Lesson 4.5 Stocks Flashcards
is simply a place where financial instruments can be bought or sold.
Stock Exchange
A company that has been in existence for sometime, looking to expand
Primary Market
A company that has already been listed
Secondary Market
long record of earnings and dividend payments
Blue Chip
low risk and modest but dependable return
Blue Chip
long record of higher than average earnings and retains more for the growth of the business
Growth
faster growth than the industry and economy as a whole
Growth
higher than average dividend payment ratio
Income
movement of earnings and prices in accordance with the business cycle
Cyclical
recession-resistant unaffected by downswings in the business cycle
Defensive
no record of good earnings
Speculative
ownership interest is more than 50%
Investment in subsidiary
when the investor has significant influence over the investee
Investment in Associate
acquired for the purpose of selling or repurchasing it in the near term
Investment security to profit or loss
part of the portfolio of identified financial instruments that are managed together
Investment security to profit or loss
debt and equity securities that are actively traded by the entity
Investment security to profit or loss
purchased strategically to realize profit from the increase in the value of these instrument
Investment in equity through other comprehensive income
Ducks corporation acquired 10,000 Swans Company shares on February 5, 2021 at Php 50 which included Php 10 per share broker’s fees and commissions. The shares were selling at Php 32 per share on December 31, 2021. The investments were designated for trading. How much is the initial carrying value of the investment on the date of acquisition and why?
Carrying value stocks held for trading:
= (Php 50 – Php 10)(10,000 shares)
= Php 40 (10,000 shares)
=Php 400,000
increase in the market value of stocks
Capital Appreciation
opposite of pay-out ratio.
Plowback Ratio
The portion of income that does not get paid out as dividends.
Plowback Ratio
BT has 20 million ordinary shares, each trading at Php 2.50. BT pays out a total of Php 1m in dividends.
Dividend Yield = (Php 1m/20m x Php 2.50) x 100
Dividend Yield = (Php 1m/Php 50m)
X 100
Dividend Yield = 2%
A firm is expected to generate Php 1.5 million in operating income and pay Php 250,000 in interest. This will generate Php 12.50 earnings per share. What will happen to the earnings per share if the operating income increases to Php 2 million?
Increase in earnings
(Php 1,750,000 – 1,250,000) Php 500,000.00
___________________________________________________________________ _________
Percentage of increase
(500/1250) 40%
___________________________________________________________________ _________
New EPS (12.5 x 1.4) Php 17.50
What is the current price of a share of stock when last year’s dividend was Php 3 and the growth rate is at 6%, and the required rate of return of investor’s is at 12%?
Amount of Next dividend:
Current year’s dividend = Php 3.00
Growth rate = 1.06
Next dividend = Php 3.18
Price of a share of stock:
Next dividend = Php 3.18
divided by (rr-gr) = .06
Price = Php 53.00
is a financial instrument where the value of the instrument is derived from the price of another underlying asset.
Derivative
where trading takes place directly between two counterparties
Over-the-countertrading
negotiated and traded privately between parties without the use of an exchange
Over-the-countertrading
where derivative have standard is traded on anorganized exchange
Exchange- traded features
a form of derivative. It is an agreement between a buyer and a seller.
Future Derivative
legally binding obligation between two parties: the buyer agrees to pay a pre-specified amount for the delivery of a particular pre-specified quantity of an asset at a pre-specified future date
Futures Contract
another form of derivative that gives a buyer the right but not the obligation to buy or sell a specified quantity of an underlying asset at a pre-agreed exercise price on or before a pre-specified future date
Option
when buyer has the right to buy the asset at the exercise price and the seller is obliged to deliver if the buyer exercises the option
Call Option
when the buyer has the right to sell the underlying asset at the exercise price and the seller of the option is obliged to take delivery and pay the exercise price
Put Option
Initial Measurement of Equity Investment
* Investment security to profit or loss (trading)
- acquisition cost
- Any cost incurred related to the acquisition
Initial Measurement of Equity Investment
- Investment in equity through other comprehensive
Measured at historical cost plus any transactions costs
distribution of cash
Cash Dividends
issuing more shares to existing holders
Stock Dividends
splits into smaller sizes, no change in wealth
Stock Dividends
- Paid either quarterly or half-yearly
- Amount is not fixed
Dividends
Share prices may fall – investors can lose capital even when dividends are paid
Price Risk
Shares may be difficult to sell at a reasonable price or sold quickly enough to prevent a loss
Liquidity Risk
Issuing company may collapse - ordinary share may become worthless
Issuer Risk
Currency Price movements
Foreign exchange risk
Initial measurement of investment to profit or loss
- Acquisition Cost
- Any cost incurred related to acquisition
Initial measurement of investment to OCI
- Historical Cost plus any transaction costs
Without controlling or significant influence over the investee
Other equity securities
Distribution of income
Dividends
Distribution of cash
Cash Dividends
Issuing more shares to existing holders
Stock Dividends
Trading Costs
- Brokers commission
- bid-ask spread
- price concession
