Module 6 - Stock Valuation Flashcards
This includes all borrowing incurred by a firm, including bonds, and is repaid according to a fixed schedule of payments
Debt
consists of funds provided by the firm’s owners (investors or stockholders) that are repaid subject to the firm’s performance
Equity
these are a form of debt that the issuing entity promises to repay at some point in the future
Bonds
these are shares in the ownership of a business
Stocks
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)
Creditors; Stockholders
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
Stockholders’ (equity)
Because stockholders are last to receive distributions, they expect ____ to compensate them for the additional risk they bear.
greater returns
Maturity: _____ have stated maturity whereas _____ has no maturity rate nd never has to be repaid by the firm
Debt securities, Equity
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)
True
Common stock: an arbitrary value established for legal purposes in the firm’s corporate charter
par value of common stock
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
Preemptive right
Common: reduction in each precious shareholder’s fractional ownership resulting from the issuance of additional shares of common stock
Dilution of ownership
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
Rights
Common Stock: shares of CS that a firm’s corporate charter allows it to issue
Authorized shares
Common Stock: shares of CS that have been put into circulation
Issued shares
Common stock: issued shares of CS repurchased by the firm
Treasury stock
Common stock: shares of CS held by private and public investors
Outstanding shares
Issued shares less treasury shares
Outstanding shares
each share of common stock entitles its holder to how many votes in the election of directors and on special issues
one
it is a statement transferring the votes of a stockholder to another party
proxy statement
gives its holders certain privileges that make them senior to common stockholders
preferred stock
Preferred stockholders are normally given a voting right (T or F)
False
Features of Preferred Stock: (5)
- Restrictive Covenants
- Cumulative preference shares
- Non-cumulative preference shares
- Callable preference shares
- Convertible preference shares
In issuing common stock, initial financing typically comes from a firm’s original founders in the form of a ___________
common stock investment
In issuing common stock, initial non-founder financially usually comes first from ______
private equity investors
Privately raised external equity capital used to fund early-stage firms with attractive growth prospects
Venture Capital
providers of venture capital
Venture capitalists
wealthy individual investors who invest in promising early-stage companies in exchange for a portion of the firm’s equity
angel capitalists
shares are offered for sale to the general public
public offering
new shares are sold to existing shareholders
rights offering
private placement
firm sells new securities directly to an investor or a group of investors
When a firm wishes to sell its stick in the primary market, it has three alternatives:
- public offering, rights offering, or private placement
the first public sale of a firm’s stock
initial public offering (IPO)
a financial intermediary that specializes in selling new security issues and advising firms with regard to major financial transactions
investment banker
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
Underwriting
Common stockholders expect to be rewarded through _______ and ______
periodic cash dividends and an increasing share value
the true value of the shares is greater than the current market price.
undervalued
the market price is greater than the true value
overvalued
assumes that the stock will pay the same dividend each year, year after year
zero-growth model
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
constant-groeth model
a common name for the constant-growth model that is widely cited in dividend valuation
Gordon model
This model works best with established companies with history of steady
dividend payments.
constant-growth model
a dividend valuation approach that allows for a change in the dividend growth rate
variable-growth model
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
Book value per share
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
liquidation value per share
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
price/earnings multiple approach
