Module 6 - Stock Valuation

Question 1

This includes all borrowing incurred by a firm, including bonds, and is repaid according to a fixed schedule of payments

Answer 1

Debt

Question 2

consists of funds provided by the firm’s owners (investors or stockholders) that are repaid subject to the firm’s performance

Answer 2

Equity

Question 3

these are a form of debt that the issuing entity promises to repay at some point in the future

Answer 3

Bonds

Question 4

these are shares in the ownership of a business

Answer 4

Stocks

Question 5

Voice in management: _____ do not receive voting privileges, _____ are owners of the firm, they generally have voting rights (selection of firm’s directors and vote on special issues)

Answer 5

Creditors; Stockholders

Question 6

Claims on income and assets: ______ claims on income and assets are secondary to the claims of creditors. their claims on income cannot be paid until the claims of all creditors have been satisfied

Answer 6

Stockholders’ (equity)

Question 7

Because stockholders are last to receive distributions, they expect ____ to compensate them for the additional risk they bear.

Answer 7

greater returns

Question 8

Maturity: _____ have stated maturity whereas _____ has no maturity rate nd never has to be repaid by the firm

Answer 8

Debt securities, Equity

Question 9

Tax treatment: Interest payments to creditors are treated as tax-deductible expenses by the issuing firm. Dividend payments to a firm’s stockholders are not tax-deductible (True or False)

Answer 9

True

Question 10

Common stock: an arbitrary value established for legal purposes in the firm’s corporate charter

Answer 10

par value of common stock

Question 11

Common stock: allows common stockholders to maintain heir proportionate ownership in the corporation when new shares are issued, thus protecting them from dilution of their ownership

Answer 11

Preemptive right

Question 12

Common: reduction in each precious shareholder’s fractional ownership resulting from the issuance of additional shares of common stock

Answer 12

Dilution of ownership

Question 13

financial instruments that allow stockholders to purchase additional shares at a price below the market price, in direct proportion to their number of owned shares

Answer 13

Rights

Question 14

Common Stock: shares of CS that a firm’s corporate charter allows it to issue

Answer 14

Authorized shares

Question 15

Common Stock: shares of CS that have been put into circulation

Answer 15

Issued shares

Question 16

Common stock: issued shares of CS repurchased by the firm

Answer 16

Treasury stock

Question 17

Common stock: shares of CS held by private and public investors

Answer 17

Outstanding shares

Question 18

Issued shares less treasury shares

Answer 18

Outstanding shares

Question 19

each share of common stock entitles its holder to how many votes in the election of directors and on special issues

Answer 19

one

Question 20

it is a statement transferring the votes of a stockholder to another party

Answer 20

proxy statement

Question 21

gives its holders certain privileges that make them senior to common stockholders

Answer 21

preferred stock

Question 22

Preferred stockholders are normally given a voting right (T or F)

Answer 22

False

Question 23

Features of Preferred Stock: (5)

Answer 23

1. Restrictive Covenants
2. Cumulative preference shares
3. Non-cumulative preference shares
4. Callable preference shares
5. Convertible preference shares

Question 24

In issuing common stock, initial financing typically comes from a firm’s original founders in the form of a ___________

Answer 24

common stock investment

Question 25

In issuing common stock, initial non-founder financially usually comes first from ______

Answer 25

private equity investors

Question 26

Privately raised external equity capital used to fund early-stage firms with attractive growth prospects

Answer 26

Venture Capital

Question 27

providers of venture capital

Answer 27

Venture capitalists

Question 28

wealthy individual investors who invest in promising early-stage companies in exchange for a portion of the firm’s equity

Answer 28

angel capitalists

Question 29

shares are offered for sale to the general public

Answer 29

public offering

Question 30

new shares are sold to existing shareholders

Answer 30

rights offering

Question 31

private placement

Answer 31

firm sells new securities directly to an investor or a group of investors

Question 32

When a firm wishes to sell its stick in the primary market, it has three alternatives:

Answer 32

1. public offering, rights offering, or private placement

Question 33

the first public sale of a firm’s stock

Answer 33

initial public offering (IPO)

Question 34

a financial intermediary that specializes in selling new security issues and advising firms with regard to major financial transactions

Answer 34

investment banker

Question 35

the role of the investment banker in bearing the risk of reselling, at a profit, the securities purchased from an issuing corporation at an agreed-on price

Answer 35

Underwriting

Question 36

Common stockholders expect to be rewarded through _______ and ______

Answer 36

periodic cash dividends and an increasing share value

Question 37

the true value of the shares is greater than the current market price.

Answer 37

undervalued

Question 38

the market price is greater than the true value

Answer 38

overvalued

Question 39

assumes that the stock will pay the same dividend each year, year after year

Answer 39

zero-growth model

Question 40

a widely cited dividend valuation approach that assumes that dividends will grow at a constant rate, but at a rate that is less than the required return

Answer 40

constant-groeth model

Question 41

a common name for the constant-growth model that is widely cited in dividend valuation

Answer 41

Gordon model

Question 42

This model works best with established companies with history of steady
dividend payments.

Answer 42

constant-growth model

Question 43

a dividend valuation approach that allows for a change in the dividend growth rate

Answer 43

variable-growth model

Question 44

the amount per share of common stock that would be received if all of the firm’s assets were sold for their exact book (accounting) value and the proceeds remaining after paying all liabilities (including preferred tock) were divided among the common stockholders

Answer 44

Book value per share

Question 45

the actual amount per share of common stock that would be received if all of the firm’s assets were sold for their market value, liabilities (including preferred stock) were paid, and any remaining money were divided among the common stockholders

Answer 45

liquidation value per share

Question 46

a popular technique used to estimate the firm’s share value; calculated by multiplying the firm’s expected earnings per share (EPS) by the average price/earnings (P/E) ratio for the industry

Answer 46

price/earnings multiple approach