Stock Valuation Flashcards
Preferred stock
stock with dividend priority over common stock
- normally with a fixed dividend rate
- sometimes no w/o voting rights
What are the two biggest stock markets in the US?
NYSE & NASDAQ
The cash flows from owning a share of stock come in the form of……….?
Future dividends
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….
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
What is the primary market
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
What is the secondary market
Where they’re traded
-provides liquidity for investors
Where previously sold issued securities are traded among investors
Dealers & Brokers
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
Dividends
payments by a corporation to the shareholders..made in either cash or stock
Unless a dividend is declared by the board of directors of a corporation, it is not a…..
liability of the corporation
-a corporation cannot default on an undeclared dividend
Dividends received by individual shareholders are…
Taxable
Common stock
stock that has no special preference either in receiving dividends or in bankruptcy
How does preferred stock differ from common stock?
It has preference over common stock in the payment of dividends and in distribution of government assets in the event of liquidation
Name some features of preferred stock
- 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
What is a proxy
the grant of authority by a shareholder to someone else to vote his or her shares
A primary reason for creating multiple classes of stock has to do with what?
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
In addition to having the right to vote for directors, shareholders also have what rights ?
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)
Cumulative voting is when a shareholder can cast all of what?
the votes for one member of the board
Straight voting is when a shareholder can cast all votes for who?
EACH member of the board of directors
What are the 2 components of total return, (R)?
- dividend yield
2. capital gains yield
Dividend yield
Expected cash dividend / current price
Capital gains yield
= Dividend growth rate, or the rate at which the value of an investment grows
In what three cases can we calculate the value for the stock?
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
Dividend growth model determines what?
The current price of a stock as:
its dividend next period divided by the discount rate
minus the dividend growth rate
We realize return in the form of what?
Dividends & capital gains
Preferred stockholders have preference over common shareholders in terms of _________________ and _____________ of the firm
dividends paid and liquidation
Why issue preferred stock since interest payments can be deducted?
(1) Avoid bankruptcy
(2) Corporate Control (Preferred is non-voting, bonds may have covenants)
(3) For corporations, dividend income is 70% tax exempt. (Marketability)
Common Stock represents the true ____________ of the firm
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
Returns on common stock can come in the form of ____________.
Dividends
Dividends:
1) Are not ___________
2) Are not ___________
3) Are not _________________ for the corporation
4) ____ are excluded from corporations income
1) required
2) guaranteed
3) tax deductible
4) 70%
NYSE (an ____________ exchange)
*organized
- central location
- open outcry, auction market
- characterized by members (~1400)
NASDAQ (an ________________________ market)
*over the counter
- no central location
- a dealer market, who serve as market makers
