred stockholders have voting rights?
no
only common stockholders have voting rights
does par value matter to preferred stockholders?
yes, as it can determine the fixed annual dividend (which is a percentage of par value)
how are dividends for preferred stockholders stated?
as a dollar amount derived from the percentage of par value
are dividends from preferred stockholders cumulative?
yes, this means they pile up if not paid in previous periods
does a preferred stock mature?
no, the assumption is that the company will continue infinitely
unless it has a callable or convertible feature
“last trade: $52.87” = ?
last time the stock was traded, it was traded at $52.87 per share
“change: 1.15” = ?
the price of the stock rose $1.15 from the end of the previous day
“52 week range: $39.72 - $54.07” = ?
in the last 52 weeks, the stock price has ranged from $39.72 to $54.07
“volume (,000s): 133,227” = ?
133,227,000 shares of the firm were traded in the previous
“P/E: 35.72” = ?
price to earnings ratio = price/earnings per share = 35.72
if price of last trade was $52.87, 52.87/EPS … EPS = $52.87/$35.72 = 1.48
“dividend: $1.44” = ?
microsoft pay dividends at an annual rate of 1.44 per share to its owners
“dividend yield: 2.72%” = ?
stock’s annual dividend/current price
1.44/52.87 = 2.72%
what is the equation to calculate earnings per share (EPS)?
p/e ratio = price/earnings per share
earnings per share = price/pe ratio
EPS shows how much one earns for each share they have
what is the equation to calculate dividend yield %?
stock’s annual dividend / current price
dividend yield is how much one earns per share from their dividends
what is the equation for dividend payout ratio?
dividend per share/earnings per share
dividend payout ratio shows how much of one’s earnings from their shares arise from their dividends
what does a dividend payout ratio of 97% show?
it shows that 97% of the firm’s net income goes towards issuing dividends
what does dividend yield show?
the return an investor would get as a percentage of the price they paid for the stock
how is the value of a stock derived?
the value of any stock should be equal to the present value of all future dividends/cash flows
how is the value of a bond derived?
its equal to the present value of all future coupons/cash flows plus the principal amount
why is it tough to estimate a stock price?
due to its indefinite life and the fact that future cash flows can be uncertain (as its dependent on the company’s performance)
the discount/compound rate over the timespan of the stock being in one’s possession is unknown
equation for the valuation of stocks = ?
cf/(1+r) to the power of 1 +
cf/(1+r) to the power of 2 +
cf/(1+r) to the power of 3 etc…
when valuing a stock what is the assumption with regards to dividends?
it’s assumed that dividends will be constant
when payment is constant in price, what is it called?
a perpetuity
perpetuity = ?
a security that pays constant periodic cash flows as long as the issuer exists
an indefinite annuity
annuity = ?
constant cash flows for a specified/limited time period
equation for finding the price of a stock = ?
p = d/r
price = dividend / interest rate
this is only with perpetuities
if x corporation’s preferred stock currently pays a $2 dividend and investors want a 10% return on preferred stocks of similar risk, what’s the preferred stock’s value?
p = d/r
price = $2/10% = $20
instead of square rooting a figure, what else can be done
to the power of 1/2
constant dividend growth = ?
when dividend is expected to grow at a constant rate forever
if a firm’s dividend grows at an annual rate of ‘g’%, what’s the equation?
dividend 1 = d(1+g) to the power of 1
dividend 2 = d(1+g) to the power of 2
dividend 3 = d(1+g) to the power of 3
dividend 4 = d(1+g) to the power of 4 etc…
what is the equation for the valuation of a stock with constant growth dividends?
p = d(1+g)/(r-g)
assume the cash dividend per share for XYZ company last year was $1.89 and annual growth rate of 8.5%. If investors want 12% return, what’s the PV?
D = $1.89, G = 8.5%, R = 12%
P = D/(R-G)
d(1+g)/(r-g)
1.89(1+0.085)/(0.12-0.085) = $58.59
return = ?
periodic income and price changes
dollar return = ?
stock price at the end of the month - stock price at the beginning of the month + dividends
percentage return = ?
dollar return / stock price at the beginning of the month
if Walgreen’s stock went from $33.63 per share to $34.31 at the end of the month and $0.04 in dividends were received, what is the dollar return and percentage return?
dollar return = 34.31-33.63+0.04 = $0.72
percentage return = 0.72/33.63 = 2.14% for the month
average return (R) = ?
sum of returns / number of periods
deviations = ?
periodic return minus the average return
suppose we have 3 annual returns, 5%, 11%, -4%
average return = ?
(5% + 11% -4%) / 3 = 4%
deviation for each annual return
5% - 4% = 1%
11% - 4% = 7%
-4% - 4% = -8%
sum of the deviations
1% + 7% - 8% = 0%
variance = ?
summing the squared deviations / (n-1)
e.g., deviations were 1%, 7%, -8%, square all of them and add them, then divide the sum by 3-1 (2) = 0.0057 = the variance
standard deviation = ?
the square root of the variance
e.g., square root of 0.0057 = 0.075 = 7.5% = standard deviation
