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constant growth assumption

best prediction for growth rate will remain constant:
-mainly for large, mature companies b/c of their stability

Non-constant growth followed by constant growth

growth that is not the same each period; for example, dividends of a supernormal growth firm are expected to grow at 30% for 3 yrs, and then the growth rate is expected to fall 5% and remain this way for the remainder of its life

business cycle

the cycle of depressing and then boosting sales and profits


when intrinsic value is greater than the market value

life cycle

in which a company's growth if quicker than the economy's, then it's the same, and in its final stage, it is slower than the economy;

supernormal growth

growth that is higher than that of the economy

D hat t

what the dividend stockholders expect to receive at the end of Year t

hat (symbol)

expected value

D at initial time, Do

the most recently paid dividend, which already has been paid

D hat at time 1, D hat 1

the next dividend that is expected to be paid at the end of this year

D hat at time 2, D hat 2

the dividend expected at the end of two years

Implicitly solving for r given market price


value of the firm

is the present value of its expected future dividends, as determined by equation 7.1

Value of a stock (equation 7.1)

Stock value - Vs - Phat0 - (Dhat1)/(1+rs)^1 + ... -summation of t-1 [ Dhat,t/ (1+rs)^t]

Multiplier Techniques using CF proxies other than Divs (no info on divs)

Earnings : Po=P/E * EPS
Cash Flows : Po = P/CF * CF
Sales : Po = P/S * Sales
Book Value : Po = P/B * Book value (shareholders s

A good analyst

would use all multiplier techniques

How does a company make sure that preferred stocks will be paid off before common stocks?

Most preferred stock have coverage requirements similar to those placed on bonds, such as maintaining TIE (times-interest-earned) ratio greater than a particular value like 3x (these restrictions limit the amount of preferred stock that a company can use as well a minimum level of RE before they can pay common dividends)

How can preferred stocks have voting rights?

If their dividends are not paid for a specified two years such as 2 yrs

sinking fund

a pool of money set aside for repurchasing a portion of the existing bonds every year (to repurchase bonds when interest rates have fallen (which means the market price of their existing bonds have risen), as they can repurchase the bonds at the specified sinking fund price, which is lower than the market price.) but the difference with callable bonds is that there's only a certain amount of issues that can be repruchased (rather than all)

participating preferred dividend

the dividend of a preferred stock is pegged to that of the common stock

is tax on a bond's interest deductible?

It is only deductible for the issuer

income stocks

stocks that produce returns that primarily depend on dividends

growth stocks

stocks that produce returns that primarily depend on their capital gains (growth)

common stock maturity

gets bought back when: 1. stock is undervalued 2. co. has excess cash but not good investment opps wants to gain more ownership

what are stockholders' rights?

right to elect firm's directors, proposals, mergers, and changes in charter

P hat initial

Present value of stock


rate of return

How to solve for dividend (pmt)?

Dividend % * par value
10% * 80 = $8

how to solve for present value of a preferred stock? (p hat initial)

Dividend payment/ required rate of return
Po=Dp / Kp

When the return on a share decreases, then the price of the stock

gets more expensive

What happens to the present value of each successive dividend as the expected dividends are growing?

expected dividends are growing, but the present value of each successive dividend is declining because the dividend growth rate is less than the rate used for discounting to the present (but r>g always)

what is the expected dividend yield if the growth rate is 0, which means a constant growth rate?

dividends will equal expected dividends so it will stay the same too

intrinsic value

expected price of the stock at the end of year t. this also depends on what the investor feels the firm is worth based on the dividend stream and the riskiness of it

How long do we have to hold it for before we have to pay higher taxes?

must pay attention to tax implications so we must hold it for one year before selling it (individual v. nonprofit (no tax))

Techniques to find value of a stock

1. discounting technique (given dividends)
2. multiplier (no divs given)


Po=P/E * EPS

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