Stocks Flashcards

1
Q

What is a share

A

A unit if equity ownership in a company

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2
Q

Where are shares in a public company traded

A

Stock markets like nasdaq

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3
Q

What can common stockholders do

A

Vote and receive dividends and sell their stock if they deem it profitable

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4
Q

What are A and B stocks

A

Common stocks that differ in dividend distribution and voting rights

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5
Q

How does preferred stock differ from common stock

A

Preferred stockholder receive a fixed dividend rate like a bond and so they are relatively price stable. Preferred stockholders also do not vote unless the firm has failed to pay them. They also have a claim on assets prior to the commoners but after debt holders

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6
Q

What does it mean that the issuer of a stock has limited liability

A

That the stockowners are only liable the amount they have in invested in the company do if it goes bankrupt the worst thing that happens ti the owners is that their share becomes worthless

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7
Q

Can a company do multiple IPOs

A

Yea if they want do make more shares to expand and develop their operations

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8
Q

What does the dividend discount model say

A

That the current price is the future dividend plus the expected future price divided by one plus the equity cost of capital

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9
Q

What is equity cost of capital

A

The return on an investment with equal risk

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10
Q

What is the total return on a stock according to the dividend discount model

A

The dividend rate of future price plus the increase ratio of the price. Dividend yield plus capital gains rate

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11
Q

When is the return of a stock the same as any asset if similar risk

A

That the estimated price and dividend yield are correct and also the equity cost of capital is correctly estimated. An open market without arbitrage is also required

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12
Q

When should you buy and sell a stock according to the dividend discount rule

A

You should buy a stock when the price is below its calculated value based in on future dividends and price and you should sell it when the price is above.

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13
Q

Is the fair price p0 dependant on our investment horizon

A

No Becouse the return in the future depends on the same equity cost of capital. The price of a stock is independent of our investment horizon

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14
Q

What us the formula for the dividend discount model

A

Sum of dividends divided by growth rate of equity cost if capital exponentiated by the time. The current price is an infinite sum of that

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15
Q

What is the constant growth ddm

A

A model where we assume that dividends grow at a constant growth rate and that the price thus becomes a perpetuity abs so can be calculated as the next dividend divided by the equity cost of capital rate minus the growth rate of the dividend

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16
Q

When does the constant growth ddm fail

A

When the growth rate is larger than the equity cost of capital. This is however unsustainable in the long run

17
Q

When do the stock price increase according to the constant growth ddm

A

When the expected dividend increases, when the growth rate increases and when the equity cost if capital rate decreases

18
Q

When is the constant growth ddm ill suited to reality

A

When stocks don’t pay dividends and when the growth rate is highly varying like in variables

19
Q

Why is there a trade-of between dividend and growth rate

A

Because growth requires investment of money which does not go to dividend payments

20
Q

What is the dividend payout ratio

A

The fraction of earnings that are payed out as dividends

21
Q

What is the retainment ratio b

A

The fraction of earnings that a firm retains after paying out dividends

22
Q

How do you calculate dividends payments

A

Earnings times the dividend payout ratio divided by the number of shares

23
Q

How do you calculate growth rate

A

Retained earnings times the return on investments

24
Q

Does decreasing the dividends also decrease tue share price

A

No not necessarily. If the retained capital are invested into projects with a positive net present value it can increase the worth of the stock

25
Q

How can the share price be calculated when growth rate differs for a period

A

By adding the present value of the volatile period with the constant growth ddm times the present value of one year nit of currency in the future when growth becomes constant

26
Q

What is a valuation multiple

A

Statistics about the value of the company like the P/E ratio

27
Q

What is the method of comparables

A

The idea that you can gain an understanding if the value of a share by comparing the valuation multiples of companies with similar risk

28
Q

What do you need to value a stock based on P/E ratio

A

The price and earnings of comparable firms

29
Q

What is a sensitivity analysis of a model

A

To check how sensitive the result is to changes in certain variables