Stock Valuation

Question 0

Preferred stock

Answer 0

stock with dividend priority over common stock

• normally with a fixed dividend rate
• sometimes no w/o voting rights

Question 1

What are the two biggest stock markets in the US?

Answer 1

NYSE & NASDAQ

Question 2

The cash flows from owning a share of stock come in the form of……….?

Answer 2

Future dividends

Question 3

As the owner of shares of common stock, you have various rights, including the right to vote to elect corporate directors. Voting in corporate elections can either be….

Answer 3

Cumulative or straight

most voting is actually done by proxy and a proxy battle breaks out when competing sides try to gain enough votes to elect their candidates for the board

Question 4

What is the primary market

Answer 4

Provides a *source of funds for corporations

Where new securities are originally sold to investors

• brought to the market for the first time
• raises capital

Question 5

What is the secondary market

Answer 5

Where they’re traded
-provides liquidity for investors

Where previously sold issued securities are traded among investors

Question 6

Dealers & Brokers

Answer 6

dealers ~ maintains an inventory and stands ready to buy and sell at any time (bid & ask price - spread)

brokers ~ brings buyers and sellers together but does not maintain an inventory

Question 7

Dividends

Answer 7

payments by a corporation to the shareholders..made in either cash or stock

Question 8

Unless a dividend is declared by the board of directors of a corporation, it is not a…..

Answer 8

liability of the corporation

-a corporation cannot default on an undeclared dividend

Question 9

Dividends received by individual shareholders are…

Answer 9

Taxable

Question 10

Common stock

Answer 10

stock that has no special preference either in receiving dividends or in bankruptcy

Question 11

How does preferred stock differ from common stock?

Answer 11

It has preference over common stock in the payment of dividends and in distribution of government assets in the event of liquidation

Question 12

Name some features of preferred stock

Answer 12

• stated value
• dividends payable on preferred stock are either cumulative or noncumulative (most are cumulative)
• unpaid preferred dividends are not debts of the firm
• preferred stockholders receive a stated dividend only; and if the corporation is liquidated, the stockholders get a stated value
• is sometimes convertible into common stock
• often callable
• some have sinking funds
• seems to be a lot like debt
• for tax purposes, they are treated like common stock dividends

Question 13

What is a proxy

Answer 13

the grant of authority by a shareholder to someone else to vote his or her shares

Question 14

A primary reason for creating multiple classes of stock has to do with what?

Answer 14

Control of the firm
- if such stock exists, management of a firm can raise equity capital by issuing non voting or limited-voting stock while maintaining control

Question 15

In addition to having the right to vote for directors, shareholders also have what rights ?

Answer 15

The right to:
> share in dividends paid
> share in assets remaining after liabilities have been paid in liquidation
> to vote on stockholder matters of importance, like a merger

(Voting is usually done at the annual meeting or a special meeting)

Question 16

Cumulative voting is when a shareholder can cast all of what?

Answer 16

the votes for one member of the board

Question 17

Straight voting is when a shareholder can cast all votes for who?

Answer 17

EACH member of the board of directors

Question 18

What are the 2 components of total return, (R)?

Answer 18

1. dividend yield

2. capital gains yield

Question 19

Dividend yield

Answer 19

Expected cash dividend / current price

Question 20

Capital gains yield

Answer 20

= Dividend growth rate, or the rate at which the value of an investment grows

Question 21

In what three cases can we calculate the value for the stock?

Answer 21

The dividend:

(1) has a zero growth rate
(2) grows at a constant rate
(3) grows at a constant rate after some length of time

Question 22

Dividend growth model determines what?

Answer 22

The current price of a stock as:
its dividend next period divided by the discount rate
minus the dividend growth rate

Question 23

We realize return in the form of what?

Answer 23

Dividends & capital gains

Question 24

Preferred stockholders have preference over common shareholders in terms of _________________ and _____________ of the firm

Answer 24

dividends paid and liquidation

Question 25

Why issue preferred stock since interest payments can be deducted?

Answer 25

(1) Avoid bankruptcy
(2) Corporate Control (Preferred is non-voting, bonds may have covenants)
(3) For corporations, dividend income is 70% tax exempt. (Marketability)

Question 26

Common Stock represents the true ____________ of the firm

Answer 26

Ownership

• –> Stockholders have certain rights
  1. Dividends
  2. Pre-emptive rights
  3. Voting rights (one share, one vote)
  - affected by: class of stock voting procedures

Question 27

Returns on common stock can come in the form of ____________.

Answer 27

Dividends

Question 28

Dividends:

1) Are not ___________
2) Are not ___________
3) Are not _________________ for the corporation
4) ____ are excluded from corporations income

Answer 28

1) required
2) guaranteed
3) tax deductible
4) 70%

Question 29

NYSE (an ____________ exchange)

Answer 29

*organized

• central location
• open outcry, auction market
• characterized by members (~1400)

Question 30

NASDAQ (an ________________________ market)

Answer 30

*over the counter

• no central location
• a dealer market, who serve as market makers