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| Two reasons to value stocks |
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Definition
| to value the common stock of a private business and to make good capital budgeting decisions |
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| ownership shares in a publicly held corporation |
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| market for the sale of new securities by corporations. |
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| first offering of stock to the general public |
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| market in which previously issued securities are traded among investors. |
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| ratio of stock price to earnings per share. KEY TOOL OF DETERMINING IF A STOCK IS OVER/UNDER VALUED! |
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| (Market Capitalization) is the total value of its outstanding shares of stock |
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| tells you how much dividend income you would receive for every $100 invested in the stock. |
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| What does dividend yield ignore? |
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| prospective capital gains or losses. |
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| net worth of the firm according to the balance sheet. Records all the money raised from its shareholders plus all the earnings that have been plowed back on their behalf. (does not capture true value of a business) |
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| net proceeds that could be realized by selling the firms assets and paying off its creditors |
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| the difference between a company's actual value and its book or liquidation value |
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| Three factors referred to by Going-Concern |
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| 1. Extra Earning power 2. Intangible assets. 3. Value of future investments. |
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Term
| Value of future investments |
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Definition
| If investors believe a company will have the opportunity to make a very profitable investment in the future, they will pay more for the company's stock today. |
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Term
| Investors buy shares on what two basis? |
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Definition
| present and future earning power |
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| Two key features that determine profits produced: |
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Definition
| 1. Earnings generated by current tangible and intangible assets 2. opportunities the firm has to invest in lucrative projects that will increase future earnings. |
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| ownership of equity in a firm; a fractional claim on the assets and operations of the firm. |
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| residual claimants; take part in the upside potential (capital appreciation) |
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| bonds that can be converted into stocks |
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| periodic cash distribution from the firm to the shareholders |
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| how much investors pay for the stock |
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| how much an investor sells the stock for |
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| the amount that investors are WILLING to pay for the shares of the firm. Depends of present an future earnings power. |
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| an order that an investor buys or sells an investment immediately at the best available price. |
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| an order to buy or sell a set number of shares as a specified price or better. |
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| prices reflect only historical information and make a profitable return |
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| historical and public infor |
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| historical, public and private info. |
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| identifying and capitalizing on the inefiiciency pushes it towards efficiency |
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| When valuating stocks what must we assume |
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Definition
| dividends are constant (no-growth) unless told otherwise |
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| PV of future cash flows from a stock or other security ("fair" price for the stock) |
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| Fundamental characteristic of prices in well-functioning markets |
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Definition
| at each point in time all securities of the same risk are priced to offer the same expected rate of return. |
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| discounted cash flow medel which states that today's stock price equals the present value of all expected future dividends. |
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Definition
| NO; both dividends and final sales price can only be estimated. |
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Term
| constant-growth dividend discount model |
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Definition
| version of the dividend discount model in which dividends grow at a constant rate. |
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| stock price in the horizon year |
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| steady rate at which a firm can grow; return on equity X plowback ration. (g) |
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| PV of Growth opportunities = |
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| PV(Growth) - PV(No-Growth) |
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Additional equity / (BE/share)
OR
ROE x Plowback Ratio |
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| amount made per $1 of equity owned |
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(BE/s) x ROE
OR
Div/Payout ratio |
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