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Finance chapter 9: Stocks

Terms in this set (17)

discounted dividend model, corporate valuation model
2 leading models to estimate stock values
preemptive right
a provision in the corporate charter or bylaws that gives common stockholders the right to purchase on a prorated basis new issues of common stock (or convertible securities)
classified stock
common stock that is given a special designation, such as class A or B, to merit special needs of the company
- enables company's founders to maintain control over company without owning the majority of common stock (founders' shares)
estimated, observed
intrinsic value must be _, stock price can be _
marginal investor
a representative investor whose actions represent the beliefs of those people who are currently trading a stock
- this person determines a stock's price
the dividends the investor receives yearly while holding the stock, price received when the stock is sold
2 things upon which the expected cash flows of a stock depend
value of stock
PV of expected future dividends
Constant growth (Gordon) model
used for stocks with dividends that are constantly growing
- g<r must be
growth
higher % earnings retained => higher _ rate
next years earnings
= prior earnings + ROE
growth rate
(1 - payout ratio)ROE
Zero growth stock
future dividends aren't expected to grow at all
supermoral (nonconstant) growth
the part of a firm's life cycle during which it grows much faster than the economy as a whole
horizon (terminal) data
when the growth rate becomes constant. At this point, it's no longer necessary to forecast the individual dividends
Corporate valuation model
used as an alternative to discounted dividend model, especially for a firm without a history of dividends, or the value of a division of a larger firm
free cash flow
generated before any payments are made to any investors, so it must be used to compensate common stockholders, preferred stockholders, and bondholders
equilibrium (stock market)
stock price = intrinsic value
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