Stock Valuation Flashcards
CH 8
common-size income statement
A type of financial report that uses a common denominator (net sales) to
A type of financial report that uses a common denominator (net sales) to convert all entries on a normal income statement from dollars to percentages. (Chapter 8)
dividend valuation model (DVM)
A model that values a share of stock on the basis of the future dividend stream it is expected to produce; its three versions are zero-growth, constant-growth, and variable-growth. (Chapter 8)
free cash flow
The cash flow remaining after a firm has paid all of its expenses and makes necessary investments in working capital and fixed assets. (Chapter 8)
free cash flow to equity method
A stock valuation approach that estimates the free cash flow that a company will produce over time and discounts that to the present to estimate the firm’s total equity value. (Chapter 8)
price-to-earnings (P/E) approach
Stock valuation approach that tries to find the P/E ratio that’s most appropriate for the stock; this ratio, along with estimated EPS, is then used to determine a reasonable stock price. (Chapter 8)
relative P/E multiple
A stock’s P/E divided by a market multiple. (Chapter 8)
stock valuation
Obtaining an estimate of a stock’s intrinsic value that investors can act on. (Chapter 8)
Depends primarily on future performance
target price
The price an analyst expects the stock to reach within a certain period of time, usually a year. (Chapter 8)
A firm’s dividend growth rate can be estimated by multiplying the firm’s return on equity (ROE) by the:
retention rate
valuation
A process by which an investor determines an investment’s worth. (Chapter 8)
Required Rate of Return
CAPM = risk free rate + [Beta x (market return - risk free rate)]
Constant Growth Rate
value = dividend divided by return - growth
Expected dividend
dividend payout ratio x EPS
expected dividend next year = .30 x $3.22 = $0.97.
